Texas 2015 - 84th Regular

Texas Senate Bill SB756 Compare Versions

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1	1	84R2401 ADM-D
2	2	By: Taylor of Collin S.B. No. 756
3	3
4	4
5	5	A BILL TO BE ENTITLED
6	6	AN ACT
7	7	relating to the determination of cost of goods sold for purposes of
8	8	computing the franchise tax.
9	9	BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
10	10	SECTION 1. Section 171.1012, Tax Code, is amended to read as
11	11	follows:
12	12	Sec. 171.1012. DETERMINATION OF COST OF GOODS SOLD. [(a)
13	13	In this section:
14	14	[(1) "Goods" means real or tangible personal property
15	15	sold in the ordinary course of business of a taxable entity.
16	16	[(2) "Production" includes construction,
17	17	installation, manufacture, development, mining, extraction,
18	18	improvement, creation, raising, or growth.
19	19	[(3)(A) "Tangible personal property" means:
20	20	[(i) personal property that can be seen,
21	21	weighed, measured, felt, or touched or that is perceptible to the
22	22	senses in any other manner;
23	23	[(ii) films, sound recordings, videotapes,
24	24	live and prerecorded television and radio programs, books, and
25	25	other similar property embodying words, ideas, concepts, images, or
26	26	sound, without regard to the means or methods of distribution or the
27	27	medium in which the property is embodied, for which, as costs are
28	28	incurred in producing the property, it is intended or is reasonably
29	29	likely that any medium in which the property is embodied will be
30	30	mass-distributed by the creator or any one or more third parties in
31	31	a form that is not substantially altered; and
32	32	[(iii) a computer program, as defined by
33	33	Section 151.0031.
34	34	[(B) "Tangible personal property" does not
35	35	include:
36	36	[(i) intangible property; or
37	37	[(ii) services.
38	38	[(b)] Subject to Section 171.1014, a taxable entity that
39	39	elects to subtract cost of goods sold for the purpose of computing
40	40	its taxable margin shall determine the amount of that cost of goods
41	41	sold as follows:
42	42	(1) for a taxable entity treated for federal income
43	43	tax purposes as a corporation, the cost of goods sold is the amount
44	44	reportable as cost of goods sold on line 2, Internal Revenue Service
45	45	Form 1120;
46	46	(2) for a taxable entity treated for federal income
47	47	tax purposes as a partnership, the cost of goods sold is the amount
48	48	reportable as cost of goods sold on line 2, Internal Revenue Service
49	49	Form 1065;
50	50	(3) for a taxable entity treated for federal income
51	51	tax purposes as an S corporation, the cost of goods sold is the
52	52	amount reportable as cost of goods sold on line 2, Internal Revenue
53	53	Service Form 1120S; or
54	54	(4) for any other taxable entity, the cost of goods
55	55	sold is an amount determined in a manner substantially equivalent
56	56	to the amount for Subdivision (1), (2), or (3) determined by rules
57	57	the comptroller shall adopt [provided by this section].
58	58	[(c) The cost of goods sold includes all direct costs of
59	59	acquiring or producing the goods, including:
60	60	[(1) labor costs;
61	61	[(2) cost of materials that are an integral part of
62	62	specific property produced;
63	63	[(3) cost of materials that are consumed in the
64	64	ordinary course of performing production activities;
65	65	[(4) handling costs, including costs attributable to
66	66	processing, assembling, repackaging, and inbound transportation
67	67	costs;
68	68	[(5) storage costs, including the costs of carrying,
69	69	storing, or warehousing property, subject to Subsection (e);
70	70	[(6) depreciation, depletion, and amortization,
71	71	reported on the federal income tax return on which the report under
72	72	this chapter is based, to the extent associated with and necessary
73	73	for the production of goods, including recovery described by
74	74	Section 197, Internal Revenue Code;
75	75	[(7) the cost of renting or leasing equipment,
76	76	facilities, or real property directly used for the production of
77	77	the goods, including pollution control equipment and intangible
78	78	drilling and dry hole costs;
79	79	[(8) the cost of repairing and maintaining equipment,
80	80	facilities, or real property directly used for the production of
81	81	the goods, including pollution control devices;
82	82	[(9) costs attributable to research, experimental,
83	83	engineering, and design activities directly related to the
84	84	production of the goods, including all research or experimental
85	85	expenditures described by Section 174, Internal Revenue Code;
86	86	[(10) geological and geophysical costs incurred to
87	87	identify and locate property that has the potential to produce
88	88	minerals;
89	89	[(11) taxes paid in relation to acquiring or producing
90	90	any material, or taxes paid in relation to services that are a
91	91	direct cost of production;
92	92	[(12) the cost of producing or acquiring electricity
93	93	sold; and
94	94	[(13) a contribution to a partnership in which the
95	95	taxable entity owns an interest that is used to fund activities, the
96	96	costs of which would otherwise be treated as cost of goods sold of
97	97	the partnership, but only to the extent that those costs are related
98	98	to goods distributed to the taxable entity as goods-in-kind in the
99	99	ordinary course of production activities rather than being sold.
