| (a) Section provisions. The provisions of this section apply to franchise tax reports originally due on or after January 1, 1992. (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. (3) Corporation--Any entity upon which tax is imposed under Tax Code, §171.001. (4) Employee retirement plan--A plan or other arrangement that qualifies under Internal Revenue Code, §401(a) or that satisfies the requirement of Internal Revenue Code, §403, or a government plan described in Internal Revenue Code, §414(d). (5) Gross receipts--All revenues that are recognized under the methods used for federal income tax purposes for the tax reporting period without deduction for the cost of property sold, materials used, labor performed, or other costs incurred, unless otherwise specifically provided for in this section or Tax Code, Chapter 171. (6) Internal Revenue Code--The Internal Revenue Code (IRC) of 1986 in effect for a specified tax year as provided by Tax Code, §171.001. Federal taxable income reported for federal income tax purposes may differ from reportable federal taxable income for franchise tax reporting purposes. To the extent that such differences exist, the applicable IRC must be used to report the differences. (A) For reports that are originally due on or after January 1, 1998, the IRC in effect for the tax year beginning on or after January 1, 1996, and before January 1, 1997 applies. (B) For reports that are originally due on or after January 1, 1996 and before January 1, 1998, the IRC in effect for the tax year beginning on or after January 1, 1994, and before January 1, 1995 applies. (C) For reports that are originally due on or after January 1, 1992 and before January 1, 1996, the IRC in effect for the tax year beginning on or after January 1, 1990, and before January 1, 1991 applies. (7) Investment--Any non-cash asset that is not a capital asset and that is neither held as inventory nor proceeds from the sale of inventory. (8) Legal domicile--The legal domicile of a corporation is its state of incorporation. The legal domicile of a partnership or trust is the principal place of business of the partnership or trust. The principal place of business of a partnership or trust is the location of its day-to-day operations. If the day-to-day operations of the partnership or trust are conducted equally or fairly evenly in more than one state, then the principal place of business is the commercial domicile. (9) Location of payor--The legal domicile of the payor. (10) Revenue--Except as otherwise specifically provided for in this section or Tax Code, Chapter 171, revenue means the value of inflows of economic resources from separate legal entities for delivering or producing goods, rendering services, or carrying out other activities in the entity's operations to the extent included in computing federal taxable income under the method used for federal income tax purposes during the tax reporting period. (11) Tax reporting period--For the purposes of this section, the period upon which the tax is based under Tax Code, §171.1532 or §171.0011. (c) Apportionment formula. Unless otherwise required under Tax Code, Chapter 171, or by this section or other sections promulgated under Tax Code, Chapter 171, a corporation's earned surplus is apportioned to this state to determine the amount of franchise tax due by multiplying the corporation's earned surplus by a fraction, the numerator of which is the corporation's gross receipts from business done in this state and the denominator of which is the corporation's gross receipts from its entire business. Examples of methods of apportionment that are "otherwise required" include, but are not limited to the following: (1) Certain items of income must be allocated as provided by Tax Code, §171.1061. (2) For reports that are originally due on or after January 1, 1992, corporations that have taxable earned surplus that is derived, directly or indirectly from the sale of services to or on behalf of a regulated investment company as defined by Internal Revenue Code, §851(a), should refer to Tax Code, §171.106(c), relating to the apportionment of gross receipts from services for regulated investment companies. (3) For reports originally due on or after January 1, 1999, corporations that have taxable earned surplus 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)(4) of this section should refer to Tax Code, §171.106(d), relating to the apportionment of gross receipts from services for employee retirement plans. (d) General rules for reporting gross receipts. (1) A corporation that files an annual report must report gross receipts based on the business done by the corporation beginning with the day after the date upon which the previous report was based, and ending with the last accounting period that ends in the year before the year in which the report is originally due. (2) A corporation that files an initial report must report gross receipts based on its activities beginning with the date on which the corporation begins to do business in Texas, as described in §3.554 of this title (relating to Earned Surplus: Nexus), or files its Texas charter, and ending on the last accounting period ending date that is at least 60 days before the original due date of the initial report; if no such date exists, then ending on the date that is the last day of a calendar month and that is nearest to the end of the corporation's first year of business in Texas. (3) A corporation must report gross receipts based solely on its own earned surplus; consolidated reporting is prohibited. For example, a corporation that joins in filing a consolidated federal income tax return based on consolidated federal income tax provisions must report taxable income deferred on sales to other members of the consolidated group as though no consolidated federal income tax return had been filed. (4) When a corporation computes gross receipts for apportionment, the corporation is deemed to have elected to use the same methods that the corporation used in filing its federal income tax return. (5) Any item of revenue that is excluded from net taxable earned surplus under Texas law or United States law is excluded from gross receipts everywhere and gross receipts in Texas. For example, any amount that is excluded