34 TAC §3.557
The Comptroller of Public Accounts adopts an amendment to §3.557,
concerning earned surplus: apportionment, with changes to the proposed text
as published in the August 2, 2002, issue of the
Texas Register
(27 TexReg 6812).
The adopted rule incorporates legislative changes from the 77th Legislature,
2001 and prior legislative sessions as described in detail in the preamble
to the proposed rule. It adds and updates the definitions for the following
terms: employee retirement plan, legal domicile, and location of payor and
Internal Revenue Code. The adopted rule also contains information on the new
apportionment requirement for dividends and/or interest received by a banking
corporation and the exclusion from Texas receipts for interest earned on federal
funds and certain securities by a banking corporation from correspondent banks.
The adopted rule provides for the computation of gross receipts by a corporate
partner, the prohibition of consolidated reporting, and apportionment of revenues
from trademarks, franchises, and licenses.
The adopted rule provides current policy resulting from court decisions
in
Pennzoil v. Sharp
,
Gulf Publishing v. Rylander
and
Rylander v.
Bandag Licensing
. It also provides current policy resulting from Hearing
Decision No. 36,590 (2000) that delivery of tangible personal property by
the seller through its motor vehicles to another state does not subject the
seller to taxation in that other state and the application of the throwback
rule. The adopted rule provides current policies relating to the treatment
of loan sales held as inventory and distributions from trusts and relating
to natural gas production.
Sprint, Texas Statewide Telephone Cooperatives, Inc. and SBC Communications,
Inc. submitted comments to the proposed text of subsection (e)(39) relating
to services provided by telephone companies. Because the proposed subsection
(e)(39) reverses a policy on fixed access fees that was determined in Hearing
Decision No. 35,677 (2000), they questioned the appropriateness of the proposed
subsection and also stated that the proposed subsection does not adequately
explain the differences between revenues from intrastate telephone calls and
revenues from interstate telephone calls and the differences between telephone
calls and telephone services. They asked that the access fees be treated as
Texas receipts or non-Texas receipts based on regulatory classifications by
Federal Communication Commission and Texas Public Utility Commission. They
also asked that the agency treat access fees in the same manner as it treats
revenues from transportation.
The Comptroller agrees that adding clarification as to difference between
intrastate calls and interstate calls will be helpful. The language in subsection
(e)(39)(A) is changed in the adopted rule to clarify that intrastate telephone
calls are calls that originate and terminate in Texas. The language in subsection
(e)(39)(B) is changed in the adopted rule to clarify that interstate telephone
calls are calls that originate in Texas but terminate outside of Texas or
vice versa. The language in subsection (e)(39)(C) is changed in the adopted
rule to clarify that it applies to telecommunication services other than those
services enumerated in subparagraph (A) or (B). The Comptroller declines to
make other suggested changes. Hearing Decision No. 35,677 expressly held that
the policy reflected in the decision should be applied until the Comptroller
revises the rule, and in accordance with that decision, the adopted subsection
reinstates the policy that existed prior to Hearing Decision No. 35,677, but
applies it prospectively. Federal or state regulatory classifications generally
do not have relevance to the computation of franchise tax. The agency's policy
on revenues from transportation companies does not preclude the adoption of
subsection (e)(39)(C).
Finally, subsection (b)(4) is corrected to replace "and" with an "or" to
state the alternative qualifications for an employee retirement plan.
The amendment 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
the Tax Code, Title 2.
The adopted amendment implements Tax Code, §§171.001, 171.1032,
171.1051, 171.106, 171.1061, and 171.1121.
§3.557.Earned Surplus: Apportionment.
(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 the 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 the 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 the 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 the 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)
Club membership fees. Club membership fees are Texas receipts
if the place where the club's employees or agents perform the service of providing
access to club benefits is in Texas.
(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.
(13)
Dividends and/or interest.
(A)
Dividends that are recognized as a reduction of the taxpayer's
basis in stock of a corporation 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 corporation
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 taxable
earned surplus;
(iii)
dividends and/or interest on federal obligations that
are excluded from earned surplus under §3.555(k) of this title (relating
to Earned Surplus: Computation);
(iv)
interest that is exempt from federal income tax.
(C)
Dividends and/or interest that are received from a corporation
are apportioned to the state of incorporation 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)
Dividends and interest from other sources are apportioned
to the legal domicile of the payor, unless otherwise required under Tax Code,
Chapter 171, this section, or other rules that have been promulgated under
Tax Code, Chapter 171.
(F)
For reports that are originally due before January 1, 2000,
dividends and/or interest that a banking corporation or savings and loan association
receives are apportioned to the commercial domicile of the banking corporation
or savings and loan association. For reports that are originally due on or
after January 1, 2000, dividends and/or interest that a banking corporation
or savings and loan association receives are apportioned to the legal domicile
of the payor.
