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Texas Franchise Tax Gross Receipts Sourcing Reform

AAFCPAs would like to make clients aware that the Texas Comptroller of Public Accounts has adopted revisions to Franchise Tax apportionment rules proposed on November 2, 2020 under 34 Tex. Admin. Code section 3.591. The revisions seek to align statutory law with prior Court rulings, and to provide industry-specific updates.

The changes may affect receipts sourcing for companies that engage in a variety of activities: general services, advertising services, internet hosting, computer software and digital property, capital assets and investments, financial derivatives, as well as sales of memberships in single-member LLCs.

Texas replaces the term “revenue” with “gross receipts”, which may include or exclude certain items of revenue. General services were previously sourced to the location where the work was performed, with an allocation to multiple locations if work was done in more than one location. Under new law, such receipts should be sourced to the location of the receipts-producing, end product act or acts. The law essentially codifies the stance Texas took in a case against Sirius XM. In this case, receipts were determined to be sourced to the location where the customer was using their Sirius XM radio, as opposed to where the radio programming was created. Such a case seems to imply a move towards more of a market-based sourcing approach for services.

Another aspect of the updated rules concerns sales of digital property, which now distinguishes based on the method of delivery. While previously such property would have been sourced to the location of the payor, the method of delivery must be considered. Digital property installed on computer hardware or other fixed physical media are sourced as tangible personal property, while electronically delivered sales continue to be sourced according to the location of the payor. Digital property delivered as a service are sourced based on the sourcing rules for services.

In line with a shift towards more of a market-based sourcing approach, sales of internet hosting services are sourced to the location of the customer. Receipts from advertising services are sourced to the location of the advertising audience. For capital assets and investments, only the net gain is included in gross receipts, while net losses are excluded (note that this change would apply for periods beginning January 1, 2021). Gross receipts from financial derivatives, as well as sales of membership interests in single-member LLCs are sourced to the location of the payor.

It is notable that these provisions are generally retroactive to January 1, 2008, with exceptions such as the new rules for capital assets and investments. Companies doing business in Texas are encouraged to contact your AAFCPAs Tax Partner to ensure compliance with Texas receipts sourcing rules.

AAFCPAs continues to monitor ever-changing developments in state and local taxation, including their impact on US tax code. If you have questions, please contact: Kelly Zack, CPA, MST, Director, State & Local Tax at kzack@nullaafcpa.com, 774.512.4001; Dan Cahill, CPA, Tax Manager at dcahill@nullaafcpa.com, 774.513.0551; or your AAFCPAs Partner.

About the Authors

Kelly Zack, MST
Kelly is a senior leader in AAFCPAs’ Commercial Tax practice. She advises individuals, partnerships, corporations, and trusts operating in multiple states and municipalities on opportunities to save tax dollars through advanced tax planning and risk mitigation. She enthusiastically assists AAFCPAs clients in identifying all location-specific tax incentives and credits which could have a major impact on business entities and their owners.
Daniel Cahill
Dan has extensive experience in federal, state and multistate corporate taxation.  He delivers compliance and tax planning solutions for a variety of sophisticated privately-held C Corporations, S Corporations, and Partnerships, as well as high-net-worth individuals. Dan specializes in multistate taxation, including: state and local tax (SALT) analysis, sales and use taxes, determining nexus, accounting for income taxes (ASC 740), and negotiating voluntary disclosure agreements.  He also advises clients in partnership compliance, including analysis of partner allocations, taxability of distributions and deductibility of pass-through losses. Dan’s depth of expertise ensures that the firm’s emerging and growth-stage clients are fully compliant with multistate tax laws and regulations while optimizing tax strategies. He has been serving AAFCPAs clients since 2012.