100	100	[(d) In addition to the amounts includable under Subsection
101	101	(c), the cost of goods sold includes the following costs in relation
102	102	to the taxable entity's goods:
103	103	[(1) deterioration of the goods;
104	104	[(2) obsolescence of the goods;
105	105	[(3) spoilage and abandonment, including the costs of
106	106	rework labor, reclamation, and scrap;
107	107	[(4) if the property is held for future production,
108	108	preproduction direct costs allocable to the property, including
109	109	costs of purchasing the goods and of storage and handling the goods,
110	110	as provided by Subsections (c)(4) and (c)(5);
111	111	[(5) postproduction direct costs allocable to the
112	112	property, including storage and handling costs, as provided by
113	113	Subsections (c)(4) and (c)(5);
114	114	[(6) the cost of insurance on a plant or a facility,
115	115	machinery, equipment, or materials directly used in the production
116	116	of the goods;
117	117	[(7) the cost of insurance on the produced goods;
118	118	[(8) the cost of utilities, including electricity,
119	119	gas, and water, directly used in the production of the goods;
120	120	[(9) the costs of quality control, including
121	121	replacement of defective components pursuant to standard warranty
122	122	policies, inspection directly allocable to the production of the
123	123	goods, and repairs and maintenance of goods; and
124	124	[(10) licensing or franchise costs, including fees
125	125	incurred in securing the contractual right to use a trademark,
126	126	corporate plan, manufacturing procedure, special recipe, or other
127	127	similar right directly associated with the goods produced.
128	128	[(e) The cost of goods sold does not include the following
129	129	costs in relation to the taxable entity's goods:
130	130	[(1) the cost of renting or leasing equipment,
131	131	facilities, or real property that is not used for the production of
132	132	the goods;
133	133	[(2) selling costs, including employee expenses
134	134	related to sales;
135	135	[(3) distribution costs, including outbound
136	136	transportation costs;
137	137	[(4) advertising costs;
138	138	[(5) idle facility expense;
139	139	[(6) rehandling costs;
140	140	[(7) bidding costs, which are the costs incurred in
141	141	the solicitation of contracts ultimately awarded to the taxable
142	142	entity;
143	143	[(8) unsuccessful bidding costs, which are the costs
144	144	incurred in the solicitation of contracts not awarded to the
145	145	taxable entity;
146	146	[(9) interest, including interest on debt incurred or
147	147	continued during the production period to finance the production of
148	148	the goods;
149	149	[(10) income taxes, including local, state, federal,
150	150	and foreign income taxes, and franchise taxes that are assessed on
151	151	the taxable entity based on income;
152	152	[(11) strike expenses, including costs associated
153	153	with hiring employees to replace striking personnel, but not
154	154	including the wages of the replacement personnel, costs of
155	155	security, and legal fees associated with settling strikes;
156	156	[(12) officers' compensation;
157	157	[(13) costs of operation of a facility that is:
158	158	[(A) located on property owned or leased by the
159	159	federal government; and
160	160	[(B) managed or operated primarily to house
161	161	members of the armed forces of the United States; and
162	162	[(14) any compensation paid to an undocumented worker
163	163	used for the production of goods. As used in this subdivision:
164	164	[(A) "undocumented worker" means a person who is
165	165	not lawfully entitled to be present and employed in the United
166	166	States; and
167	167	[(B) "goods" includes the husbandry of animals,
168	168	the growing and harvesting of crops, and the severance of timber
169	169	from realty.
