Texas Margin Tax Update

Transcription

1 Texas Margin Tax Update August 4-5, 2016 Fort Worth Chapter Tax Institute August 2016

2 Your presenter Donna Rutter Executive Director, Indirect Tax Services Income/ Franchise Tax Page 1

3 Agenda Comptroller Update Rule Changes and Proposed Rules Update Filing and reporting Taxpayers and rates Policy Updates COGS and Revenue Exclusion Recent Hearings and Letter Rulings Gulf Copper Hallmark Marketing Service Revenue Unitary Decisions Border State Louisiana I/F Update Questions Page 2

4 Texas Comptroller Update Current Environment 1,800 Active court cases 2,700 Open Hearings with the State Delay of Refunds Under Current Tax Law Lack of Uniformity in Application of Current Laws Increase in Audits/ Difficulty in Resolving Common Issues Other Issues: Practice and Procedures Rule updates POA forms Page 3

5 Texas Comptroller Rule Updates 15 Proposed Rule changes in progress Margins: Reports and Payments Exemptions Finalized Rule changes: Returns and Filings No Tax Due Returns required to be filed electronically for returns due after January 1, 2016 Limited partnerships and professional associations are now required to file Public Information Reports with the Comptroller s office instead of Ownership Information Reports This change applies to reports originally due on or after January 1, 2016 Passive Entities that are limited partnerships may be required to file periodic reports with secretary of state see 34TAC Page 4

6 Tax policy update Revenue exclusions and COGS L Tax Policy Memo June 30, 2016 Revenue Exclusion: Section (g) states, A taxable entity shall exclude from its total revenue only the following flow-through funds that are mandated by contract to be distributed to other entities: Other entities may include customer or subcontractors COGS: Comptroller will no longer require an entity to actually physically touch the property or make a change to the property to qualify for the COGS deduction Page 5

7 Recent Franchise Tax Decisions Page 6

8 Texas Franchise Tax and Cost of Goods Sold Gulf Copper & Manufacturing Corp. v. Hegar, Feb 2016 Taxpayer was eligible for revenue exclusion and cost of goods sold deduction for all costs related to the rig repairs The Comptroller argued that Gulf Copper could only deduct the costs incurred in manufacturing the replacement component parts and not the costs incurred to remove defective portions and to install the new ones. The Comptroller contended that the costs associated with removing defective rig components and installing the new ones were costs incurred for services, not for the production of goods. Clear language of the statute allowed all costs to be deductible TTC (c) The cost of goods sold includes all direct costs of acquiring or producing the goods, including. Page 7

9 Texas Franchise Tax COGS (continued) CGG Veritas Services (U.S.), Inc. v. Combs (Tex. Dist. Ct. Sept. 17, 2014) pending before Third Court of Appeals Seismic data produced by the taxpayer is TPP and eligible for COGS Autohaus LP, LLP v. Combs (Tex. Dist. Ct. April 29, 2015) Production is defined to include installation; comptroller limited installation only when occurring during manufacturing or construction Page 8

10 Hallmark Marketing Co., LLC v. Hegar Texas Supreme Court, No , 2016 WL (Tex. Apr. 15, 2016) Pre-2007: If the combination of net gains and losses resulted in a net loss, the corporation was required to report zero gross receipts from such transaction When Texas enacted the new Texas franchise tax treatment appeared to be similar under Tex. Tax. Code Ann (b) ( If a taxable entity sells an investment or capital asset, the taxable entity's gross receipts from its entire business for taxable margin includes only the net gain from the sale. ). However, the Comptroller extended this in 34 Tex. Admin. Code 3.591(e)(2)( If the combination of net gains and losses results in a net loss, the taxable entity should net the loss against other receipts, but not below zero. ) Prior Tax Policy: Only net gain from the sale of investments should be included in the Texas gross receipts factor. Page 9

11 Hallmark Marketing Co., LLC v. Hegar (continued) Overview of the case Sale of capital investment resulted in $628 million loss Taxpayer did not include net loss in it s apportionment factor based on Tex. Tax. Code Ann (b) ( If a taxable entity sells an investment or capital asset, the taxable entity's gross receipts from its entire business for taxable margin includes only the net gain from the sale. ). Comptroller, trial court, and Court of Appeals stated that definition of net gain was ambiguous and relied on 34 Tex. Admin. Code 3.591(e)(2)( If the combination of net gains and losses results in a net loss, the taxable entity should net the loss against other receipts, but not below zero. ). Texas Supreme Court noted that, even if "net gain" is ambiguous, the ambiguity is irrelevant because neither party disputed that Hallmark suffered only a net loss, and the statute requires inclusion only of the net gain "and under no reading can 'net gain' include a net loss. Page 10

12 Net Gains and Losses Example Taxpayer gross receipts: Sales $1,000* $1,000 Interest $ 200 $ 200 Net gain $ 300 $ ($300 - $450 = 150 net loss) 4797 loss $( 450) $ Net loss in NOT included Total $1,050 $1,200 Texas Apportionment $1,000/$1,050 = 95% $1,000/1,200 = 83% Comptroller method would result in 95% Texas Apportionment Texas Supreme Court ruled plain reading of the statute only the net gain Page 11

