22 June 2016 Texas Comptroller's proposed amendment to Reg. 3.584 would retroactively affect the ability of retailers and wholesalers to qualify for lower franchise tax rate The Texas Comptroller of Public Accounts (Comptroller) has issued proposed amendments to 34 Tex. Admin. Code Section 3.584 regarding franchise tax reports and payments, defining previously undefined terms and providing guidance on various laws enacted in 2011, 2013 and 2015.1 Among the provisions in the draft regulations are new definitions (including a new definition of "primarily engaged in retail or wholesale trade"), franchise tax and information reports due dates, franchise tax calculations, taxability thresholds, electronic filing requirements and discounts, among others. As currently drafted, the new definition of "primarily engaged in retail or wholesale trade" would, in effect, retroactively limit the ability of certain taxpayers to qualify for the reduced franchise tax rate available to retailers and wholesalers, especially those in industries where the taxpayer creates or produces a component part that is installed or incorporated into the product before it is sold. The State Tax Committee of the Texas Society of Certified Public Accountants (TSCPA), along with other interested parties, provided comments on the proposed regulation to the Comptroller (which were due by June 20, 2016). The Comptroller proposes defining "primarily engaged in retail or wholesale trade," which previously was not defined for Texas franchise tax purposes. Under this proposed definition, a taxable entity is primarily engaged in retail or wholesale trade only if: (1) the taxable entity does not provide retail or wholesale utilities, including telecommunications services, electricity, or gas; (2) the total revenue from the taxable entity's activities in retail and wholesale trade is greater than the total revenue from its activities in trades other than retail and wholesale trade; and (3) less than 50% of the total revenue from the taxable entity's activities in retail or wholesale trade comes from the sale of products the taxable entity produces or products produced by an entity that is part of an affiliated group to which the taxable entity also belongs, except for certain businesses under the eating and drinking establishment classification (Major Group 58). For purposes of item (3), the regulation provides that a taxable entity produces the product that it sells if the taxable entity acquires the product and makes modifications to the product that increase its sales price by more than 10%. In addition, a taxable entity would be determined to produce the product that it sells if the taxable entity manufactures, develops or creates tangible personal property that is incorporated into, installed in or becomes a component part of the product that it sells. Under the examples the Comptroller has set out in the proposed regulation, a taxable entity would be deemed to be producing an electronic device that it sells when the taxable entity produces a computer program, such as an application or an operating system that is installed in the device, even if the device is manufactured by an unrelated party. In another example, a taxable entity would be deemed to be producing a drug that it sells when the taxable entity produces the active ingredient in the drug, even if the drug is manufactured by an unrelated party. In yet another example, a taxable entity would be deemed not to be producing a product that it sells if the product is manufactured by an unrelated party to the taxable entity's specifications. The proposed regulations also provide a definition for the term "unrelated party." With respect to a taxable entity, an "unrelated party" is an entity that is not part of the same affiliated group (as defined for combined reporting purposes). Also, the proposal offers new definitions of "retail trade" and "wholesale trade" that refer to and are based upon classifications found in the Standard Industrial Classification (SIC) Manual established by the US Department of Labor.2 (Three statutory definitions of "retail trade" exist because of legislative changes over the years.) The proposed regulation would incorporate a new method of computing taxable margin, enacted in 2013 as part of the changes brought about by the Legislature in adopting HB 500. For reports originally due or after January 1, 2014, that statute and proposed regulation provide that a taxable entity's margin equals the least of the following calculations, if eligible: (1) total revenue minus cost of goods sold, (2) total revenue minus compensation, (3) 70% of total revenue, or (4) total revenue minus $1 million. In addition, the proposed regulation would also incorporate the reduced franchise tax rates that were enacted in 2013 (HB 500) and 2015 (HB 32).
A taxable entity owes no tax and may file a No Tax Due Report for franchise tax if its annualized total revenue is: (1) $1,030,000 or less for reports originally due on or after January 1, 2012, but before January 1, 2014; (2) $1,080,000 or less for reports due on or after January 1, 2014, but before January 1, 2016; (3) $1,110,000 or less for reports originally due on or after January 1, 2016, but before January 1, 2018; or (4) the amount determined under Tex. Tax Code Section 171.006 for reports originally due on or after January 1, 2018. Effective September 1, 2015, No Tax Due Reports must be filed electronically, with the exception of the tiered partnership exception.3 The proposed regulations would also amend the E-Z computation to reflect increases to the E-Z computation threshold qualification enacted as part of HB 32. As amended, taxable entities with annualized total revenue of $10 million or less could choose to pay the franchise tax under the E-Z Computation method, for reports originally due on or after January 1, 2008, and before January 1, 2016. In these cases, the tax rate would be 0.575% applied to the apportioned total revenue and subtracting any applicable discount. For reports due on or after January 1, 2016, a taxable entity with annualized total revenue of $20 million or less could choose to pay the franchise tax by using the E-Z Computation method, calculated by applying a tax rate of 0.331% to apportioned total revenue. No deductions to compute margin, credits or other adjustments, however, would be permitted if a taxable entity elected to use the E-Z Computation method. Provisions related to initial reports, first annual reports and annual reports are generally unchanged, but the proposed regulations would require that a final tax report and payment of the additional tax are due within 60 days after the taxable entity no longer has sufficient nexus with Texas to be subject to the franchise tax. In addition, a taxable entity will be granted a 45-day extension of time to file a final report, if it requests the extension on or before the filing date, requests the extension on a form provided by the comptroller; and remits 90% or more of the tax reported as due on the final report. The proposed regulations would add limited partnerships and professional associations to the list of taxable entities required to submit public information reports, which are due at the same time the initial, first annual and annual reports are due.4 Taxable entities not required to file a public information report must file an ownership information report. The proposed regulations define certain items that Texas has not previously defined, and this could affect the tax liability of certain entities. Other provisions implement laws that the Texas legislature enacted in several previous sessions.
1 Tex. Laws 2011, SB 1 (82nd Leg., First Called Session), signed by the governor on July 19, 2011; Tex. Laws 2013, HB 500 (83rd Leg.), signed by the governor on June 14, 2013; Tex. Laws 2015, HB 32 (84th Leg.), signed by the governor on June 15, 2015; Tex. Laws 2015, HB 2891 (84th Leg.), signed by the governor on June 19, 2015; Tex. Laws 2015, SB 1049 (84th Leg.), signed by the governor on June 4, 2015; and Tex. Laws 2015, SB 1364 (84th Leg.), signed by the governor on June 18, 2015. 2 US Department of Labor, Occupational Safety & Health Administration Standard Industrial Classification Manual, accessible on the Internet (last accessed June 22, 2006). 4 Other entities required to file public information reports are corporations, limited liability companies, and financial institutions. Document ID: 2016-1090 | ||||||||||||||||||||
