(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.
(E)The customer location is determined by the physical
location where the purchaser or the purchaser's designee consumes
the service. The location should be determined in good faith using
the most reasonable method under the circumstances, considering the
information reasonably available. Receipts from some services may
be sourced to multiple customer locations or to multiple customers.
Locations that may be reasonable under the circumstances include the
customer's principal place of business, the customer's business unit
that is using the computer services, the delivery addresses for individual
units of service provided to the customer, the primary place or places
of consumption by the customer, the service address of the customer,
the billing address of the customer, or a combination of methods.
(i)Example 1. An individual purchases access to a
dating application. The most reasonable customer location for consumption
of the service may be the billing address of the individual in the
absence of information regarding the individual's physical address.
(ii)Example 2. A benefactor purchases access to a
computer service for a charitable organization. The customer is the
purchaser's designee for consuming the service - the charitable organization.
The most reasonable customer location for consumption of the service
may be the physical address of the charitable organization.
(iii)Example 3. An intermediary purchases access to
a computer service for resale to a third party. The customer is purchaser's
designee for consuming the service - the third party. The most reasonable
customer location for consumption of the service may be the physical
location of the third party, if known.
(iv)Example 4. A law firm purchases access to a database
search program for attorneys in multiple offices. The customers are
the purchaser's designees for consuming the service - its attorneys.
The most reasonable customer locations for consumption of the service
may be physical addresses of each office, with the access fee sourced
proportionately based on the number of attorneys in each office.
(v)Example 5. A retailer with multiple sales outlets
purchases access to point of sales software that reports to the retailer's
central office. The most reasonable customer locations for consumption
of the service may be the physical addresses of the central office
and each designated point of sale, with the access fee sourced proportionately
between the central office and each designated point of sale.
(vi)Example 6. A retailer with multiple sales outlets
purchases access to federal income tax preparation software. The most
reasonable customer location for consumption of the service may be
the principal place of business of the retailer.
(vii)Example 7. An individual pays a fee to an internet
ride-sharing service connecting the individual with a driver at a
particular location. The most reasonable customer location for consumption
of the service may be the physical address of rendezvous point for
the ride.
(14)Leases and subleases.
(A)Gross receipts from the lease, sublease, rental,
or subrental of real property are sourced to the location of the property.
(B)Gross receipts from the lease, sublease, rental,
or subrental of tangible personal property are sourced to the location
of the property. If the property is used both inside and outside Texas,
then lease payments are sourced based on the number of days that the
tangible personal property was used in Texas divided by the number
of days that the tangible personal property was used everywhere. If
the amount due under the lease is based on mileage, then the lease
payments are sourced based on the number of miles in Texas divided
by the number of miles everywhere.
(C)If a lump sum is charged for the lease, sublease,
rental, or subrental of more than one item of property, and the items
are located both inside and outside Texas, the lump-sum is sourced
to Texas based on a ratio of the fair rental value of the items located
in Texas to the fair value of the items located outside of Texas.
(D)Gross receipts from the lease, sublease, rental,
or subrental of a vessel that engages in commerce are sourced to Texas
based on the number of days that the vessel is engaged in commerce
in Texas waters divided by the number of days that the vessel is engaged
in commerce everywhere.
(E)Gross receipts from a lease, sublease, rental,
or subrental of real property or tangible personal property that is
treated as a sale for federal income tax purposes are sourced in the
same manner as a sale. Any portion of the payments that the contracting
parties designate as interest is sourced as provided in paragraph
(12) of this subsection, concerning interest.
(15)Litigation awards. Litigation awards are gross
receipts that are sourced to the location of the payor; however, if
the litigation awards are intended to replace receipts for which another
rule provided in this section applies, then the gross receipts are
sourced in accordance with that rule. For example, if a taxable entity
sues a Delaware corporation to recover on a sale of goods delivered
to a Texas location, then a judgment for the amount of that sale would
not convert the receipts from Texas gross receipts to Delaware receipts.
See subsection (f) of this section, for the sourcing of receipts from
judgments, compromises, or settlements that relate to natural gas
production.
(16)Loan servicing.
(A)Gross receipts from servicing loans secured by
real property are sourced to the location of the collateral real property
that secures the loan being serviced.
(B)Gross receipts from servicing loans that are not
secured by real property are sourced as provided in paragraph (26)
of this subsection, concerning services.
(17)Loans and securities treated as inventory of the
seller.
(A)Gross proceeds from the sale of a loan or security
treated as inventory of the seller for federal income tax purposes
are included in gross receipts even though the tax basis is not included
in total revenue under §3.587(e)(4) of this title. Securities
and loans held for investment or risk management purposes are not
inventory. Gross receipts from the sale of a loan or security treated
as inventory of the seller are sourced to the location of the payor
as provided in paragraph (25) of this subsection, concerning securities.
See paragraph (2) of this subsection, concerning capital assets and
investments, or paragraph (10) of this subsection, concerning financial
derivatives, for the treatment of gains and losses from sales of loans
and securities not treated as inventory of the seller.
(B)If a lending institution categorizes a loan or
security as "Securities Available for Sale" or "Trading Securities"
under Financial Accounting Standard No. 115, the gross proceeds of
the sale of that loan or security are considered gross receipts. In
this subparagraph, "Financial Accounting Standard No. 115" means the
Financial Accounting Standard No. 115 in effect as of January 1, 2009,
not including any changes made after that date.
(18)Membership or enrollment fees paid for access
to benefits. Membership or enrollment fees paid for access to benefits
are gross receipts from the sale of an intangible asset and are sourced
to the location of the payor.
(19)Mixed transactions. If a transaction involves
elements of both a sale of tangible personal property and a service,
but no documentation exists to show separate charges for the tangible
personal property and service elements, then the comptroller may determine
the amounts that are allocable to each element based on fair values
or on any available evidence.
(20)Net distributive income. The net distributive
income or loss from a passive entity that is included in total revenue
is sourced to the principal place of business of the passive entity.
(21)Patents, copyrights, and other intangible assets.
(A)Gross receipts from the use of intangible assets.
(i)Revenues from a patent royalty are included in
Texas receipts to the extent that the patent is utilized in production,
fabrication, manufacturing, or other processing in Texas.
(ii)Revenues from a copyright royalty are included
in Texas receipts to the extent that the copyright is utilized in
printing or other publication in Texas.
(iii)Gross receipts that the owner of a patent, copyrighted
material, trademark, franchise, or license receives from licensing
the use of the patent, copyrighted material, trademark, franchise,
or license are sourced to Texas to the extent the patent, copyrighted
material, trademark, franchise or license is used in Texas.
Cont'd...
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