The Comptroller of Public Accounts adopts new §3.591, concerning margin: apportionment, with changes to the proposed text as published in the September 14, 2007, issue of the Texas Register (32 TexReg 6297).

This section implements House Bill 3, 79th Legislature, Third Called Special Session, 2006, and House Bill 3928, 80th Legislature, 2007, which revise the franchise tax. This section establishes guidelines for the apportionment of the franchise tax. Subsection (a) provides that this section only applies to franchise tax reports originally due on or after January 1, 2008. Subsection (b) defines words and terms used in the section. Subsection (c) gives the apportionment formula and provides for two exceptions to the apportionment formula. Subsection (d) provides general rules for reporting gross receipts. Subsection (e) provides the treatment of specific items of revenue in the computation of gross receipts. Subsection (f) provides guidance in the determination of gross receipts for natural gas production.

We received comments from various groups. Following is a summary of the comments received and the responses.

The Texas Society of Certified Public Accounts (TSCPA) recommended that subsection (b)(7) be amended to define the "legal domicile" of a limited liability company. The "legal domicile" of a limited liability company is defined in subsection (b)(7).

The TSCPA states that the proposed rule raises some ambiguity as to whether the revenues from security sales are to be determined on a "net" or "gross" basis and asks if the increase in the default percentage from 6.5% to 7.9% was intentional. Subsection (e)(16) states when a security may be reported at "gross". The increase from 6.5% to 7.9% was intentional and was based on the increase in the Texas population.

The State Bar of Texas, Section of Taxation (SBT) recommended adding language to subsection (e)(26) to clarify that the determination of where a service is performed is not limited to activities performed directly by a taxable entity. The comptroller declined to make these changes as the apportionment of receipts from the performance of a service has not changed and should continue to be sourced to the location where the service is performed. Questions regarding this topic will be more appropriately addressed in a case by case basis.

The comptroller corrected references in subsection (b)(4) and (e)(2).

This rule is adopted under Tax Code, §111.002, 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 new section implements Tax Code, §§171.103, 171.1055, 171.106, and 171.1121.