(G)
For reports that are originally due on or after January
1, 2002, 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. See §3.560 of this title
(Relating to Banking Corporations).
(14)
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.
(15)
Federal enclave. All revenues from a corporation'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.
(16)
Freight charges. Customer's reimbursements to the seller
for freight charges that the seller paid to a third party for goods and merchandise
that have been shipped to a customer are not gross receipts when the charges
are entered as a separate item on the sales invoice, if the reimbursement
does not exceed the actual expenses paid to the third party.
(17)
Health care supplies and food. Revenues from sales of
health care supplies and food are included in the computation of receipts
everywhere and Texas receipts in the same manner as revenues from any other
sale of tangible personal property.
(18)
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.
(19)
Intercorporate expense allocations. Expense allocations
by a corporation among one or more related entities (other than income taxes
that are allocable to the applicable corporation)--whether recorded as management
fees, administrative overhead, interest, accounting services, legal services,
or other designations--are gross receipts to the corporation that allocates
the expenses, unless an agency relationship exists.
(20)
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.
(21)
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 corporation 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.
(22)
Loan principal. The principal of a loan that is received
or repaid is not a gross receipt. However, if the loan is treated as inventory
of the seller for federal income tax purposes, then the gross proceeds of
the sale of that loan are considered gross receipts.
(23)
Newspapers or magazines. All advertising revenues of a
newspaper or magazine, including those revenues derived from out-of-state
advertisements, are apportioned to Texas based on the number of newspapers
or magazines distributed in Texas. All other receipts must be apportioned
in accordance with the apportionment rules otherwise set out in this section.
For example, receipts from sales of newspapers or magazines are to be apportioned
based on paragraph (37) of this subsection.
(24)
Partnership or joint venture. A corporation that is a
partner or joint venturer must apportion its share of a partnership or joint
venture's income that is included in the corporation's federal taxable income
as follows:
(A)
for reports that are originally due on or after January
1, 2002, a corporation's share of the gross receipts of a partnership or joint
venture must be apportioned as though the corporation directly earned the
receipts. Only a partnership's or joint venture's gross receipts that generated
income that is included in the corporation's federal taxable income are used
as the corporation's gross receipts.
(B)
For reports that are originally due before January 1, 2002,
a corporation may either use the method provided by subparagraph (A) of this
paragraph or use the corporation's share of the partnership or joint venture's
net federal taxable income as the corporation's gross receipts. If the corporation's
share of the partnership's or joint venture's net federal taxable income is
used as the corporation's gross receipts, then the corporation should apportion
it based on the principal place of business of the partnership or joint venture.
(25)
Patents, copyrights, and other intangible rights.
(A)
Receipts from the use of intangibles.
(i)
Revenues from a patent royalty are included in Texas receipts
to the extent that the patent is utilized in production, fabrication, manufacturing,
or other processing in Texas.
(ii)
Revenues from a copyright royalty are included in Texas
receipts to the extent that the copyright is utilized in printing or other
publication in Texas.
(iii)
Revenues that the owner of a trademark, franchise, or
license receives are apportioned as follows:
(I)
for reports that are originally due before January 1, 1998,
revenues are apportioned based on the location of the payor;
(II)
for reports that are originally due on or after January
1, 1998, revenues are included as Texas receipts to the extent the trademark,
franchise or license is used in Texas.
(iv)
Revenues from the sale or licensing of computer programs
are apportioned to Texas in accordance with paragraph (6) of this subsection.
(B)
Sales. Sales of intangibles are apportioned based on the
location of payor.
(26)
Purchase discounts and allowances. Returns, discounts,
and allowances that are granted to a purchaser are not gross receipts to the
purchaser even if refunds are given in cash.
(27)
Radio/television. All advertising revenues of a radio
or television station that broadcasts or transmits from a location in Texas
constitute Texas receipts, even though some of the listening or viewing audiences
are located outside Texas. All other receipts must be apportioned in accordance
with the apportionment rules otherwise set out in this section.
(28)
Real property. Revenues from the sale, lease, rental,
sublease, or subrental of real property are apportioned to the location of
the property.
(29)
Sales and services. If a transaction involves elements
of both a sale of tangible personal property and a service, but no documentation
exists to show separate charges for the sale and service elements, then the
comptroller may determine the amounts that are allocable to each element based
on fair values or on any available evidence.
(30)
Sales discounts. Cash or trade discounts that a seller
allows reduce gross sales of the seller in the computation of gross receipts.
(31)
Sales returns and allowances. Sales returns and allowances
that a seller allows reduce gross sales of the seller in the computation of
gross receipts.
