| (a) Effective Date. The provisions of this section
apply to franchise tax reports originally due on or after January
1, 2008, except as otherwise noted.
(b) Definitions. The following words and terms, when
used in this section, shall have the following meanings, unless the
context clearly indicates otherwise.
(1) Arm's length--The standard of conduct under which
entities that are not related parties and that have substantially
equal bargaining power, each acting in its own interest, would negotiate
or carry out a particular transaction.
(2) Computer program--A series of instructions that
are coded for acceptance or use by a computer system and that are
designed to permit the computer system to process data and provide
results and information. The series of instructions may be contained
in or on magnetic tapes, printed instructions, or other tangible or
electronic media.
(3) Goods--Real or tangible personal property sold
in the ordinary course of business of a taxable entity.
(4) Heavy construction equipment--Self-propelled, self-powered,
or pull-type equipment that weighs at least 3,000 pounds and is intended
to be used for construction. The term does not include a motor vehicle
required to be titled and registered.
(5) Lending institution--An entity that makes loans
and:
(A) is regulated by the Federal Reserve Board, the
Office of the Comptroller of the Currency, the Federal Deposit Insurance
Corporation, the Commodity Futures Trading Commission, the Office
of Thrift Supervision, the Texas Department of Banking, the Office
of Consumer Credit Commissioner, the Credit Union Department, or any
comparable regulatory body;
(B) is licensed by, registered with, or otherwise regulated
by the Department of Savings and Mortgage Lending;
(C) is a "broker" or "dealer" as defined by the Securities
Exchange Act of 1934 at 15 U.S.C. §78c; or
(D) provides financing to unrelated parties solely
for agricultural production.
(6) Principal business activity--The activity in which
a taxable entity derives the largest percentage of its "total revenue".
(7) Production--Construction, manufacture, installation
occurring during the manufacturing or construction process, development,
mining, extraction, improvement, creation, raising, or growth.
(8) Related party--A person, corporation, or other
entity, including an entity that is treated as a pass-through or disregarded
entity for purposes of federal taxation, whether the person, corporation,
or entity is subject to the tax under this chapter or not, in which
one person, corporation, or entity, or set of related persons, corporations,
or entities, directly or indirectly owns or controls a controlling
interest in another entity.
(9) Service costs--Indirect costs and administrative
overhead costs that can be identified specifically with a service
department or function, or that directly benefit or are incurred by
reason of a service department or function. For purposes of this section,
a service department includes personnel (including costs of recruiting,
hiring, relocating, assigning, and maintaining personnel records or
employees); accounting (including accounts payable, disbursements,
and payroll functions); data processing; security; legal; general
financial planning and management; and other similar departments or
functions.
(10) Tangible personal property--
(A) includes:
(i) personal property that can be seen, weighed, measured,
felt, or touched or that is perceptible to the senses in any other
manner;
(ii) films, sound recordings, videotapes, live and
prerecorded television and radio programs, books, and other similar
property embodying words, ideas, concepts, images, or sound, without
regard to the means or methods of distribution or the medium in which
the property is embodied, for which, as costs are incurred in producing
the property, it is intended or is reasonably likely that any medium
in which the property is embodied will be mass-distributed by the
creator or any one or more third parties in a form that is not substantially
altered; and
(iii) a computer program, as defined in paragraph (2)
of this subsection.
(B) does not include:
(i) intangible property or
(ii) services.
(c) General rules for determining cost of goods sold.
(1) Affiliated entities. Notwithstanding any other
provision of this section, a payment made by one member of an affiliated
group to another member of that affiliated group not included in the
combined group may be subtracted as a cost of goods sold only if it
is a transaction made at arm's length.
(2) Capitalization or expensing of certain costs. The
election to capitalize or expense allowable costs is made by filing
the franchise tax report using one method or the other. The election
is for the entire period on which the report is based and may not
be changed after the due date or the date the report is filed, whichever
is later. A taxable entity that is allowed a subtraction by this section
for a cost of goods sold and that is subject to Internal Revenue Code, §§263A,
460, or 471 (including a taxable entity subject to §471 that
elects to use LIFO under §472), may elect to:
(A) Capitalize those costs in the same manner and to
the same extent that the taxable entity capitalized those costs on
its federal income tax return, except for those costs excluded under
subsection (g) of this section, or in accordance with subsections
(d), (e), and (f) of this section. A taxable entity that elects to
capitalize costs on its first report due on or after January 1, 2008,
may include, in beginning inventory, costs allowable for franchise
tax purposes that would be in beginning inventory for federal income
tax purposes.
(i) If the taxable entity elects to capitalize those
costs allowed under this section as a cost of goods sold, it must
capitalize each cost allowed under this section that it capitalized
on its federal income tax return.
(ii) If the taxable entity later elects to begin expensing
those costs allowed under this section as a cost of goods sold, the
entity may not deduct any cost incurred before the first day of the
period on which the report is based, including any ending inventory
from a previous report.
(B) Expense those costs, except for those costs excluded
under subsection (g) of this section, or in accordance with subsections
(d), (e), and (f) of this section.
(i) If the taxable entity elects to expense those costs
allowed under this section as a cost of goods sold, costs incurred
before the first day of the period on which the report is based may
not be subtracted as a cost of goods sold.
(ii) If the taxable entity later elects to begin capitalizing
those costs allowed under this section as a cost of goods sold, costs
incurred prior to the accounting period on which the report is based
may not be capitalized.
(3) Election to subtract cost of goods sold. A taxable
entity, if eligible, must make an annual election to subtract cost
of goods sold in computing margin by the due date, or at the time
the report is filed, whichever is later. The election to subtract
cost of goods sold is made by filing the franchise tax report using
the cost of goods sold method. An amended report may be filed within
the time allowed by Tax Code, §111.107 to change the method of
computing margin to the cost of goods sold deduction method or from
the cost of goods sold deduction method to the compensation deduction
method, 70% of total revenue, or, if otherwise qualified, the E-Z
computation method. An election may also be changed as part of an
audit. See §3.584 of this title (relating to Margin: Reports
and Payments).
(4) Exclusions from total revenue. Any expense excluded
from total revenue (see §3.587 of this title (relating to Margin:
Total Revenue)) may not be included in the determination of cost of
goods sold.
(5) Film and broadcasting. A taxable entity whose principal
business activity is film or television production or broadcasting
or the sale of broadcast rights or the distribution of tangible personal
property described by subsection (b)(10)(A)(ii) of this section, or
any combination of these activities, and who elects to use cost of
goods sold to determine margin, may include as cost of goods sold:
(A) the costs described in this section in relation
to the property;
(B) depreciation, amortization, and other expenses
directly related to the acquisition, production, or use of the property,
including
(C) expenses for the right to broadcast or use the
property.
(6) Lending institutions. Notwithstanding any other
provision of this section, if the taxable entity is a lending institution
that offers loans to the public and elects to subtract cost of goods
sold, the entity may subtract as a cost of goods sold an amount equal
to interest expense.
Cont'd... |
