The Comptroller of Public Accounts adopts amendments to §3.599, concerning margin: research and development activities credit, without changes to the proposed text as published in the June 10, 2022, issue of the Texas Register (47 TexReg 3434). The rule will not be republished.

The comptroller amends this section to provide guidance regarding the franchise tax research and development activities credit.

The comptroller amends the definition of Internal Revenue Code (IRC) in subsection (b)(5) to explain which federal Treasury Regulations are applicable to the 2011 federal income tax year. The comptroller has reconsidered comments received during the 2021 rulemaking process and agrees that the adopted definition is too restrictive. The amended definition includes any Treasury Regulation that a taxable entity could have applied to the 2011 federal income tax year. The amended definition also includes specific examples of Treasury Regulations applicable to the 2011 federal income tax year.

The comptroller amends subsection (d)(5) to remove items that are inconsistent with the changes made to the definition of IRC. The comptroller reletters subparagraph (C) accordingly.

The comptroller reorganizes subsection (i)(1) and (2) for readability and amends the language moved from paragraph (2) to paragraph (1) to explain that the combined group is the taxable entity for the purposes of calculating and reporting the credit.

The comptroller revises paragraph (3) to remove the current text restricting credit carryforwards and describes how to determine the credit carryforward when the membership of a combined group changes.

The comptroller amends subsection (m) by explaining that the conveyance, assignment, or transfer of an ownership interest in the taxable entity is not a conveyance, assignment, or transfer of the credit by the taxable entity.

The comptroller received comments regarding adoption of the amendment from Michael Thompson of Ryan and Mike Williams of RSM US LLP (RSM). While Mr. Thompson welcomes the proposed revisions, both he and Mr. Williams commented on the existing language of the rule rather than the text proposed for amendment. With two exceptions described below, the commenters made the same comments during the process of adopting the previous amendments to this rule and the comptroller addressed the comments at that time. The comptroller's response to each comment has not changed. A summary of the comments and the comptroller's responses can be found in the preamble to the previous amendments, as published in October 15, 2021, issue of the Texas Register (46 TexReg 7060).

Mr. Thompson also requests a public hearing. Government Code, §2001.029 (Public Comment) requires a public hearing if a public hearing is requested by: at least 25 persons; a governmental subdivision or agency; or an association having at least 25 members. Ryan is not a governmental subdivision or agency, and it is not an association having at least 25 members. The minimum of 25 persons required to mandate a public hearing has not been met because Ryan was the only person to request a public hearing. The comptroller declines to hold a public hearing.

Mr. Thompson comments that the amendment to subsection (b)(5) that now includes Treasury Regulations related to pilot models is inconsistent with the provision in subsection (b)(8)(A)(iii) explaining that certain sales tax exemptions are allowed for uses that are incompatible with the item also being used in qualified research activities. The pilot model Treasury Regulations referenced relate to the Section 174 Test. These regulations do not affect the other three parts of the Four-Part Test, the definition of "qualified research expenses," or any uses for which sales tax exemptions are allowed. The comptroller declines to modify the rule based on this comment.

The amendments are 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 (State Taxation).

The amendments implement Tax Code, Chapter 171, Subchapter M (Tax Credit for Certain Research and Development Activities).