| (ii) Example 2. Software Company designs bookkeeping
software for personal use. Software Company licenses the software
to Computer Company to include in the software sold with its computers.
Software Company sells digital versatile discs (DVDs) of the bookkeeping
software to Retail Company for resale to end users. Software Company
sells downloads of its bookkeeping software directly to end users.
Software Company sells an on-line version of its bookkeeping software
in which end users can enter and store data on-line using the Software
Company's website for a periodic fee. Software Company receipts from
licensing the software to Computer Company are from the use of its
digital product and sourced to the location of use under paragraph
(21)(A) of this subsection. Computer Company's receipts from the sale
of computers with pre-loaded software are from the sale of tangible
personal property and sourced under paragraph (29) of this subsection.
Software Company's receipts from the sale of DVDs to Retail Company
are from the sale of tangible personal property and sourced under
paragraph (29) of this subsection. Software Company's receipts from
the sale of downloads to end users are from the sale of intangible
property and sourced to the location of payor under paragraph (21)(B)
of this subsection. Software Company's receipts from the sale of its
on-line version are from the sale of an internet hosting service and
sourced to the location of the customer under paragraph (13) of this
subsection.
(4) Condemnation. Gross receipts from condemnation
of property are sourced to the location of the property condemned.
(5) Debt forgiveness. If a creditor releases any part
of a debt, then the amount that the creditor forgives is a gross receipt
that is sourced to the legal domicile of the creditor.
(6) Debt retirement. Gross receipts from the retirement
of a taxable entity's own indebtedness, such as through the taxable
entity's purchase of its own bonds at a discount, are sourced to the
taxable entity's legal domicile. The indebtedness is treated as an
investment in the determination of the amount of gross receipts.
(7) Dividends.
(A) Dividends that are recognized as a reduction of
the taxpayer's basis in stock of a taxable entity for federal income
tax purposes are not gross receipts. Dividends that exceed the taxpayer's
basis for federal income tax purposes that are recognized as a capital
gain are treated as dividends for apportionment purposes.
(B) The following are excluded from Texas gross receipts
and gross receipts from an entity's entire business:
(i) dividends from a subsidiary, associate, or affiliated
taxable entity that does not transact a substantial portion of its
business or regularly maintain a substantial portion of its assets
in the United States;
(ii) Form 1120, Schedule C special deductions that
are excluded from total revenue; and
(iii) dividends on federal obligations that are excluded
from total revenue.
(C) Dividends that are received from a corporation
or other sources are sourced to the location of the payor.
(D) Dividends received from a national bank are sourced
to Texas if the bank's principal place of business is located in Texas.
Dividends received from a bank that is organized under the Texas Banking
Code are sourced to Texas.
(8) Exchanges of property. Exchanges of property are
included in gross receipts to the extent that the exchange is recognized
as a taxable transaction for federal income tax purposes. Such exchange
must be included in gross receipts based on the gross exchange value,
unless otherwise required under this section.
(9) Federal enclave. Gross receipts from a taxable
entity's sales, services, leases, or other business activities that
are transacted on a federal enclave that is located in Texas are sourced
to Texas, unless otherwise excepted by this section.
(10) Financial derivatives. Gross receipts from the
settlement of financial derivatives contracts, including hedges, options,
swaps, futures, and forward contracts, and other risk management transactions
are sourced to the location of the payor.
(11) Insurance proceeds.
(A) Business interruption insurance proceeds are gross
receipts when the proceeds are intended to replace lost profits. Such
receipts are Texas gross receipts when the location of the payor is
in Texas.
(B) Gross receipts from fire and casualty insurance
proceeds are sourced to the location of the damaged or destroyed property.
(12) Interest.
(A) Except as provided in subparagraph (B) of this
paragraph, interest received is sourced to the location of the payor.
(B) Interest received from a national bank is a Texas
gross receipt if the bank's principal place of business is located
in Texas. Interest received from a bank that is organized under the
Texas Banking Code is a Texas gross receipt.
(C) The following are excluded from Texas gross receipts
and gross receipts from an entity's entire business:
(i) interest on federal obligations that is excluded
from total revenue; and
(ii) interest that is exempt from federal income tax.
(D) A banking corporation may exclude from its Texas
gross receipts interest that is earned on federal funds and interest
that is earned on securities that are sold under an agreement to repurchase
and that are held in a correspondent bank that is domiciled in Texas,
but the banking corporation must include the interest in its gross
receipts from an entity's entire business.
(13) Internet hosting service. For reports originally
due on or after January 1, 2014, receipts from internet hosting are
Texas gross receipts if the customer is located in Texas.
(A) Internet hosting service means providing to an
unrelated user access over the internet to computer services using
property that is owned or leased and managed by the provider and on
which the user may store or process the user's own data or use software
that is owned, licensed, or leased by the user or provider.
(B) Internet hosting includes real-time, nearly real-time,
and on-demand access over the internet to computer services such as:
(i) data storage and retrieval;
(ii) video gaming;
(iii) database search services;
(iv) entertainment streaming services;
(v) processing of data; and
(vi) marketplace provider services.
(C) Internet hosting does not include:
(i) telecommunications service;
(ii) cable television service;
(iii) internet connectivity service;
(iv) internet advertising service; or
(v) internet access solely to download digital content
for storage and use on the customer's computer or other electronic
device.
(D) The purchase of access over the internet to computer
services is distinguished from the purchase or lease of computer hardware
or digital property (which are sourced under subsection (e)(3) of
this section) by taking into account all relevant factors, the relevance
of which may vary depending upon the circumstances. Some relevant
factors indicating the purchase of access to a computer service rather
than the purchase or lease of computer hardware or digital property
include:
(i) the customer is not in physical possession of the
property;
(ii) the customer does not control the property, beyond
the customer's network access and use of the property;
(iii) the provider has the right to determine the specific
property used in the transaction and replace such property with comparable
property;
(iv) the property is a component of an integrated operation
in which the provider has other responsibilities, including ensuring
the property is maintained and updated;
(v) the customer does not have a significant economic
or possessory interest in the property;
(vi) the provider bears any risk of substantially diminished
receipts or substantially increased expenditures if there is nonperformance
under the contract;
(vii) the provider uses the property concurrently to
provide significant services to entities unrelated to the customer;
(viii) the provider's fee is primarily based on a measure
of work performed or the level of the customer's use rather than the
mere passage of time; and
(ix) the total contract price substantially exceeds
the rental value of the property for the contract period.
Cont'd... |
