On January 4, 2021, the Texas Comptroller of Public Accounts adopted revisions to the Texas franchise tax apportionment rules under 34 Tex. Admin. Code section 3.591. The final rule comes from the initial proposed revision to Section 3.591 on November 2, 2020, with the final rule republished on January 15, 2021 Texas Register.
Prior to the amendment, the Comptroller was using the cost of performance method to source receipts from services. Under the revisions, Texas seems to be moving more towards a market-based sourcing approach. Under the market-based sourcing, taxpayers apportion receipts to the location of the benefit of the services received by their customers (the state in which the services are delivered, rather than the state in which the services are performed).
Notable changes to Texas franchise tax apportionment rules
Net Gains or Losses from Sales of Capital Assets or Investments
The final rule revised the treatment of net gains and net losses from the sale of non-inventory assets. Under the revisions, net losses generated from the individual sales of capital assets or investments are disregarded. Whereas in prior policy, net losses, would offset net gains.
The revised rules consolidated the advertising sourcing regardless of the type of media, advertising receipts are sourced to the location of the audience. If taxpayers are unable to reasonably determine the location of the audience, taxpayers may use the fixed 8.7% census-base figure to determine the sourcing to the state.
The final rules have retained the mileage-based apportionment option but with modifications. Under the adopted rule, taxpayers may elect to apportion receipts using one of two formulas a) gross receipts or b) compensated mileage.
How changes will be applied
The Comptroller intends to apply the adopted rule retroactively except for a few provisions which the Comptroller concedes are changes in the policy. Taxpayers should consult with their tax advisors to determine whether they should file amended franchise tax reports for periods still open under Texas’ statute of limitations (generally four years from the date the tax was due and payable).
If you have questions about the outline above including tax planning, Calvetti Ferguson can help.