| (A) This paragraph does not apply to entities primarily
engaged in an activity described by category 5932 of the 1987 Standard
Industrial Classification Manual published by the federal Office of
Management and Budget.
(B) For purposes of this subsection, an entity engaged
in lending to unrelated parties solely for agricultural production
offers loans to the public.
(7) Mixed transactions. If a transaction contains elements
of both a sale of tangible personal property and a service, a taxable
entity may only subtract as cost of goods sold the costs otherwise
allowed by this section in relation to the tangible personal property
sold.
(8) Movie theaters. Effective for reports originally
due on or after September 1, 2013, if a taxable entity that is a movie
theater elects to subtract cost of goods sold, the cost of goods sold
for the taxable entity shall be the costs described by this section
in relation to the acquisition, production, exhibition, or use of
a film or motion picture, including expenses for the right to use
the film or motion picture, and the costs otherwise allowed by this
section in relation to concessions sold.
(9) Owner of goods. A taxable entity may make a subtraction
under this section in relation to the cost of goods sold only if that
entity owns the goods.
(A) A taxable entity that holds the legal title to
the goods is presumed to be the owner of the goods for purposes of
this section. A taxable entity may rebut this presumption by proving
an ownership right superior to the legal title holder based on all
of the facts and circumstances, including the various benefits and
burdens of ownership vested with the taxable entity.
(B) A taxable entity furnishing labor or materials
to a project for the construction, improvement, remodeling, repair,
or industrial maintenance (as the term "maintenance" is defined in §3.357
of this title (relating to Nonresidential Real Property Repair, Remodeling,
and Restoration; Real Property Maintenance)) of real property is considered
to be an owner of the labor or materials and may include the costs,
as allowed by this section, in the computation of the cost of goods
sold. For purposes of determining whether a taxable entity is considered
an owner of the labor or materials under this paragraph, and eligible
to deduct costs as described in subsections (d), (e), and (f) of this
section, the following terms mean:
(i) Labor--Labor used in the direct prosecution of
the project.
(ii) Material--All or part of:
(I) the material, machinery, fixtures, or tools incorporated
into the project, consumed in the direct prosecution of the project,
or ordered and delivered for incorporation or consumption;
(II) rent at a reasonable rate and actual running repairs
at a reasonable cost for construction equipment used or reasonably
required and delivered for use in the direct prosecution of the project
at the site of the project; or
(III) power, water, fuel, and lubricants consumed or
ordered and delivered for consumption in the direct prosecution of
the project.
(C) Solely for the purposes of this section, a taxable
entity shall be treated as the owner of goods being manufactured or
produced by the entity under a contract with the federal government,
including any subcontracts that support a contract with the federal
government, notwithstanding that the Federal Acquisition Regulations
may require that title or risk of loss with respect to those goods
be transferred to the federal government before the manufacture or
production of those goods is complete.
(10) Pipeline entities. Effective for reports originally
due on or after January 1, 2014, and notwithstanding paragraph (9)
of this subsection and subsection (g)(3) of this section, a pipeline
entity that provides services for others related to the product that
the pipeline does not own and to which this paragraph applies may
subtract as a cost of goods sold its depreciation, operations, and
maintenance costs allowed by this section related to the services
provided.
(A) For purposes of this paragraph, "pipeline entity"
means an entity:
(i) that owns or leases and operates the pipeline by
which the product is transported for others and only to that portion
of the product to which the entity does not own title; and
(ii) that is primarily engaged in gathering, storing,
transporting, or processing crude oil, including finished petroleum
products, natural gas, condensate, and natural gas liquids, except
for a refinery installation that manufactures finished petroleum products
from crude oil.
(B) For purposes of this paragraph, "processing" means
the physical or mechanical removal, separation, or treatment of crude
oil, including finished petroleum products, natural gas, condensate,
and natural gas liquids after those materials are produced from the
earth. The term does not include the chemical or biological transformation
of those materials.
(11) Rental or leasing companies. Notwithstanding any
other provision of this section:
(A) a motor vehicle rental company that remits a tax
on gross receipts imposed under Tax Code, §152.026, or a motor
vehicle leasing company, may subtract as costs of goods sold the costs
otherwise allowed by this section in relation to motor vehicles that
the company rents or leases in the ordinary course of its business;
(B) a heavy construction equipment rental or leasing
company may subtract as costs of goods sold the costs otherwise allowed
by this section in relation to heavy construction equipment that the
company rents or leases in the ordinary course of its business; and
(C) a railcar rolling stock rental or leasing company
may subtract as costs of goods sold the costs otherwise allowed by
this section in relation to railcar rolling stock that the company
rents or leases in the ordinary course of its business.
(12) Reporting methods. A taxable entity shall determine
its cost of goods sold, except as otherwise provided by this section,
in accordance with the methods used on the federal income tax return
on which the report under this chapter is based. This subsection does
not affect the type or category of cost of goods sold that may be
subtracted under this section.
(13) Restaurants and bars. Entities engaged in activities
described in Major Group 58 (Eating and Drinking Places) of the Standard
Industrial Classification Manual may deduct for cost of goods sold
only those expenses allowed under subsections (d), (e) and (f) of
this section, that relate to the acquisition and production of food
and beverages. Any costs related to both the production of food and
beverages and to other activities must be allocated to production
on a reasonable basis.
(d) Direct costs. The cost of goods sold includes all
direct costs of acquiring or producing the goods. Direct costs include:
(1) Labor costs. A taxable entity may include in its
cost of goods sold calculation labor costs, other than service costs,
that are properly allocable to the acquisition or production of goods
and are of the type subject to capitalization or allocation under
Treasury Regulation Sections 1.263A-1(e) or 1.460-5 as direct labor
costs, indirect labor costs, employee benefit expenses, or pension
and other related costs, without regard to whether the taxable entity
is required to or actually capitalizes such costs for federal income
tax purposes.
(A) For purposes of this section, labor costs include
W-2 wages, IRS Form 1099 payments for labor, temporary labor expenses,
payroll taxes, pension contributions, and employee benefits expenses,
including, but not limited to, health insurance and per diem reimbursements
for travel expenses, to the extent deductible for federal tax purposes.
(B) Labor costs under this paragraph shall not include
any type of costs includable in subsection (f) or excluded in subsection
(g) of this section. Costs for labor that do not meet the requirements
set forth in this paragraph may still be subtracted as a cost of goods
sold if the cost is allowed under another provision of this section.
For example, service costs may be included in a taxable entity's cost
of goods sold calculation to the extent provided by subsection (f)
of this section.
(2) Incorporated materials. A taxable entity may include
in its cost of goods sold calculation the cost of materials that are
an integral part of specific property produced.
(3) Consumable materials. A taxable entity may include
in its cost of goods sold calculation the cost of materials that are
consumed in the ordinary course of performing production activities.
(4) Handling costs. A taxable entity may include in
its cost of goods sold calculation handling costs, including costs
attributable to processing, assembling, repackaging, and inbound transportation.
(5) Storage costs. A taxable entity may include in
its cost of goods sold calculation storage costs, including the costs
of carrying, storing, or warehousing property, subject to subsection
(g) of this section, concerning excluded costs.
Cont'd... |