from earned surplus under Internal Revenue Code, §78 or §§951 - 964, is excluded from gross receipts. (6) Corporations that report federal taxable income under a long-term contract method must report revenues that are recognized for federal income tax purposes without reduction for the cost of property sold, materials used, labor performed, or other costs incurred. For example, a contractor that uses the percentage-of-completion method to report a construction contract for federal income tax purposes would recognize the portion of the total contract price that the contractor used in computing gross income on the appropriate federal income tax return. (7) If the installment method is used to report sales of property, then the seller should include the revenues recognized for federal income tax purposes, unless the property sold is a capital asset or investment. If the property sold is a capital asset or investment, then the net gain that is included in federal taxable income must be used in computing receipts. (8) Revenues that the receiver of a corporation in receivership collects or otherwise obtains are gross receipts of the corporation. (9) If the comptroller determines that commonly controlled affiliated corporations have not entered into a transaction on an arm's length basis, then the comptroller may distribute or allocate income and deductions from such transaction as necessary to prevent franchise tax avoidance, provided that such adjustments are authorized under application of principles that are found in Internal Revenue Code, §482, and regulations thereunder. (10) A corporation 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 taxable earned surplus is computed. (11) Gross receipts that relate to income that is described in Tax Code, §171.1061 are allocated to a state and are not included in gross receipts everywhere or Texas gross receipts for apportionment purposes. (e) Treatment of specific items in the computation of receipts. (1) Agency reimbursements. Reimbursements from a principal to a corporation that acts as the principal's agent for charges that the agent incurs on behalf of the principal, are not gross receipts. Amounts identified as reimbursements that exceed actual expenses paid to a third party are gross receipts. (2) Bad debt recoveries. Bad debt recoveries are not gross receipts. (3) Capital assets and investments. Net gains and losses from sales of investments and capital assets must be added to determine the total receipts from such transactions. (A) If the combination of net gains and losses results in a net loss, the corporation must report zero gross receipts from such transactions. (B) If the combination of net gains and losses results in a net gain, and 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 Texas net gain exceeds the total net gain, then the Texas net gain to report equals the total net gain. Net gain on sales of intangibles held as capital assets or investments is apportioned to the location of the payor. Examples of intangibles include, but are not limited to, stocks, bonds, commodities, futures contracts, patents, copyrights, licenses, trademarks, franchises, goodwill, and general receivable rights. (4) Capital loss carrybacks and carryforwards. The excess of capital losses over capital gains that are carried back or carried forward for federal income tax purposes must be used in the computation of receipts in the year of the actual loss, not in the year to which such loss is actually used as a carryback or carryforward. (5) Membership or enrollment fees paid for access to benefits. Membership or enrollment fees paid for access to benefits are receipts from the sale of an intangible asset and are apportioned to the legal domicile of the payor. (6) Computer services and programs. Receipts from the sale of computer software services are apportioned to the location where the services are performed. 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. (7) Condemnation. Revenues from condemnation that result from the taking of property are gross receipts that are apportioned based on the location of the property condemned. (8) Debt forgiveness. If a creditor releases any part of a debt, then the amount that the creditor forgives is a gross receipt that is apportioned to the legal domicile of the creditor. (9) Debt retirement. Revenues from the retirement of a corporation's own indebtedness, such as through the corporation's purchase of its own bonds at a discount, are gross receipts that are apportioned to the corporation's state of incorporation. The indebtedness is treated as an investment in the determination of the amount of gross receipts. (10) Deemed sales of assets under Internal Revenue Code, §338. Amounts that are deemed to have been received by the target corporation are treated as sales of assets by the target corporation, and are apportioned according to rules that otherwise apply to sales of such assets under Tax Code, Chapter 171, or this section. For the purposes of this paragraph, the purchaser of the target's stock is considered the purchaser of the assets. (11) Demurrage charges. Demurrage charges for the detention or storage of equipment that is used in the transportation of goods and merchandise in interstate commerce are Texas receipts to the extent that the detention or storage occurs in Texas. (12) DISC or FSC. A DISC (domestic international sales corporation) or FSC (foreign sales corporation) is treated in the same manner as any other corporation, except that a commission DISC or FSC may elect to use the earned surplus apportionment factor of its parent if the parent is doing business in Texas under the guidelines that are outlined in §3.554 of this title (relating to Earned Surplus: Nexus). Receipts from the sale of tangible personal property by a corporation to a DISC or FSC that is located in Texas are not Texas receipts, if the tangible personal property flows uninterrupted from the selling corporation to a foreign purchaser who is located outside of Texas. If a DISC or FSC assembles, packages, repackages, modifies, stores, or otherwise takes physical delivery of tangible personal property in Texas, then the receipts from the sale of the tangible personal property are Texas receipts to the selling corporation. Cont'd... |
