By: Paxton H.B. No. 4003
A BILL TO BE ENTITLED
AN ACT
relating to the rates and computation of the franchise tax.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
SECTION 1. Sections 171.002(a), (b), and (d), Tax Code, are
amended to read as follows:
(a) Subject to Sections 171.003 and 171.1016 and except as
provided by Subsection (b), the rate of the franchise tax is:
(1) for taxable margin of $1 million or less, zero;
(2) for taxable margin that exceeds $1 million but
does not exceed $10 million, 0.5 percent of the taxable margin that
exceeds $1 million; and
(3) for taxable margin that exceeds $10 million,
$45,000 plus one percent of the taxable margin that exceeds $10
million.
(b) Subject to Sections 171.003 and 171.1016, for those
taxable entities primarily engaged in retail or wholesale trade,
the rate of the franchise tax is:
(1) for taxable margin of $1 million or less, zero;
(2) for taxable margin that exceeds $1 million but
does not exceed $10 million, 0.25 percent of the taxable margin that
exceeds $1 million; and
(3) for taxable margin that exceeds $10 million,
$22,500 plus 0.5 percent of the taxable margin that exceeds $10
million [for those taxable entities primarily engaged in retail or
wholesale trade].
(d) A taxable entity is not required to pay any tax and is
not considered to owe any tax for a period if [:
[(1)] the amount of tax computed for the taxable entity
is less than $5,000 [$1,000; or
[(2) the amount of the taxable entity's total revenue
from its entire business is less than or equal to $300,000 or the
amount determined under Section 171.006 per 12-month period on
which margin is based].
SECTION 2. Subchapter A, Chapter 171, Tax Code, is amended
by adding Section 171.0023 to read as follows:
Sec. 171.0023. TAX LIABILITY OF CERTAIN TAXABLE ENTITIES.
(a) In this section, "taxable income" means:
(1) for a taxable entity treated for federal income
tax purposes as a corporation, the amount reportable as taxable
income on line 30, Internal Revenue Service Form 1120;
(2) for a taxable entity treated for federal income
tax purposes as a partnership, the amount reportable as ordinary
business income or loss on line 22, Internal Revenue Service Form
1065; or
(3) for a taxable entity other than a taxable entity
treated for federal income tax purposes as a corporation or
partnership, an amount determined in a manner substantially
equivalent to the amount for Subdivision (1) or (2) determined by
rules the comptroller shall adopt.
(b) Except as provided by Subsection (c), a taxable entity
is not required to pay any tax and is not considered to owe any tax
for a period if the taxable entity's taxable income for the period
is zero or less.
(c) Subsection (b) does not apply to a taxable entity that
is a member of a combined group.
(d) Section 171.1011(a) applies to a reference in this
section to an Internal Revenue Service form, and Section
171.1011(b) applies to a reference in this section to an amount
reportable on a line number on an Internal Revenue Service form.
(e) The comptroller shall adopt rules as necessary to
accomplish the legislative intent prescribed by this section.
SECTION 3. The heading to Section 171.006, Tax Code, is
amended to read as follows:
Sec. 171.006. ADJUSTMENT OF ELIGIBILITY FOR [NO TAX DUE,
DISCOUNTS, AND] COMPENSATION DEDUCTION.
SECTION 4. Section 171.006(b), Tax Code, is amended to read
as follows:
(b) On [Beginning in 2010, on] January 1 of each
even-numbered year, the amount [amounts] prescribed by Section
[Sections 171.002(d)(2), 171.0021, and] 171.1013(c) is [are]
increased or decreased by an amount equal to the amount prescribed
by that section [those sections] on December 31 of the preceding
year multiplied by the percentage increase or decrease during the
preceding state fiscal biennium in the consumer price index and
rounded to the nearest $10,000.
SECTION 5. Section 171.1012, Tax Code, is amended to read as
follows:
Sec. 171.1012. DETERMINATION OF COST OF GOODS SOLD.
[(a) In this section:
[(1) "Goods" means real or tangible personal property
sold in the ordinary course of business of a taxable entity.
[(2) "Production" includes construction,
installation, manufacture, development, mining, extraction,
improvement, creation, raising, or growth.
[(3)(A) "Tangible personal property" means:
[(i) personal property that can be seen,
weighed, measured, felt, or touched or that is perceptible to the
senses in any other manner;
[(ii) films, sound recordings, videotapes,
live and prerecorded television and radio programs, books, and
other similar property embodying words, ideas, concepts, images, or
sound, without regard to the means or methods of distribution or the
medium in which the property is embodied, for which, as costs are
incurred in producing the property, it is intended or is reasonably
likely that any medium in which the property is embodied will be
mass-distributed by the creator or any one or more third parties in
a form that is not substantially altered; and
[(iii) a computer program, as defined by
Section 151.0031.
