New subparagraph (B) gives non-exhaustive examples of internet hosting services. These examples extend beyond what might be ordinarily considered as internet hosting services. However, the statutory definition extends beyond the ordinary meaning, as was noted by the analysis of the same definition that was proposed in House Bill 416 during the same legislative session. House Research Organization Analysis of House Bill 416, 83rd Legislature, 2013 ("A growing number of companies offering cloud computing services and products likely would fall under the definition of web hosting in the bill."). House Bill 500's specific exclusion of telecommunications service, which would not ordinarily be considered as an internet hosting service, indicates that the Legislature was aware of the broad sweep of the definition. The specific meaning dictated by the legislation "elevate{s} the Legislature's substituted meaning even when it departs from the term's ordinary meaning." Entergy Gulf States, Inc. v. Summers, 282 S.W.3d 433, 442 (2009).

New subparagraph (C) gives non-exhaustive examples that are not internet hosting services.

New subparagraph (D) lists factors for distinguishing the purchase of access to computer services over the internet from the purchase or lease of digital property over the internet. The factors are taken from the Internal Revenue Service Notice of Proposed Rulemaking regarding "Classification of Cloud Transactions and Transactions Involving Digital Content," 84 Fed. Reg. 40317 (Aug. 14, 2019).

Chris Rosas of Rackspace suggested various revisions to fine-tune the factors. The Comptroller declines these suggestions. Subparagraph (D) contains a partial list of factors, the relevance of which may vary depending upon the circumstances. If a factor described in subparagraph (D) does not fit a particular circumstance, it may be discounted.

New subparagraph (E) provides guidance for determining the physical location of the customer. The statute refers to "the customer to whom the service is provided." The comptroller has concluded from these references that the "customer" means the purchaser, or the designee of the purchaser, that consumes the service. Thus, in a resale situation, the service provider should source the revenue to the customer's customer that actually receives the service.

The statute provides no further instruction for determining the location of the customer. New subparagraph (E) enables taxpayers to determine the most reasonable sourcing method based on the available information. The method will be subject to audit review for reasonableness under the circumstances.

Chris Rosas of Rackspace requested the comptroller delete the example in subparagraph (E)(iii) regarding customer location when an intermediary purchases access to a computer service for resale to a third party. The comptroller declines the request. This is an example of the general rule that the customer location is determined by the physical location where the purchaser or the purchaser's designee consumes the service.

The comptroller amends renumbered subsection (e)(14) addressing leases and subleases to standardize the language used throughout the section. The comptroller amends subparagraphs (C) - (E) to improve readability.

The comptroller amends renumbered subsection (e)(15) to improve readability.

The comptroller amends the title of renumbered subsection (e)(16) to include all loan servicing and adds two subparagraphs. New subparagraph (A) contains the original guidance for sourcing gross receipts from servicing loans secured by real property, pursuant to Tax Code, §171.103(a)(2). New subparagraph (B) provides guidance on sourcing gross receipts from servicing other loans that are not secured by real property.

The comptroller amends the title of renumbered subsection (e)(17) to reflect that the content applies only to loans and securities treated as inventory of the seller. The comptroller amends subparagraph (A) to state that loans and securities held by a taxable entity for investment or risk management purposes are not inventory. The comptroller adds references to information on sourcing receipts from the sale of loans and securities. The comptroller amends subparagraph (B) to reflect that the guidance applies to original reports due on or after January 1, 2008, pursuant to STAR Accession No. 201005671L (May 28, 2010).

Sandi Farquharson of Ryan comments that subsection (e)(17) repeats the mistakes of subsection (b)(5), in stating that securities and loans held for investment or risk management purposes are not inventory. For the reasons stated in response to the comments under subsection (b)(5), the comptroller declines to make any changes to subsection (e)(17).

The comptroller removes subsection (e)(20) concerning the sourcing of receipts from newspaper and magazine advertising and incorporates the information into new subsection (e)(1) to consolidate sourcing rules for advertising.

The comptroller amends subsection (e)(21) on the sourcing of receipts from the licensing of intangibles to improve the readability of subparagraph (B) and add examples taken from TGS-NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432 (Tex. 2011) in new subparagraph (C).

The comptroller moves the information on the sourcing of receipts from radio and television advertising from former subsection (e)(22) to new subsection (e)(1) to consolidate sourcing rules for advertising. The comptroller moves information on sourcing receipts from qualified stock purchases under IRC, §338(h)(10) from former subsection (e)(7) to subsection (e)(22). The comptroller retitles subsection (e)(22) to more accurately reflect the contents and amends the language to improve readability.

The comptroller amends subsection (e)(24) to improve readability.

