(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)Capital asset--Any asset[, other than an investment,
] that is held for use in the production of income, and that
is subject to depreciation, depletion or amortization.
[(2)Commercial domicile--The principal
place from which the trade or business of the entity is directed.]
(2)[(3)] Employee retirement
plan--A plan or other arrangement that qualifies under Internal Revenue
Code (IRC), §401(a) (Qualified pension, profit-sharing,
and stock bonus plans), or that satisfies the requirement of
IRC, §403 (Taxation of employee annuities), or a government
plan described in IRC, §414(d) (Definitions and special
rules).
(3)[(4)] Gross receipts--Revenue
as determined [The amount determined as total revenue]
under §3.587 of this title (relating to Margin: Total Revenue),
except as provided in subsection (e)(2) (concerning capital assets
and investments) and subsection (e)(17) ((concerning loans
and securities) of this section. Non-receipt items excluded from total
revenue under §3.587 of this title are not included in the calculation
of total revenue under that section and are not deducted from gross
receipts. These non-receipt items include the exclusion [except
for a taxable entity taking a deduction] for uncompensated care
, the $500 exclusion per [or] pro bono services case
, the exclusion for the direct cost of providing waterway
transportation, the exclusion for the direct cost of providing agricultural
aircraft services, and the exclusion for the cost of a vaccine. See
subsection (d)(5) of this section for gross receipts that are excluded
from the apportionment calculation. [or an entity for which
subsection (e)(16) of this section, applies.]
(4)[(5)] Internal Revenue Code--The
Internal Revenue Code of 1986 in effect for the federal tax year
beginning on January 1, 2007, not including any changes made by federal
law after that date, and any regulations adopted under that code applicable
to that period [a specified tax year as provided by Tax
Code, §171.0001].
(5)Inventory--Property held primarily
for sale to customers in the ordinary course of a trade or business.
Securities and loans held for investment, hedging, or risk management
purposes are not inventory.
(6)Investment--Any non-cash asset that is not a capital
asset or inventory.
(7)Legal domicile--The legal domicile of a corporation
or limited liability company is its state of formation. The legal
domicile of a partnership, trust, or joint venture is the principal
place of business of the partnership, trust, or joint venture. [The
principal place of business of a partnership, trust, or joint venture
is the location of its day-to-day operations. If the day-to-day operations
are conducted equally or fairly evenly in more than one state, then
the principal place of business is the commercial domicile.]
(8)Location of payor--The legal domicile of the payor.
(9)Principal place of business--The
place where an entity's management directs, controls, and coordinates
the entity's activities.
(10)Regulated investment company--Any
domestic corporation defined under IRC, §851(a) (Definition of
regulated investment company), including a taxable entity that includes
trustees or sponsors of employee benefit plans that have accounts
in a regulated investment company.
(11)[(9)] Security--An instrument
defined under IRC [Internal Revenue Code], §475(c)(2)
(Mark to market accounting method for dealers in securities). This
term [, and] includes instruments described by §475(e)(2)(B),
(C), and (D) of that code.
(12)[(10)] Tax reporting period--The
period upon which the tax is based under Tax Code, §171.1532 (Business
on Which Tax on Net Taxable Margin Is Based) or §171.0011
(Additional Tax).
(13)[(11)] Taxable entity--Any
entity upon which tax is imposed under Tax Code, §171.0002(a) (Definition
of Taxable Entity) and not specifically excluded under Tax Code,
§171.0002(b) or §171.0002(c). See also §3.581 of this
title (relating to Margin: Taxable and Nontaxable Entities).
(14)Texas gross receipts--The portion
of a taxable entity's gross receipts that is from business done in
Texas.
(c)Apportionment formula. Except as provided
in paragraphs (1) and (2) of this subsection, a [A]
taxable entity's margin is apportioned to Texas [this
state] to determine the amount of franchise tax due by multiplying
the taxable entity's margin by a fraction, the numerator of which
is the taxable entity's Texas gross receipts [from
business done in this state] and the denominator of which is
the taxable entity's gross receipts from its entire business [except
as provided by this subsection].
(1)Regulated investment company services. A taxable
entity's margin derived, directly or indirectly, from the sale of
management, distribution, or administration services to or on behalf
of a regulated investment company, is apportioned to Texas by multiplying
that portion of the taxable entity's total margin by a fraction: [
Taxable entities that have margin that is derived, directly or indirectly
from the sale of services to or on behalf of a regulated investment
company as defined by IRC, §851(a), should refer to Tax Code,
§171.106(b), relating to the apportionment of gross receipts
from services for regulated investment companies.]