[(B) "Tangible personal property" does not
include:
[(i) intangible property; or
[(ii) services.
[(b)] Subject to Section 171.1014, a taxable entity that
elects to subtract cost of goods sold for the purpose of computing
its taxable margin shall determine the amount of that cost of goods
sold as follows:
(1) for a taxable entity treated for federal income
tax purposes as a corporation, the cost of goods sold is the amount
reportable as cost of goods sold on line 2, Internal Revenue Service
Form 1120;
(2) for a taxable entity treated for federal income
tax purposes as a partnership, the cost of goods sold is the amount
reportable as cost of goods sold on line 2, Internal Revenue Service
Form 1065;
(3) for a taxable entity treated for federal income
tax purposes as an S corporation, the cost of goods sold is the
amount reportable as cost of goods sold on line 2, Internal Revenue
Service Form 1120S; or
(4) for any other taxable entity, the cost of goods
sold is an amount determined in a manner substantially equivalent
to the amount for Subdivision (1), (2), or (3) determined by rules
the comptroller shall adopt [as provided by this section].
[(c) The cost of goods sold includes all direct costs of
acquiring or producing the goods, including:
[(1) labor costs;
[(2) cost of materials that are an integral part of
specific property produced;
[(3) cost of materials that are consumed in the
ordinary course of performing production activities;
[(4) handling costs, including costs attributable to
processing, assembling, repackaging, and inbound transportation
costs;
[(5) storage costs, including the costs of carrying,
storing, or warehousing property, subject to Subsection (e);
[(6) depreciation, depletion, and
amortization, reported on the federal income tax return on which
the report under this chapter is based, to the extent associated
with and necessary for the production of goods, including recovery
described by Section 197, Internal Revenue Code;
[(7) the cost of renting or leasing equipment,
facilities, or real property directly used for the production of
the goods, including pollution control equipment and intangible
drilling and dry hole costs;
[(8) the cost of repairing and maintaining equipment,
facilities, or real property directly used for the production of
the goods, including pollution control devices;
[(9) costs attributable to research, experimental,
engineering, and design activities directly related to the
production of the goods, including all research or experimental
expenditures described by Section 174, Internal Revenue Code;
[(10) geological and geophysical costs incurred to
identify and locate property that has the potential to produce
minerals;
[(11) taxes paid in relation to acquiring or producing
any material, or taxes paid in relation to services that are a
direct cost of production;
[(12) the cost of producing or acquiring electricity
sold; and
[(13) a contribution to a partnership in which the
taxable entity owns an interest that is used to fund activities, the
costs of which would otherwise be treated as cost of goods sold of
the partnership, but only to the extent that those costs are related
to goods distributed to the taxable entity as goods-in-kind in the
ordinary course of production activities rather than being sold.
[(d) In addition to the amounts includable under Subsection
(c), the cost of goods sold includes the following costs in relation
to the taxable entity's goods:
[(1) deterioration of the goods;
[(2) obsolescence of the goods;
[(3) spoilage and abandonment, including the costs of
rework labor, reclamation, and scrap;
[(4) if the property is held for future production,
preproduction direct costs allocable to the property, including
costs of purchasing the goods and of storage and handling the goods,
as provided by Subsections (c)(4) and (c)(5);
[(5) postproduction direct costs allocable to the
property, including storage and handling costs, as provided by
Subsections (c)(4) and (c)(5);
[(6) the cost of insurance on a plant or a facility,
machinery, equipment, or materials directly used in the production
of the goods;
[(7) the cost of insurance on the produced goods;
[(8) the cost of utilities, including electricity,
gas, and water, directly used in the production of the goods;
[(9) the costs of quality control, including
replacement of defective components pursuant to standard warranty
policies, inspection directly allocable to the production of the
goods, and repairs and maintenance of goods; and
[(10) licensing or franchise costs, including fees
incurred in securing the contractual right to use a trademark,
corporate plan, manufacturing procedure, special recipe, or other
similar right directly associated with the goods produced.
