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TITLE 34PUBLIC FINANCE
PART 1COMPTROLLER OF PUBLIC ACCOUNTS
CHAPTER 3TAX ADMINISTRATION
SUBCHAPTER VFRANCHISE TAX
RULE §3.591Margin: Apportionment

(a) Effective date. The provisions of this section apply to franchise tax reports originally due on or after January 1, 2008, except as otherwise noted.

(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) Employee retirement plan--A plan or other arrangement that qualifies under Internal Revenue Code (IRC), §401(a), or that satisfies the requirement of IRC, §403, or a government plan described in IRC, §414(d).

  (4) Gross receipts--The amount determined as total revenue under §3.587 of this title (relating to Margin: Total Revenue), except for a taxable entity taking a deduction for uncompensated care or pro bono services or an entity for which subsection (e)(16) of this section, applies.

  (5) Internal Revenue Code--The Internal Revenue Code of 1986 in effect for a specified tax year as provided by Tax Code, §171.0001.

  (6) Investment--Any non-cash asset that is not a capital asset.

  (7) Legal domicile--The legal domicile of a corporation or limited liability company is its state of formation. The legal domicile of a partnership, trust, or joint venture is the principal place of business of the partnership, trust, or joint venture. The principal place of business of a partnership, trust, or joint venture is the location of its day-to-day operations. If the day-to-day operations are conducted equally or fairly evenly in more than one state, then the principal place of business is the commercial domicile.

  (8) Location of payor--The legal domicile of the payor.

  (9) Security--An instrument defined under Internal Revenue Code, §475(c)(2), and includes instruments described by §475(e)(2)(B), (C), and (D) of that code.

  (10) Tax reporting period--The period upon which the tax is based under Tax Code, §171.1532 or §171.0011.

  (11) Taxable entity--Any entity upon which tax is imposed under Tax Code, §171.0002(a) and not specifically excluded under Tax Code, §171.0002(b) or §171.0002(c). See also §3.581 of this title (relating to Margin: Taxable and Nontaxable Entities).

(c) Apportionment formula. A taxable entity's margin is apportioned to this state to determine the amount of franchise tax due by multiplying the taxable entity's margin by a fraction, the numerator of which is the taxable entity's gross receipts from business done in this state and the denominator of which is the taxable entity's gross receipts from its entire business except as provided by this subsection.

  (1) Taxable entities that have margin that is derived, directly or indirectly from the sale of services to or on behalf of a regulated investment company as defined by IRC, §851(a), should refer to Tax Code, §171.106(b), relating to the apportionment of gross receipts from services for regulated investment companies.

  (2) Taxable entities that have margin 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)(3) of this section, should refer to Tax Code, §171.106(c), relating to the apportionment of gross receipts from services for employee retirement plans.

(d) General rules for reporting gross receipts.

  (1) A taxable entity that files an annual report must report gross receipts based on the business done by the taxable entity beginning with the day after the date upon which the previous report was based, and ending with the last accounting period ending date for federal income tax purposes ending in the calendar year before the calendar year in which the report is originally due. If the taxable entity has not filed a previous report and must file an annual report, see §3.595 of this title (relating to Margin: Transition).

  (2) A taxable entity that files an initial report must report gross receipts based on its activities commencing with the beginning date, as described in §3.584 of this title (relating to Margin: Reports and Payments), and ending on the last accounting period ending date for federal income tax purposes that is at least 60 days before the original due date of the initial report.

  (3) Taxable entities that are members of an affiliated group that are part of a unitary business must file a combined franchise tax report. See §3.590 of this title (relating to Margin: Combined Reporting), for determining gross receipts for a combined report.

  (4) When a taxable entity computes gross receipts for apportionment, the taxable entity is deemed to have elected to use the same methods that the taxable entity used in filing its federal income tax return.

  (5) Any item of revenue that is excluded from total revenue under Texas law or United States law is excluded from gross receipts everywhere and gross receipts in Texas as provided by Tax Code, §171.1055(a). For example, any amount that is excluded from total revenue under the Internal Revenue Code, §78 or §§951 - 964, is excluded from gross receipts.