(A)the numerator of which is the
average of the sum of shares owned at the beginning of the year and
the sum of the shares owned at the end of the year by the investment
company shareholders whose principal place of business is in this
state or, if the shareholders are individuals, are residents of this
state; and
(B)the denominator of which is the
average of the sum of shares owned at the beginning of the year and
the sum of shares owned at the end of the year by all investment company
shareholders.
(2)Employee retirement plan services. A taxable
entity's margin derived, directly or indirectly, from the sale of
management, administration, or investment services to an employee
retirement plan is apportioned to Texas by multiplying that portion
of the taxable entity's total margin by a fraction: [Taxable
entities that have margin that is derived, directly or indirectly,
from the sale of management, administration, or investment services
to an employee retirement plan, as defined in subsection (b)(3) of
this section, should refer to Tax Code, §171.106(c), relating
to the apportionment of gross receipts from services for employee
retirement plans.]
(A)the numerator of which is the
average of the sum of beneficiaries domiciled in Texas at the beginning
of the year and the sum of beneficiaries domiciled in Texas at the
end of the year; and
(B)the denominator of which is the
average of the sum of all beneficiaries at the beginning of the year
and the sum of all beneficiaries at the end of the year.
(d)General rules for reporting gross receipts.
(1)A taxable entity that files an annual report must
report gross receipts based on the business done by the taxable entity
beginning with the day after the date upon which the previous report
was based, and ending with the last accounting period ending date
for federal income tax purposes ending in the calendar year before
the calendar year in which the report is originally due. [If
the taxable entity has not filed a previous report and must file an
annual report, see §3.595 of this title (relating to Margin:
Transition).]
(2)A taxable entity with a beginning date prior
to October 4, 2009 that files an initial report must report
gross receipts based on its activities commencing with the beginning
date, as described in §3.584 of this title (relating to Margin:
Reports and Payments), and ending on the last accounting period ending
date for federal income tax purposes that is at least 60 days before
the original due date of the initial report. A taxable entity
with a beginning date on or after October 4, 2009 that files a first
annual report must report gross receipts based on its activities commencing
with the beginning date and ending on the last accounting period ending
date for federal income tax purposes in the same calendar year as
the beginning date.
(3)Taxable entities that are members of an affiliated
group that are part of a unitary business must file a combined franchise
tax report. See §3.590 of this title (relating to Margin: Combined
Reporting), for determining gross receipts for a combined report.
(4)When a taxable entity computes gross receipts for
apportionment, the taxable entity is deemed to have elected to use
the same methods that the taxable entity used in filing its federal
income tax return.
(5)Any item of revenue that is excluded from total
revenue under Texas law or United States law is excluded from gross
receipts from an entity's entire business [everywhere]
and Texas gross receipts [in Texas ]as provided
by Tax Code, §171.1055(a) (Exclusion of Certain Receipts
for Margin Apportionment). For example, any amount that is excluded
from total revenue under the IRC [Internal Revenue
Code], §78 (Dividends received from certain foreign
corporations by domestic corporations choosing foreign tax credit) or
§§951 - 964(26 U.S. Code Subpart F - Controlled Foreign
Corporations), is excluded from gross receipts. Non-receipt
items that are excluded from total revenue under §3.587 of this
title, such as $500 per pro bono services case; the actual cost of
uncompensated care; the direct cost of providing waterway transportation;
the direct cost of providing agricultural aircraft services and the
cost of a vaccine, are not deducted from gross receipts under this
section. See subsection (b)(3) of this section, concerning definition
of gross receipts. For example, under Tax Code, §171.1011(g-3)
(Determination of Total Revenue from Entire Business), an attorney
may exclude $500 from total revenue for handling a pro bono case.
Since the $500 is not a receipt, there is no exclusion for pro bono
work when calculating gross receipts. Therefore, if a taxable entity
starts with its total revenue amount to calculate its gross receipts,
the taxable entity must add back the $500 per pro bono services case.
(6)A taxable entity that uses a 52 - 53 week accounting
year end and that has an accounting year that ends during the first
four days of January of the year in which the report is originally
due may use the preceding December 31 as the date through which margin
is computed.
(7)Any item of allocated revenue excluded under §3.587(c)(9)
of this title is excluded from Texas gross receipts and gross
receipts from an entity's entire business [everywhere
].