The comptroller amends subsection (e)(25) to update the percentage that is applied to securities sold through an exchange when a buyer cannot be identified in order to use more current population data for Texas and the United States. The Comptroller's Revenue Estimating Division provided the current data.

Celeste Embrey of TBA and Kim Chamberlain of SIFMA comment that subsection (e)(25) should be applied prospective and request that taxpayers be given an additional option to source securities when a buyer cannot be identified. Both request that taxpayers be able to source receipts earned in Texas from similar, comparable securities instead of 8.7%. The comptroller agrees in part and will retain the use of 7.9% of gross receipts for prior periods. The comptroller declines to amend the section to provide for the alternative method of sourcing because determining what securities would be similar, comparable securities would be too subjective.

The comptroller amends subsection (e)(26) to provide additional guidance on the sourcing of receipts from services and reorganizes the paragraph.

The statutory apportionment formula for the margin tax is based on "each service performed in this state," with a proviso that receipts from servicing loans secured by real property are apportioned based on the location of the property. Historically, the comptroller has interpreted the statute largely by ad hoc adjudications of specific cases, which were sometimes followed by rule codifications of specific outcomes for specific industries. See, Southwestern Bell Tel. Co. v. Combs, 270 S.W.3d 249, 266 at n. 39 (Tex. App. - Amarillo 2008, pet. denied). The former rule had special provisions for internet access fees, fees for loan servicing of real property, newspaper and magazine advertising revenue, radio and television advertising revenue, services procurement, telephone companies, and transportation companies. The adopted rule largely retains or consolidates these special provisions, and adds a new special provision for internet hosting services as a result of the 2013 legislation.

Amended subsection (e)(26), like former subsection (e)(26), remains as the generic rule for apportioning all other service receipts. Former subsection (e)(26) provided little guidance. It tracked the statutory declaration that receipts from services are apportioned to the location where the service is performed and added a second sentence: "If services are performed inside and outside Texas, then such receipts are Texas receipts on the basis of the fair value of the services rendered in Texas." Although this sentence explained the manner of apportionment "if" services were performed inside and outside Texas, neither the sentence nor the rest of the subsection text explained when services were considered to be performed inside and outside Texas.

In Comptroller's Decision No. 10,028 (1980), the comptroller added some additional meaning to the generic apportionment rule for services (emphasis added):

"To accomplish the goal of giving independent meaning and significance to the receipts factor from sales of services of a corporation, the phrase 'services performed within Texas' as used in Art. 12.02(1)(b)(ii) must be construed as 'units of service sold, the performance of which occurs within Texas, ' thereby shifting the focus geographically from every activity performed by a corporation that generates service receipts, to those specific, end-product acts for which a customer contracts and pays to receive. If no distinction between receipt-producing activities versus non-receipt- producing, albeit essential, support activities were made, no independent meaning could be given to the 'receipts from sales of services' factor, since the determination of the dollar amount of such services performed within Texas would always be ascertained by looking at other factors, such as the property and payroll located in Texas, on the theory that no activity of a corporation that generates service receipts is any more important than any other activity, since all are essential to the end-product performance of the service that is sold."

The agency has cited this decision on a number of occasions, and the courts have acknowledged that the decision represents a "longstanding interpretation" of the agency. Westcott Communications, Inc. v. Strayhorn, 104 S.W.3d 141, 146 (Tex. App. - Austin 2003, pet. denied); Hegar v. Sirius XM Radio, Inc., No. 03-18-00573-CV (Tex. App. - Austin 2020).

Comptroller's Decision No. 10,028 distinguishes between receipts-producing activities and non-receipts producing, albeit essential support activities and focuses on the end-product acts for which a customer contracts and pays to receive. The adopted rule expounds upon these principles.

The comptroller amends subparagraph (A) or subsection (e)(26) to assist auditors and taxpayers in identifying where a service is performed. The new language reflects current guidance that a service is performed at the location where the receipts-producing, end-product act occurs, provided that there is a receipts-producing, end-product act. New clauses (i)-(ii) are added to provide examples. The comptroller amends subparagraph (B) to provide additional guidance for determining the fair value of services performed in Texas. New clauses (i)-(iii) give examples. The comptroller amends subparagraph (C) to contain information originally provided in subparagraph (A). New subparagraph (D) contains information originally provided in subparagraph (B). New subparagraph (E) contains information originally provided in subparagraph (C).