170	170	[(f) A taxable entity may subtract as a cost of goods sold
171	171	indirect or administrative overhead costs, including all mixed
172	172	service costs, such as security services, legal services, data
173	173	processing services, accounting services, personnel operations,
174	174	and general financial planning and financial management costs, that
175	175	it can demonstrate are allocable to the acquisition or production
176	176	of goods, except that the amount subtracted may not exceed four
177	177	percent of the taxable entity's total indirect or administrative
178	178	overhead costs, including all mixed service costs. Any costs
179	179	excluded under Subsection (e) may not be subtracted under this
180	180	subsection.
181	181	[(g) A taxable entity that is allowed a subtraction by this
182	182	section for a cost of goods sold and that is subject to Section
183	183	263A, 460, or 471, Internal Revenue Code, may capitalize that cost
184	184	in the same manner and to the same extent that the taxable entity
185	185	capitalized that cost on its federal income tax return or may
186	186	expense those costs, except for costs excluded under Subsection
187	187	(e), or in accordance with Subsections (c), (d), and (f). If the
188	188	taxable entity elects to capitalize costs, it must capitalize each
189	189	cost allowed under this section that it capitalized on its federal
190	190	income tax return. If the taxable entity later elects to begin
191	191	expensing a cost that may be allowed under this section as a cost of
192	192	goods sold, the entity may not deduct any cost in ending inventory
193	193	from a previous report. If the taxable entity elects to expense a
194	194	cost of goods sold that may be allowed under this section, a cost
195	195	incurred before the first day of the period on which the report is
196	196	based may not be subtracted as a cost of goods sold. If the taxable
197	197	entity elects to expense a cost of goods sold and later elects to
198	198	capitalize that cost of goods sold, a cost expensed on a previous
199	199	report may not be capitalized.
200	200	[(h) A taxable entity shall determine its cost of goods
201	201	sold, except as otherwise provided by this section, in accordance
202	202	with the methods used on the federal income tax return on which the
203	203	report under this chapter is based. This subsection does not affect
204	204	the type or category of cost of goods sold that may be subtracted
205	205	under this section.
206	206	[(i) A taxable entity may make a subtraction under this
207	207	section in relation to the cost of goods sold only if that entity
208	208	owns the goods. The determination of whether a taxable entity is
209	209	an owner is based on all of the facts and circumstances, including
210	210	the various benefits and burdens of ownership vested with the
211	211	taxable entity. A taxable entity furnishing labor or materials to a
212	212	project for the construction, improvement, remodeling, repair, or
213	213	industrial maintenance (as the term "maintenance" is defined in 34
214	214	T.A.C. Section 3.357) of real property is considered to be an owner
215	215	of that labor or materials and may include the costs, as allowed by
216	216	this section, in the computation of cost of goods sold. Solely for
217	217	purposes of this section, a taxable entity shall be treated as the
218	218	owner of goods being manufactured or produced by the entity under a
219	219	contract with the federal government, including any subcontracts
220	220	that support a contract with the federal government,
221	221	notwithstanding that the Federal Acquisition Regulation may
222	222	require that title or risk of loss with respect to those goods be
223	223	transferred to the federal government before the manufacture or
224	224	production of those goods is complete.
225	225	[(j) A taxable entity may not make a subtraction under this
226	226	section for cost of goods sold to the extent the cost of goods sold
227	227	was funded by partner contributions and deducted under Subsection
228	228	(c)(13).
229	229	[(k) Notwithstanding any other provision of this section,
230	230	if the taxable entity is a lending institution that offers loans to
231	231	the public and elects to subtract cost of goods sold, the entity,
232	232	other than an entity primarily engaged in an activity described by
233	233	category 5932 of the 1987 Standard Industrial Classification Manual
234	234	published by the federal Office of Management and Budget, may
235	235	subtract as a cost of goods sold an amount equal to interest
236	236	expense. For purposes of this subsection, an entity engaged in
237	237	lending to unrelated parties solely for agricultural production
238	238	offers loans to the public.