  (6) A taxable entity 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 margin is computed.

  (7) Any item of allocated revenue excluded under §3.587(c)(9) of this title is excluded from Texas receipts and receipts everywhere.

(e) Treatment of specific items in the computation of gross receipts.

  (1) Bad debt recoveries. Bad debt recoveries are gross receipts.

  (2) Capital assets and investments. Except as provided by paragraph (16) of this subsection, net gains and losses from sales of investments and capital assets must be added to determine the total gross receipts from such transactions. If 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 combination of net gains and losses results in a net loss, the taxable entity should net the loss against other receipts, but not below zero. In no instance shall the apportionment factor be greater than 1. 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.

  (3) Computer software services and programs. Gross receipts from the sale of computer software services are apportioned to the location where the services are performed. Gross 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.

  (4) 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.

  (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 apportioned to the legal domicile of the creditor.

  (6) Debt retirement. Revenues 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 gross receipts that are apportioned to the taxable entity's legal domicile. The indebtedness is treated as an investment in the determination of the amount of gross receipts.

  (7) Deemed sales of assets under Internal Revenue Code, §338. Amounts that are deemed to have been received by the target taxable entity are treated as sales of assets by the target taxable entity, 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.

  (8) Dividends and/or interest.

    (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 receipts and receipts everywhere:

      (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) schedule C special deductions that are excluded from total revenue;

      (iii) dividends and/or interest on federal obligations that are excluded from total revenue;

      (iv) interest that is exempt from federal income tax.

    (C) Dividends and/or interest that are received from a corporation or other sources are apportioned to the legal domicile of the payor.

    (D) Dividends and/or interest that are received from a national bank are apportioned to Texas if the bank's principal place of business is located in Texas. Dividends and/or interest that are received from a bank that is organized under the Texas Banking Code are apportioned to Texas.

    (E) 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 everywhere.

  (9) 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 receipts based on the gross exchange value, unless otherwise required under this section.

  (10) Federal enclave. All revenues 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 Texas receipts, unless otherwise excepted by this section.

  (11) Insurance proceeds.

    (A) Business interruption insurance proceeds are gross receipts when the proceeds are intended to replace lost profits. Such receipts are apportioned to the legal domicile of the payor of the proceeds.

    (B) Revenues from fire and casualty insurance proceeds are apportioned to the location of the damaged or destroyed property.

  (12) Internet access fee. A fee that is charged to obtain access to the World Wide Web in Texas is a Texas gross receipt.

  (13) Leases and subleases.

    (A) Revenues from the lease or sublease (or rental or subrental) of real property are apportioned to the location of the property.

    (B) Revenues from the lease or sublease (or rental or subrental) of tangible personal property are apportioned to the location of the property. If the property is used both inside and outside Texas, then lease payments are apportioned 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 of revenue that is due under the lease is based on mileage, then the lease payments are apportioned based on the number of miles in Texas divided by the number of miles everywhere.

    (C) If a lump sum is charged for leased or subleased (or rented or subrented) property that is located both inside and outside Texas, then the allocation of such revenue is based on the rental value of each item of property.

    (D) Revenues from the lease or sublease (or rental or subrental) of a vessel that engages in commerce are apportioned 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) If a lease, sublease, rental, or subrental of real property or tangible personal property is treated as a sale for federal income tax purposes, then the receipts from the transaction are apportioned in the same manner as a sale. Any portion of the payments that the contracting parties designate as interest is interest receipts.

  (14) Litigation awards. Revenues that are realized from litigation awards are gross receipts that are apportioned to the legal domicile of the payor of the proceeds; however, if the litigation awards are intended to replace receipts for which another apportionment rule is provided in this section, then the apportionment must be made 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 receipts to Delaware receipts. See subsection (f) of this section, for the apportionment of receipts from judgments, compromises, or settlements that relate to natural gas production.

Cont'd...

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