13 Apportionment of Service Revenue L Private Letter Ruling Facts: Texas based radio network, develops, produces and syndicates programming in Texas and US Company does not own radio stations, it enters into program licensing agreements with various stations Company earns revenue with its customers who contract with the Company to have the ads broadcast during the syndicated programs in Texas and nationally How should the advertising revenue be sourced in Texas for apportionment purposes? Page 12

14 Apportionment of Service Revenue L Private Letter Ruling continued Rule 3.591(e)(22) provides that [a]ll advertising revenues of a radio or television station that broadcasts or transmits from a location in Texas constitute Texas receipts. Not applicable in this specific case Response: Receipts from advertising are receipts from the performance of a service the dissemination of a customer s message the focus is on the specific, end-product acts for which the customer contracts and pays to receive, not on non-receipt producing, albeit essential, support activities The Company may determine Texas receipts from national advertising revenue based on the ratio of licensee radio stations in Texas to total licensee radio stations. Page 13

15 Apportionment of Service Revenue L Private Letter Ruling Facts: Transportation management company based in Arizona (AZ) with employees and IT located in Colorado (CO); salesperson and Independent contractors located in Texas Revenue earned by matching shipping customers with carriers through proprietary online software located on server in AZ Shipping customer posts request for shipping online, then selects carrier from online bids using the software Company does not own any transportation equipment or control the carriers Texas activities include solicitation and customer service How should the revenues be sourced for Texas margin tax purposes? Page 14

16 Apportionment of Service Revenue L Private Letter Ruling continued Rule 3.591(e)(26) receipts from a service are apportioned to the location where the service is performed the determination of where services are performed is based on the location at which the specific, end-product acts for which the customer contracts take place, not the location at which non-receipt producing, albeit essential, support activities are performed Revenue generating service is the matching of shipping customers with transportation companies and those activities are performed on the server located in AZ Page 15

17 Unitary Group Non-unitary relationship CPA Hearing No. 111,577 Summary: Individual was sole owner over two entities One entity provided cleaning services to high-end residential clients Other entity provided consulting to small businesses A single individual (not owner) oversaw administrative functions for both entities The two businesses were physically housed in the same building Comptroller found that the groups were non-unitary; the Comptroller unitary panel found them unitary: Were 100% by the same individual; Had a common administrator; Had a common payroll; and Used common software Taxpayer established by a preponderance of the evidence that the shared administrative functions carried out by the common administrator did not constitute strong centralized management Page 16

18 Unitary Group Ownership test CPA Hearing No. 109,672 Summary: 2 unrelated individuals own more than 50% of Company A and Company B Company A provides medical services to patients Company B provides management services to Company A Originally filed separate reports, later amended to file combined group Comptroller denied affiliated group since a common owner did not own more than 50% An affiliated group means a group of one or more entities in which a controlling interest is owned by a common owner or owners, either corporate or noncorporate, or by one or more of the member entities. Tex. Tax Code Section (1) ALJ ruled the entities were unitary based on the plain language of the statute agency interpretations cannot contradict statutory text. It is well settled that an agency rule may not impose additional burdens, conditions, or restrictions in excess of or inconsistent with the relevant statutory provision Page 17

19 Texas Margin Tax Flow Thru Funds Revenue Exclusion TTC (g)(3) CPA Hearing No. 111,668 - Flow-through exclusion Taxpayer is a Landman company that performs various services for oil and gas companies. Taxpayer provided services around the acquisition and divesture of mineral rights and titles which it claimed as being required as a pre-step to do design/construction/remodeling on real property Taxpayer claimed a revenue exclusion on the basis of flow thru funds mandated by contract to be distributed to other entities by the taxable entity to provide services, labor, or materials in connection with the actual or proposed design, construction, remodeling, remediation, or repair of improvements on real property ALJ took a very narrow view of provide services, labor, or materials in connection with the actual or proposed design, construction, remodeling, or repair of improvements on real property or the location of the boundaries of real property. Petitioner failed to present evidence supporting subcontracting payments Page 18

20 Border state Louisiana Legislative Update Page 19

21 Louisiana Legislative Changes Note effective dates Franchise Tax effective for reports after Jan. 1, 2017 LLC s taxed as C corporations subject to franchise tax Expands nexus to include corporate partners or members of a partnership or LLC doing business in the state Provides for Holding Company deduction from franchise tax base: deduction is allowed for subsidiaries that are owned 80% or more and are subject to LA franchise tax Multiply parent s investment in subsidiary by the subs LA apportionment factor Page 20

22 Louisiana Legislative Changes Note effective dates Income Tax NOL s limited to 72% of LA net income Effect. Jan. 1, 2016 Ordering of NOL carryforwards are on the LIFO basis, beginning with the most recent loss year effective Jan. 1, 2017 Related Party Expense Addback Interest expense, Intangibles and management fees add-back not applicable if the corporation establishes the related party transactions did not have as a principal purpose the avoidance of any Louisiana tax Apportionment Factor Changes HB20 Second Special Session June 23 Single sales factor with market based sourcing for Service Providers Double Weighted sales factor for Oil and Gas companies Page 21

23 Questions Page 22

24 Thank you For your participation and feedback! Page 23

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