BILL ANALYSIS C.S.H.B. 3684 By: Capriglione Ways & Means Committee Report (Substituted) BACKGROUND AND PURPOSE Chapter 171 of the Tax Code governs the franchise tax, which is assessed on the total revenue of taxable entities in Texas. However, the bill author has informed the committee that for entities engaged in securities markets, revenue often includes pass-through payments that do not reflect true income, particularly transaction rebate payments made to brokers or dealers as part of securities trades. C.S.H.B. 3684 seeks to address this issue and secure accurate tax treatment for entities operating in the securities market by excluding from an entity's total revenue, for purposes of the franchise tax, rebate payments made to brokers or dealers that do not represent retained income. CRIMINAL JUSTICE IMPACT It is the committee's opinion that this bill does not expressly create a criminal offense, increase the punishment for an existing criminal offense or category of offenses, or change the eligibility of a person for community supervision, parole, or mandatory supervision. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency, or institution. ANALYSIS C.S.H.B. 3684 amends the Tax Code to require a taxable entity that is a registered securities market operator, in calculating the entity's total revenue for purposes of the franchise tax, to exclude from its total revenue transaction rebate payments made by the operator to a broker or dealer as part of a securities transaction. The bill defines the following terms: "broker" and "dealer" by reference to the federal Securities Exchange Act of 1934; "registered securities market operator" as an entity that is engaged in activities described in category 523210 of the 2022 North American Industry Classification System and is subject to registration with and regulation by the U.S. Securities and Exchange Commission or the U.S. Commodity Futures Trading Commission; "securities transaction" as the purchase or sale of a security by a broker or dealer; and "transaction rebate payment" as an amount paid to incentivize a broker or dealer to provide liquidity to the market. The bill establishes that "security" has the meaning assigned by federal Internal Revenue Code provisions relating to the mark to market accounting method for dealers in securities. C.S.H.B. 3684 applies only to a report originally due on or after the bill's effective date. EFFECTIVE DATE January 1, 2026. COMPARISON OF INTRODUCED AND SUBSTITUTE While C.S.H.B. 3684 may differ from the introduced in minor or nonsubstantive ways, the following summarizes the substantial differences between the introduced and committee substitute versions of the bill. The substitute omits definitions present in the introduced for the terms "exchange" and "member" and includes definitions absent from the introduced for the terms "broker," "dealer," and "registered securities market operator." Whereas the introduced defined "securities transaction" as the purchase or sale of a security on an exchange by a member of the exchange, the substitute defines that term as the purchase or sale of a security by a broker or dealer. Whereas the introduced defined "transaction rebate payment" as an amount paid to compensate a member of the exchange in order to provide liquidity to the market, the substitute defines that term as an amount paid to incentivize a broker or dealer to provide liquidity to the market. The introduced required a taxable entity, in calculating the entity's total revenue for purposes of the franchise tax, to exclude the following from its total revenue: if the entity is an exchange, transaction rebate payments made by the exchange to a member of the exchange as part of a securities transaction; and if the entity is a member of an exchange, transaction rebate payments made to the member by the exchange as part of a securities transaction. The substitute omits this requirement and instead requires a taxable entity that is a registered securities market operator, in making that calculation, to exclude from its total revenue transaction rebate payments made by the operator to a broker or dealer as part of a securities transaction.
BILL ANALYSIS
# BILL ANALYSIS
C.S.H.B. 3684
By: Capriglione
Ways & Means
Committee Report (Substituted)
C.S.H.B. 3684
By: Capriglione
Ways & Means
Committee Report (Substituted)
BACKGROUND AND PURPOSE Chapter 171 of the Tax Code governs the franchise tax, which is assessed on the total revenue of taxable entities in Texas. However, the bill author has informed the committee that for entities engaged in securities markets, revenue often includes pass-through payments that do not reflect true income, particularly transaction rebate payments made to brokers or dealers as part of securities trades. C.S.H.B. 3684 seeks to address this issue and secure accurate tax treatment for entities operating in the securities market by excluding from an entity's total revenue, for purposes of the franchise tax, rebate payments made to brokers or dealers that do not represent retained income.
CRIMINAL JUSTICE IMPACT It is the committee's opinion that this bill does not expressly create a criminal offense, increase the punishment for an existing criminal offense or category of offenses, or change the eligibility of a person for community supervision, parole, or mandatory supervision.
RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency, or institution.
ANALYSIS C.S.H.B. 3684 amends the Tax Code to require a taxable entity that is a registered securities market operator, in calculating the entity's total revenue for purposes of the franchise tax, to exclude from its total revenue transaction rebate payments made by the operator to a broker or dealer as part of a securities transaction. The bill defines the following terms: "broker" and "dealer" by reference to the federal Securities Exchange Act of 1934; "registered securities market operator" as an entity that is engaged in activities described in category 523210 of the 2022 North American Industry Classification System and is subject to registration with and regulation by the U.S. Securities and Exchange Commission or the U.S. Commodity Futures Trading Commission; "securities transaction" as the purchase or sale of a security by a broker or dealer; and "transaction rebate payment" as an amount paid to incentivize a broker or dealer to provide liquidity to the market. The bill establishes that "security" has the meaning assigned by federal Internal Revenue Code provisions relating to the mark to market accounting method for dealers in securities. C.S.H.B. 3684 applies only to a report originally due on or after the bill's effective date.