[(e) The cost of goods sold does not include the following
costs in relation to the taxable entity's goods:
[(1) the cost of renting or leasing equipment,
facilities, or real property that is not used for the production of
the goods;
[(2) selling costs, including employee expenses
related to sales;
[(3) distribution costs, including outbound
transportation costs;
[(4) advertising costs;
[(5) idle facility expense;
[(6) rehandling costs;
[(7) bidding costs, which are the costs incurred in
the solicitation of contracts ultimately awarded to the taxable
entity;
[(8) unsuccessful bidding costs, which are the costs
incurred in the solicitation of contracts not awarded to the
taxable entity;
[(9) interest, including interest on debt incurred or
continued during the production period to finance the production of
the goods;
[(10) income taxes, including local, state, federal,
and foreign income taxes, and franchise taxes that are assessed on
the taxable entity based on income;
[(11) strike expenses, including costs associated
with hiring employees to replace striking personnel, but not
including the wages of the replacement personnel, costs of
security, and legal fees associated with settling strikes;
[(12) officers' compensation;
[(13) costs of operation of a facility that is:
[(A) located on property owned or leased by the
federal government; and
[(B) managed or operated primarily to house
members of the armed forces of the United States; and
[(14) any compensation paid to an undocumented worker
used for the production of goods. As used in this subdivision:
[(A) "undocumented worker" means a person who is
not lawfully entitled to be present and employed in the United
States; and
[(B) "goods" includes the husbandry of animals,
the growing and harvesting of crops, and the severance of timber
from realty.
[(f) A taxable entity may subtract as a cost of goods sold
indirect or administrative overhead costs, including all mixed
service costs, such as security services, legal services, data
processing services, accounting services, personnel operations,
and general financial planning and financial management costs, that
it can demonstrate are allocable to the acquisition or production
of goods, except that the amount subtracted may not exceed four
percent of the taxable entity's total indirect or administrative
overhead costs, including all mixed service costs. Any costs
excluded under Subsection (e) may not be subtracted under this
subsection.
[(g) A taxable entity that is allowed a subtraction by this
section for a cost of goods sold and that is subject to Section
263A, 460, or 471, Internal Revenue Code, may capitalize that cost
in the same manner and to the same extent that the taxable entity
capitalized that cost on its federal income tax return or may
expense those costs, except for costs excluded under Subsection
(e), or in accordance with Subsections (c), (d), and (f). If the
taxable entity elects to capitalize costs, it must capitalize each
cost allowed under this section that it capitalized on its federal
income tax return. If the taxable entity later elects to begin
expensing a cost that may be allowed under this section as a cost of
goods sold, the entity may not deduct any cost in ending inventory
from a previous report. If the taxable entity elects to expense a
cost of goods sold that may be allowed under this section, a cost
incurred before the first day of the period on which the report is
based may not be subtracted as a cost of goods sold. If the taxable
entity elects to expense a cost of goods sold and later elects to
capitalize that cost of goods sold, a cost expensed on a previous
report may not be capitalized.
[(h) A taxable entity shall determine its cost of goods
sold, except as otherwise provided by this section, in accordance
with the methods used on the federal income tax return on which the
report under this chapter is based. This subsection does not
affect the type or category of cost of goods sold that may be
subtracted under this section.
[(i) A taxable entity may make a subtraction under this
section in relation to the cost of goods sold only if that entity
owns the goods. The determination of whether a taxable entity is
an owner is based on all of the facts and circumstances, including
the various benefits and burdens of ownership vested with the
taxable entity. A taxable entity furnishing labor or materials to
a project for the construction, improvement, remodeling, repair, or
industrial maintenance (as the term "maintenance" is defined in 34
T.A.C. Section 3.357) of real property is considered to be an owner
of that labor or materials and may include the costs, as allowed by
this section, in the computation of cost of goods sold. Solely for
purposes of this section, a taxable entity shall be treated as the
owner of goods being manufactured or produced by the entity under a
contract with the federal government, including any subcontracts
that support a contract with the federal government,
notwithstanding that the Federal Acquisition Regulation may
require that title or risk of loss with respect to those goods be
transferred to the federal government before the manufacture or
production of those goods is complete.
[(j) A taxable entity may not make a subtraction under this
section for cost of goods sold to the extent the cost of goods sold
was funded by partner contributions and deducted under Subsection
(c)(13).
[(k) Notwithstanding any other provision of this section,
if the taxable entity is a lending institution that offers loans to
the public and elects to subtract cost of goods sold, the entity,
other than an entity primarily engaged in an activity described by
category 5932 of the 1987 Standard Industrial Classification Manual
published by the federal Office of Management and Budget, may
subtract as a cost of goods sold an amount equal to interest
expense. For purposes of this subsection, an entity engaged in
lending to unrelated parties solely for agricultural production
offers loans to the public.