(32)
Sales taxes. State or local sales taxes that are imposed
on the customer, but are collected by a seller are not gross receipts of the
seller. However, discounts that a seller is allowed to take in remittance
of the collected sales tax are gross receipts to the seller.
(33)
Services. Receipts from a service are apportioned to the
location where the service is performed. If services are performed both inside
and outside Texas, then such receipts are Texas receipts on the basis of the
fair value of the services that are rendered in Texas.
(A)
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 should refer to Tax Code, §171.106(c), for information on apportionment
of such taxable earned surplus.
(B)
For reports that are 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 the Tax Code, §171.106(d), for information
on apportionment of such taxable earned surplus.
(C)
Receipts from services that a defense readjustment project
performs in a defense economic readjustment zone are not Texas receipts.
(34)
Services procurement. Revenues for the procurement of
services are apportioned to the place where the service procurement is performed.
(35)
Stocks. Receipts from the sale of securities are apportioned
based on the location of the payor. If securities are sold through a stock
exchange, and the buyer cannot be identified, then 6.5% of the net gain (or
gross sales price, if securities are inventory) is a Texas receipt. If the
securities are investments, see paragraph (3) of this subsection regarding
the computation of receipts.
(36)
Subsidies or grants. Proceeds of subsidies or grants that
a corporation receives from a governmental agency are gross receipts, except
when the funds are required to be expended dollar-for-dollar (i.e., passed
through) to third parties on behalf of the agency. Receipts from a governmental
subsidy or grant are apportioned in the same manner as the item to which the
subsidy or grant was attributed. For example, if a corporation qualifies for
a grant to conduct research for the government, then the receipts from that
grant are receipts from a service and are apportioned to the location where
the research is performed.
(37)
Tangible personal property. Examples of transactions that
involve the sale of tangible personal property and result in Texas receipts
include, but are not limited to, the following:
(A)
the sale of tangible personal property that is delivered
in Texas to a purchaser. Delivery is complete upon transfer of possession
or control of the property to the purchaser, an employee of the purchaser,
or transportation vehicles that the purchaser leases or owns. FOB point, location
of title passage, and other conditions of the sale are not relevant to the
determination of Texas gross receipts;
(B)
the sale of tangible personal property that is delivered
in Texas to an employee or transportation agent of an out-of-state purchaser.
A carrier is an employee or agent of the purchaser if the carrier is under
the supervision and control of the purchaser with respect to the manner in
which goods are transported;
(C)
the sale and delivery in Texas of tangible personal property
that is loaded into a barge, truck, airplane, vessel, tanker, or any other
means of conveyance that the purchaser of the property leases and controls
or owns. The sale of tangible personal property that is delivered in Texas
to an independent contract carrier, common carrier, or freight forwarder that
a purchaser of the property hires results only in gross receipts everywhere
if the carrier transports or forwards the property to the purchaser outside
this state;
(D)
the sale of tangible personal property with delivery to
a common carrier outside Texas, and shipment by that common carrier to a purchaser
in Texas;
(E)
the sale of oil or gas to an interstate pipeline company,
with delivery in Texas;
(F)
the sale of tangible personal property that is delivered
in Texas to a warehouse or other storage facility that the purchaser owns
or leases;
(G)
the sale of tangible personal property that is delivered
to and stored in a warehouse or other storage facility in Texas at the purchaser's
request, as opposed to a necessary delay in transit, even though the property
is subsequently shipped outside Texas;
(H)
the drop shipment of tangible personal property in Texas.
A drop shipment is a shipment of tangible personal property from a seller
directly to a purchaser's customer, at the request of the purchaser, without
passing through the hands of the purchaser. This results in Texas gross receipts
for the seller and the purchaser;
(I)
sales to which the throwback rule applies. Each sale of
tangible personal property that is shipped from this state to a purchaser
in another state in which the seller is not subject to taxation (known as
the "throwback rule"). This subparagraph controls if it conflicts with any
other provision of this section. Another state means a state of the United
States, the District of Columbia, Puerto Rico, or any territory or possession
of the United States. A corporation or limited liability company is subject
to taxation in another state if the corporation or limited liability company
is chartered or organized in that state or has sufficient contact with that
state such that a tax on net income could be imposed on the corporation or
limited liability company without violating 15 United States Code §381
(i.e., Public Law 86-272). Sales into another state where the seller merely
holds a certificate of authority are treated as sales to which the throwback
rule applies. Voluntary payment of tax to another state or the inclusion of
a corporation or limited liability company in another entity's state combined
or consolidated income tax return does not, by itself, cause the corporation
or limited liability company to be subject to taxation in another state. The
selling corporation or limited liability company must be subject to taxation
in the other state during the accounting year upon which the tax is based.