(e)Computation and sourcing [Treatment
of specific items in the computation] of gross receipts.
(1)Advertising services. Gross receipts from
the dissemination of advertising are sourced to the locations of the
advertising audience. The locations of the advertising audience should
be determined in good faith using the most reasonable method under
the circumstances, considering the information reasonably available.
The method should be consistently applied from year to year and supported
by records retained by the service provider. Locations that may be
reasonable include the physical locations of the advertising, advertising
audience locations recorded in the books and records of the service
provider, and locations listed in published rating statistics. If
the locations of nationwide advertising audiences cannot otherwise
be reasonably determined, then 8.7% of the gross receipts are sourced
to Texas [Bad debt recoveries. Bad debt recoveries are
gross receipts].
(2)Capital assets and investments.
(A)Only the net gain from the sale
of a capital asset or investment is included in gross receipts. A
net loss from the sale of a capital asset or investment is not included
in gross receipts.
(i)The net gain or net loss is determined
separately for each sale of a capital asset or investment.
(ii)For reports originally due prior
to January 1, 2021, a taxable entity must add the [Except
as provided by paragraph (16) of this subsection,] net gains
and losses from sales of investments and capital assets [must
be added] to determine the total gross receipts from such transactions.
If both Texas and out-of-state sales have occurred, then a separate
calculation of net gains and losses on Texas sales must be made. [If
the combination of net gains and losses results in a net loss, the
taxable entity should net the loss against other receipts, but not
below zero. In no instance shall the apportionment factor be greater
than 1.]
(iii)Example 1. During a report year,
a real estate investment company sells two Texas investment properties,
reporting a gain on sale of one property and a loss on the sale of
the other property. The company should include the net gain on the
profitable sale in gross receipts from its entire business but should
not include the net loss on the unprofitable sale. The company should
not offset the net loss against the net gain. To determine Texas gross
receipts, the company should include only the net gain on sale of
the Texas investment property in Texas gross receipts and would not
include the net loss on the sale of the other Texas investment property.
(iv)Example 2. The facts are the
same as in Example 1, except the real
estate investment company also had net gains and net losses from the
sale of out-of-state properties and net gains and net losses from
the out-of-state sale of capital assets. For reports originally due
prior to January 1, 2021, the real estate investment company must
offset all of the net losses from these sales against all of the net
gains and, if the result is a net gain, include only the net gain
in gross receipts from its entire business. If the result is a net
loss, the net loss is not included in gross receipts from its entire
business. To determine Texas gross receipts, the company should offset
the net loss from the sale of the one Texas property against the net
gain from the sale of the other Texas property. If the result is a
net gain, only the net gain is included in Texas gross receipts. If
the result is a net loss, the net loss is not included in Texas gross
receipts.
(B)The net gain from the sale of a
capital asset or investments is sourced based on the type of asset
or investment sold. The net gain from the sale of an intangible asset
is sourced to the location of the payor as provided in paragraph (21)(B)
of this subsection, concerning gross receipts from the sale of intangible
assets, and paragraph (25) of this subsection, concerning securities,
of this subsection. [Net gain on sales of intangibles held
as capital assets or investments is apportioned to the location of
the payor.] Examples of intangible assets [intangibles
] include, but are not limited to, stocks, bonds, commodity
contracts [commodities], futures contracts, patents,
copyrights, licenses, trademarks, franchises, goodwill, and general
receivable rights. The net gain from the sale of real property
is sourced as provided in paragraph (23) of this subsection, concerning
real property. The net gain from the sale of tangible personal property
is sourced as provided in paragraph (29) of this subsection, concerning
tangible personal property.
(3)Computer hardware and digital property.
software services and programs. Gross receipts from the sale of computer
software services are apportioned to the location where the services
are performed. Gross receipts from the sale of a computer program
(as the term "computer program" is defined in §3.308 of this
title (relating to Computers--Hardware, Software, Services and Sales)),
are receipts from the sale of an intangible asset and are apportioned
to the legal domicile of the payor.]
(A)Gross receipts from the sale of
computer hardware together with any software installed on the hardware
are sourced as the sale or lease of tangible personal property under
paragraph (29) of this subsection.
(B)Gross receipts from the lease
of computer hardware together with any software installed on the hardware
are sourced as the leasing of tangible personal property under paragraph
(14)(B) of this subsection.
Cont'd...
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