[(k-1) Notwithstanding any other provision of this section,
the following taxable entities may subtract as a cost of goods sold
the costs otherwise allowed by this section in relation to tangible
personal property that the entity rents or leases in the ordinary
course of business of the entity:
[(1) a motor vehicle rental or leasing company that
remits a tax on gross receipts imposed under Section 152.026;
[(2) a heavy construction equipment rental or leasing
company; and
[(3) a railcar rolling stock rental or leasing
company.
[(l) Notwithstanding any other provision of this section, a
payment made by one member of an affiliated group to another member
of that affiliated group not included in the combined group may be
subtracted as a cost of goods sold only if it is a transaction made
at arm's length.
[(m) In this section, "arm's length" means the standard of
conduct under which entities that are not related parties and that
have substantially equal bargaining power, each acting in its own
interest, would negotiate or carry out a particular transaction.
[(n) In this section, "related party" means a person,
corporation, or other entity, including an entity that is treated
as a pass-through or disregarded entity for purposes of federal
taxation, whether the person, corporation, or entity is subject to
the tax under this chapter or not, in which one person, corporation,
or entity, or set of related persons, corporations, or entities,
directly or indirectly owns or controls a controlling interest in
another entity.
[(o) If a taxable entity, including a taxable entity with
respect to which cost of goods sold is determined pursuant to
Section 171.1014(e)(1), whose principal business activity is film
or television production or broadcasting or the distribution of
tangible personal property described by Subsection (a)(3)(A)(ii),
or any combination of these activities, elects to subtract cost of
goods sold, the cost of goods sold for the taxable entity shall be
the costs described in this section in relation to the property and
include depreciation, amortization, and other expenses directly
related to the acquisition, production, or use of the property,
including expenses for the right to broadcast or use the property.]
SECTION 6. Section 171.1013, Tax Code, is amended by adding
Subsection (i) to read as follows:
(i) Subject to Section 171.1014 and the limitation in
Subsection (c), a taxable entity that elects to subtract
compensation for the purpose of computing its taxable margin under
Section 171.101 may include as wages and cash compensation any
compensation paid to an independent contractor as reported on
Internal Revenue Service Form 1099, or any subsequent form with a
different number or designation that substantially provides the
same information.
SECTION 7. Section 171.1015(d), Tax Code, is amended to
read as follows:
(d) Section 171.002(d) does not apply to an upper tier
entity if, before the attribution of any total revenue by a lower
tier entity to an upper tier entity under this section, the lower
tier entity does not meet the criteria of Section 171.002(d)
[171.002(d)(1) or (d)(2)].
Effective January 1, 2011, Section 171.103(b), Tax Code, is
amended to read as follows:
(b) A combined group shall include in its gross receipts
computed under Subsection (a) the gross receipts of each taxable
entity that is a member of the combined group [and that has a nexus
with this state for the purpose of taxation].
Effective January 1, 2011, Section 171.1055(b), Tax Code, is
amended to read as follows:
(b) In apportioning margin, receipts derived from
transactions between individual members of a combined group that
are excluded under Section 171.1014(c)(3) may not be included in
the receipts of the taxable entity from its business done in this
state as determined under Section 171.103[, except that receipts
ultimately derived from the sale of tangible personal property
between individual members of a combined group where one member
party to the transaction does not have nexus in this state shall be
included in the receipts of the taxable entity from its business
done in this state as determined under Section 171.103 to the extent
that the member of the combined group that does not have nexus in
this state resells the tangible personal property without
substantial modification to a purchaser in this state. "Receipts
ultimately derived from the sale" means the amount paid for the
tangible personal property by the third party purchaser].
SECTION 8. Section 171.204(b), Tax Code, is amended to read
as follows:
(b) The comptroller may require a taxable entity that does
not owe any tax because of the application of Section 171.0023
[171.002(d)(2)] to file an abbreviated information report with the
comptroller stating the amount of the taxable entity's taxable
income as defined by that section [total revenue from its entire
business]. The comptroller may not require a taxable entity
described by this subsection to file an information report that
requires the taxable entity to report or compute its margin.
SECTION 9. Sections 171.0021, 171.1016(d), and 171.103(c)
and (d), Tax Code, are repealed.
SECTION 10. This Act applies only to a report originally due
on or after the effective date of this Act.
SECTION 11. Except as otherwise provided by this Act, this
Act takes effect January 1, 2010.