Delivery of tangible personal property to another state by use of motor vehicles
that the seller owns, leases or rents does not subject the seller to taxation
in the other state, and the throwback rule applies, effective for reports
that are due originally on or after January 1, 2003. The corporation or limited
liability company has the burden of proof that the company is subject to taxation
in the other state (see §3.554 of this title (relating to Earned Surplus:
Nexus)).
(38)
Tax refunds. Tax refunds are not gross receipts. However,
interest that is awarded on tax refunds are gross receipts.
(39)
Telephone companies.
(A)
Revenues from telephone calls that both originate and terminate
in Texas are Texas receipts.
(B)
Revenues from telephone calls that originate in Texas but
terminate outside of Texas or that originate outside of Texas, but terminate
in Texas are excluded from Texas receipts.
(C)
Revenues from telecommunication services other than those
services in subparagraph (A) or (B) of this paragraph are Texas receipts if
the services are performed in Texas. For example, a telephone company that
provides a long distance carrier access to the telephone company's local exchange
network in Texas is performing a service in Texas. Any fee that the telephone
company charges the long distance carrier for access to the local exchange
network in Texas is a Texas receipt regardless of whether the access is related
to an interstate call. For reports originally due before January 1, 2003,
a fee that is charged to obtain access to a local exchange network in Texas
and that is based on the duration of an interstate telephone call may be excluded
from Texas receipts.
(40)
Texas waters. Revenues from transactions that occur in
Texas waters are Texas receipts. Texas waters are considered to extend to
10.359 statute miles, or nine nautical miles, from the Texas coastline.
(41)
Transportation companies. Transportation companies must
report Texas receipts from transportation services in intrastate commerce
by:
(A)
the inclusion of revenues that are derived from the transportation
of goods or passengers in intrastate commerce; or
(B)
the multiplication of total transportation receipts by
total mileage in the transportation of goods and passengers that move in intrastate
commerce within Texas divided by total mileage everywhere.
(42)
Trusts. Distributions to a corporation that is the beneficiary
of a trust are apportioned to the legal domicile of the trust. See subsection
(b)(8) of this section regarding the legal domicile of a trust.
(f)
Natural Gas Production.
(1)
Revenues that a gas producer realizes from the contract
price of gas that the gas producer produces and that the purchaser takes pursuant
to the terms of sales are gross receipts and are apportioned to Texas, if
the gas is delivered in Texas.
(2)
Revenues that a gas producer realizes from a purchaser's
payment under a sale or purchase contract for gas to be produced even if no
gas is produced and delivered to the purchaser, are gross receipts and are
apportioned to the legal domicile of the payor.
(3)
Revenues that a gas producer realizes from a purchaser's
payments to terminate a gas purchase contract are gross receipts and are apportioned
to the legal domicile of the payor.
(4)
Revenues that a gas producer realizes from a contract amendment
that relates to the price of the gas sold are gross receipts from the sales
of gas and are apportioned to Texas if delivery is made to a location in Texas.
Revenues that the gas producer realizes from a contract amendment that relates
to a provision other than the price of gas sold are gross receipts and are
apportioned to the legal domicile of the payor.
(5)
Revenues that a gas producer realizes from litigation awards
for a breach of contract, reimbursements for litigation-related expenses (e.g.,
documented attorney's fees or court costs), or interest (upon which the parties
have agreed, that the records of the producer reflects, or in an amount that
a court has ordered) are gross receipts and are apportioned to the legal domicile
of the payor.
(6)
Revenues that a gas producer realizes from a judgment,
compromise, or settlement relating to the recovery of a contract price of
gas produced are gross receipts and are apportioned to Texas to the extent
the contract specified delivery to a location in Texas. Revenues that a gas
producer realizes from a judgment, compromise, or settlement that relates
to several claims or causes of action shall be prorated based upon the documented
amounts due under the contract for each claim or cause of action according
to the records of the producer. For example, a settlement sum of $100,000
for a pricing dispute of $25,000 and for failure to pay for gas not taken
in the amount of $225,000, would result in receipts of $10,000 from gas sales
(100,000 X 25,000/250,000) and receipts from other business of $90,000 (100,000
X 225,000/250,000). Records of the producer shall include, but are not limited
to the following: contracts, settlement agreements, accounting records and
entries, court pleadings and worksheets, including calculations reflecting
settlement amounts.
This agency hereby certifies that the adoption has been
reviewed by legal counsel and found to be a valid exercise of the agency's
legal authority.
Filed with the Office of
the Secretary of State on January 23, 2003.
TRD-200300463
Martin Cherry
Deputy General Counsel for Taxation
Comptroller of Public Accounts
Effective date: February 12, 2003
Proposal publication date: August 2, 2002
For further information, please call: (512) 475-0387