239	239	[(k-1) Notwithstanding any other provision of this section,
240	240	the following taxable entities may subtract as a cost of goods sold
241	241	the costs otherwise allowed by this section in relation to tangible
242	242	personal property that the entity rents or leases in the ordinary
243	243	course of business of the entity:
244	244	[(1) a motor vehicle rental or leasing company that
245	245	remits a tax on gross receipts imposed under Section 152.026;
246	246	[(2) a heavy construction equipment rental or leasing
247	247	company; and
248	248	[(3) a railcar rolling stock rental or leasing
249	249	company.
250	250	[(k-2) This subsection applies only to a pipeline entity:
251	251	(1) that owns or leases and operates the pipeline by which the
252	252	product is transported for others and only to that portion of the
253	253	product to which the entity does not own title; and (2) that is
254	254	primarily engaged in gathering, storing, transporting, or
255	255	processing crude oil, including finished petroleum products,
256	256	natural gas, condensate, and natural gas liquids, except for a
257	257	refinery installation that manufactures finished petroleum
258	258	products from crude oil. Notwithstanding Subsection (e)(3) or (i),
259	259	a pipeline entity providing services for others related to the
260	260	product that the pipeline does not own and to which this subsection
261	261	applies may subtract as a cost of goods sold its depreciation,
262	262	operations, and maintenance costs allowed by this section related
263	263	to the services provided.
264	264	[(k-3) For purposes of Subsection (k-2), "processing" means
265	265	the physical or mechanical removal, separation, or treatment of
266	266	crude oil, including finished petroleum products, natural gas,
267	267	condensate, and natural gas liquids after those materials are
268	268	produced from the earth. The term does not include the chemical or
269	269	biological transformation of those materials.
270	270	[(l) Notwithstanding any other provision of this section, a
271	271	payment made by one member of an affiliated group to another member
272	272	of that affiliated group not included in the combined group may be
273	273	subtracted as a cost of goods sold only if it is a transaction made
274	274	at arm's length.
275	275	[(m) In this section, "arm's length" means the standard of
276	276	conduct under which entities that are not related parties and that
277	277	have substantially equal bargaining power, each acting in its own
278	278	interest, would negotiate or carry out a particular transaction.
279	279	[(n) In this section, "related party" means a person,
280	280	corporation, or other entity, including an entity that is treated
281	281	as a pass-through or disregarded entity for purposes of federal
282	282	taxation, whether the person, corporation, or entity is subject to
283	283	the tax under this chapter or not, in which one person, corporation,
284	284	or entity, or set of related persons, corporations, or entities,
285	285	directly or indirectly owns or controls a controlling interest in
286	286	another entity.
287	287	[(o) If a taxable entity, including a taxable entity with
288	288	respect to which cost of goods sold is determined pursuant to
289	289	Section 171.1014(e)(1), whose principal business activity is film
290	290	or television production or broadcasting or the distribution of
291	291	tangible personal property described by Subsection (a)(3)(A)(ii),
292	292	or any combination of these activities, elects to subtract cost of
293	293	goods sold, the cost of goods sold for the taxable entity shall be
294	294	the costs described in this section in relation to the property and
295	295	include depreciation, amortization, and other expenses directly
296	296	related to the acquisition, production, or use of the property,
297	297	including expenses for the right to broadcast or use the property.
298	298	[(t) If a taxable entity that is a movie theater elects to
299	299	subtract cost of goods sold, the cost of goods sold for the taxable
300	300	entity shall be the costs described by this section in relation to
301	301	the acquisition, production, exhibition, or use of a film or motion
302	302	picture, including expenses for the right to use the film or motion
303	303	picture.]
304	304	SECTION 2. Section 171.1011(v), Tax Code, is amended to
305	305	read as follows:
306	306	(v) A taxable entity primarily engaged in the business of
307	307	transporting goods by waterways that does not subtract cost of
308	308	goods sold in computing its taxable margin shall exclude from its
309	309	total revenue direct costs of providing transportation services by
310	310	intrastate or interstate waterways to the same extent that a
311	311	taxable entity that sells in the ordinary course of business real or
312	312	tangible personal property would be authorized by Section 171.1012
313	313	to subtract those costs as costs of goods sold in computing its
314	314	taxable margin[, notwithstanding Section 171.1012(e)(3)].
315	315	SECTION 3. This Act applies only to a report originally due
316	316	on or after the effective date of this Act.
317	317	SECTION 4. This Act takes effect January 1, 2016.