EFFECTIVE DATE January 1, 2026.
COMPARISON OF INTRODUCED AND SUBSTITUTE While C.S.H.B. 3684 may differ from the introduced in minor or nonsubstantive ways, the following summarizes the substantial differences between the introduced and committee substitute versions of the bill. The substitute omits definitions present in the introduced for the terms "exchange" and "member" and includes definitions absent from the introduced for the terms "broker," "dealer," and "registered securities market operator." Whereas the introduced defined "securities transaction" as the purchase or sale of a security on an exchange by a member of the exchange, the substitute defines that term as the purchase or sale of a security by a broker or dealer. Whereas the introduced defined "transaction rebate payment" as an amount paid to compensate a member of the exchange in order to provide liquidity to the market, the substitute defines that term as an amount paid to incentivize a broker or dealer to provide liquidity to the market. The introduced required a taxable entity, in calculating the entity's total revenue for purposes of the franchise tax, to exclude the following from its total revenue: if the entity is an exchange, transaction rebate payments made by the exchange to a member of the exchange as part of a securities transaction; and if the entity is a member of an exchange, transaction rebate payments made to the member by the exchange as part of a securities transaction. The substitute omits this requirement and instead requires a taxable entity that is a registered securities market operator, in making that calculation, to exclude from its total revenue transaction rebate payments made by the operator to a broker or dealer as part of a securities transaction.
BACKGROUND AND PURPOSE
Chapter 171 of the Tax Code governs the franchise tax, which is assessed on the total revenue of taxable entities in Texas. However, the bill author has informed the committee that for entities engaged in securities markets, revenue often includes pass-through payments that do not reflect true income, particularly transaction rebate payments made to brokers or dealers as part of securities trades. C.S.H.B. 3684 seeks to address this issue and secure accurate tax treatment for entities operating in the securities market by excluding from an entity's total revenue, for purposes of the franchise tax, rebate payments made to brokers or dealers that do not represent retained income.
CRIMINAL JUSTICE IMPACT
It is the committee's opinion that this bill does not expressly create a criminal offense, increase the punishment for an existing criminal offense or category of offenses, or change the eligibility of a person for community supervision, parole, or mandatory supervision.
RULEMAKING AUTHORITY
It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency, or institution.
ANALYSIS
C.S.H.B. 3684 amends the Tax Code to require a taxable entity that is a registered securities market operator, in calculating the entity's total revenue for purposes of the franchise tax, to exclude from its total revenue transaction rebate payments made by the operator to a broker or dealer as part of a securities transaction. The bill defines the following terms:
"broker" and "dealer" by reference to the federal Securities Exchange Act of 1934;
"registered securities market operator" as an entity that is engaged in activities described in category 523210 of the 2022 North American Industry Classification System and is subject to registration with and regulation by the U.S. Securities and Exchange Commission or the U.S. Commodity Futures Trading Commission;
"securities transaction" as the purchase or sale of a security by a broker or dealer; and
"transaction rebate payment" as an amount paid to incentivize a broker or dealer to provide liquidity to the market.
The bill establishes that "security" has the meaning assigned by federal Internal Revenue Code provisions relating to the mark to market accounting method for dealers in securities.
C.S.H.B. 3684 applies only to a report originally due on or after the bill's effective date.
EFFECTIVE DATE
January 1, 2026.
COMPARISON OF INTRODUCED AND SUBSTITUTE
While C.S.H.B. 3684 may differ from the introduced in minor or nonsubstantive ways, the following summarizes the substantial differences between the introduced and committee substitute versions of the bill.
The substitute omits definitions present in the introduced for the terms "exchange" and "member" and includes definitions absent from the introduced for the terms "broker," "dealer," and "registered securities market operator."
Whereas the introduced defined "securities transaction" as the purchase or sale of a security on an exchange by a member of the exchange, the substitute defines that term as the purchase or sale of a security by a broker or dealer. Whereas the introduced defined "transaction rebate payment" as an amount paid to compensate a member of the exchange in order to provide liquidity to the market, the substitute defines that term as an amount paid to incentivize a broker or dealer to provide liquidity to the market.
The introduced required a taxable entity, in calculating the entity's total revenue for purposes of the franchise tax, to exclude the following from its total revenue:
if the entity is an exchange, transaction rebate payments made by the exchange to a member of the exchange as part of a securities transaction; and
if the entity is a member of an exchange, transaction rebate payments made to the member by the exchange as part of a securities transaction.
The substitute omits this requirement and instead requires a taxable entity that is a registered securities market operator, in making that calculation, to exclude from its total revenue transaction rebate payments made by the operator to a broker or dealer as part of a securities transaction.