Patrick Reynolds of COST argues that the amendments to subsection (e)(26) result in market-based sourcing that is not supported by any legislative change, and that any changes should be applied prospectively. The comptroller agrees with COST that Rule 3.591 should seek to fairly apportion multistate business to Texas consistent with the statutes. The comptroller disagrees that the adopted rule is a retroactive application of market-based sourcing to service receipts. Rather, the rule recognizes that sometimes a service is performed where the taxpayer's market is located and sometimes it is not. That is the comptroller's current interpretation of the sourcing statutes, and the comptroller hopes that the rule will assist taxpayers and auditors in telling the difference.

The comptroller amends subsection (e)(27) to provide guidance on the sourcing of receipts from the sale of a membership interest in a single member limited liability company and delete the guidance regarding service procurement. Renumbered subsection (e)(13) on internet hosting and subsection (e)(26), the general rule for services, cover the sourcing of receipts from service procurement.

The comptroller amends the title of subsection (e)(30) to accurately reflect that it applies to all taxable entities providing telecommunication services.

The comptroller adds new subsection (e)(31) concerning sourcing of broadcasting receipts to implement House Bill 2896, which enacted Tax Code, §171.106(h). The language in this paragraph tracks the statutory language. Subsequent paragraphs are renumbered accordingly.

Sandi Farquharson of Ryan requests that the comptroller remove subsection (e)(32) on the ground that language regarding the sourcing receipts from transactions that occur in Texas waters is not necessary, and that these receipts should be sourced under the other types of transactions in subsection (e). She further comments that this paragraph might conflict with other sourcing paragraphs like paragraph (26) (Services). She suggests that subsection (e)(32) might be more appropriate moved to subsection (b) as a definition regarding transactions sourced to "Texas" as including Texas waters. The comptroller declines to make these changes. Subsection (e)(32) has been in existence since the adoption of the rule, and there have not been any disputes regarding the application of this subsection.

The comptroller amends renumbered subsection (e)(33) to retitle the paragraph to accurately reflect that it applies to transportation services, and to replace the concept of "intrastate commerce" with the concept of transportation "in Texas."

The proposed rule eliminated the option to source based on the ratio of Texas mileage to everywhere mileage. Jo Ellen Stock of Union Pacific requested that the comptroller retain the option, but to clarify that the calculation should only include mileage involving the actual movement of goods and passengers. The adopted rule accepts the comment to retain the mileage option. The adopted rule also provides that only compensated mileage should be included in the calculation, to be consistent with the Legislature's overall scheme that sourcing should be based on activities that generate gross receipts.

The comptroller received comments from Celeste Embrey of TBA, Kim Chamberlain of SIFMA, and Dale Craymer of TTARA regarding the retroactive application of the additions and revisions to the rule.

When the additions or revisions are changes, the adopted rule retains the option of applying the sourcing procedures of the former rule to former periods. For example, subsection (e)(2) no longer allows the adding of net gains and net losses in calculating gross receipts from the sale of capital assets and investments. So, the subsection retains the old rule provision that allowed the addition of net gains and losses for reports originally due prior to January 1, 2021. The adopted rule retains similar options for the sourcing of receipts from the sale of securities under subsection (e)(25), which changed the percentage of Texas receipts when the payor cannot be identified, and the sourcing of receipts from radio and television advertising under subsection (e)(1), which changed the sourcing from the location of the broadcast tower to the location of the audience.

In some instances, the rule adds text to incorporate legislation adopted after the previous rule revision. New subsection (e)(31) implements the sourcing of broadcasting receipts under House Bill 2896, 84th Legislature, and new subsection (e)(13) implements the sourcing of internet hosting receipts under House Bill 500, 83rd Legislature. In those instances, the adopted rule applies the effective date of the legislation, so the additions are not retroactive applications of the law.

In other instances, the additions or revisions are expositions of existing Comptroller policy rather than changes. An example is the general rule for sourcing service receipts under subsection (e)(26). The rule is an exposition of the comptroller's current interpretation of the sourcing statute, which has been endorsed in part by the Court of Appeals opinion in the Sirius XM Radio litigation. TTARA suggests that it may be premature to revise the rule until the Texas Supreme Court has ruled on the pending petition for review. However, TTARA has also filed an amicus brief in the Texas Supreme Court asserting that "clarification of the sourcing rule" is needed. The amended rule clarifies how the agency applies the sourcing statute.

Finally, TTARA and others point to language in the preamble of the proposed rule that the agency might supersede some prior inconsistent rulings. However, superseding selected rulings that are inconsistent with the agency's current interpretation, as it has been broadly applied, does not constitute retroactive rulemaking. Obsolete or inconsistent rulings are routinely superseded even without rulemaking.

This amendment is adopted under Tax Code, §111.002 (Comptroller's Rules; Compliance; Forfeiture), which provides the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of the provisions of Tax Code, Title 2.

The amendment implements Tax Code, §171.106 (Apportionment of Margin to This State).