83R9915 BEF-D
By: Zedler H.B. No. 2347
A BILL TO BE ENTITLED
AN ACT
relating to the franchise tax.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
SECTION 1. Section 171.0003(a), Tax Code, is amended to
read as follows:
(a) An entity is a passive entity only if:
(1) the entity is a general or limited partnership or a
trust, other than a business trust;
(2) during the period on which margin is based, the
entity's federal gross income consists of at least 90 percent of the
following income:
(A) dividends, interest, foreign currency
exchange gain, periodic and nonperiodic payments with respect to
notional principal contracts, option premiums, cash settlement or
termination payments with respect to a financial instrument, and
income from a limited liability company;
(B) distributive shares of partnership income to
the extent that those distributive shares of income are greater
than zero;
(C) net capital gain [capital gains] from the
sale of real property, gains from the sale of commodities traded on
a commodities exchange, and gains from the sale of securities; and
(D) royalties, bonuses, or delay rental income
from mineral properties and income from other nonoperating mineral
interests; and
(3) the entity does not receive more than 10 percent of
its federal gross income from conducting an active trade or
business.
SECTION 2. 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 3. Section 171.1013, Tax Code, is amended by
amending Subsection (a) and adding Subsection (i) to read as
follows:
(a) Except as otherwise provided by this section, "wages and
cash compensation" means the amount entered in the Medicare wages
and tips box of Internal Revenue Service Form W-2 or any subsequent
form with a different number or designation that substantially
provides the same information. The term also includes, to the
extent not included above:
(1) a person's net distributive income from a taxable
entity treated as a partnership for federal income tax purposes,
but only if the person [receiving the distribution] is a natural
person, a professional association owned entirely by natural
persons, or a professional corporation owned entirely by natural
persons, and only if the amount is positive;
(2) a person's net distributive income from limited
liability companies and corporations treated as S corporations for
federal income tax purposes, but only if the person [receiving the
distribution] is a natural person and only if the amount is
positive;
(3) stock awards and stock options deducted for
federal income tax purposes; [and]
(4) a person's net distributive income from a limited
liability company treated as a sole proprietorship for federal
income tax purposes, but only if the person [receiving the
distribution] is a natural person and only if the amount is
positive; and
(5) payroll taxes paid by a taxable entity in
connection with the employment of an officer, director, owner,
partner, or employee.
(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
nonemployee 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 4. Sections 171.103(c) and (d), Tax Code, are
repealed.
SECTION 5. This Act applies only to a report originally due
on or after the effective date of this Act.
SECTION 6. This Act takes effect January 1, 2014.