PLANNING UNDER THE TEXAS MARGIN TAX HOW TO SAVE MONEY. Kirk R. Lyda Karen H. Currie Jones Day, 2727 N. Harwood St.

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1 PLANNING UNDER THE TEXAS MARGIN TAX HOW TO SAVE MONEY Kirk R. Lyda Karen H. Currie Jones Day, 2727 N. Harwood St., Dallas, TX 75201

2 PRELIMINARY INFORMATION If you are having difficulty hearing the webcast, please check to make sure that you have the volume on your computer s speakers turned up If you have technical difficulties during the webcast, please click on the Customer Support link at the bottom of the web page or support@brighttalk.com CLE Credit Complete survey prior to webcast Respond to polls throughout webcast Complete and return CLE Evaluation Form

3 PRESENTERS Kirk R. Lyda Karen H. Currie *Please note that the views expressed in this webcast are solely those of the presenters. The presentation is meant to be informational and is not intended to provide legal advice. This presentation should not be used in other presentations or publications without Jones Day s consent.

4 TEXAS MARGIN TAX At A Glance Lesser of 70% of TOTAL REVENUE or TOTAL REVENUE less either Cost of Goods Sold or Compensation SINGLE SALES APPORTIONMENT FACTOR 1% or 0.5% TAX RATE Unique unitary group

5 NETTING OF REVENUE AND EXPENSES $10 $100 TAXPAYER $15 $20 Examples travel agent, landlord reimbursements, credit card fees

6 DEDUCTION FOR FLOW-THROUGH FUNDS Flow-through funds mandated by law or fiduciary duty Fiduciary duty not defined by statute or regulation Power and obligation to act for another under circumstances that require total trust, good faith and honesty; Business advisers, attorneys, guardians, administrators of estates, real estate agents, bankers, stockbrokers, title companies Paid to other entities or persons Don t forget about flow through funds mandated by contract too!

7 COST OF GOODS SOLD Largest deduction (85%) on Texas margin tax return Goods includes tangible personal property sold in the ordinary course of business Sold not defined Who qualifies? Bucket approach to COGS

8 COST OF GOOD SOLD Qualifying Companies Leasing?? Property includes every right that accompanies ownership Sale includes a lease or rental of real property Deduction over life of property Service businesses?? Goods does not include services COGS not permitted for service providers Rule permits COGS for mixed transactions only in relation to tangible property sold

9 Cost Of Goods Sold: Buckets Listed Indirect Costs Related To Goods Listed Disallowed Costs 4% Overhead Costs 9

10 COST OF GOOD SOLD Interpretation of Direct Costs No statutory or regulatory definition of direct costs Issues: List not comprehensive Costs not on list: costs that can be specifically identified with an output (Financial Accounting) Overhead: amount of money for material, labor, and overhead to produce a product (Black s) Indirect approach: negative inference from definition of indirect costs Inconsistency in application

11 COST OF GOODS SOLD Narrow View of Disallowed Costs Comprehensive list Costs that seem to be disallowed may be more limited than they appear Internal transportation costs: Distribution costs: including outbound transportation costs Texas margin tax: franchise taxes that are assessed on the taxable entity based on income Benefits to officers: officer s compensation Internal wages?: Selling costs, including employee expenses related to sales (sales compensation?)

12 COST OF GOODS SOLD Administrative Costs Not an enumerated list ( 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 ) Allocable to the acquisition or production of goods Two computations

13 MAXIMIZING THE 0.5% RATE Primarily engaged in retail or wholesale trade if: Total revenue from its activities in retail or wholesale trade is greater than total revenue from activities in other trades Less than 50% of the total revenue from activities in retail or wholesale trade comes from the sale of products it (or an affiliate) produces Entity does not provide retail or wholesale utilities, including telecommunication services, electricity or gas Retail trade means the activities described in Division G of the SIC Manual

14 MAXIMIZING THE 0.5% RATE Texas Tax Reform Commission [T]axable entities primarily engaged in retail or wholesale trade would pay a reduced rate of 0.5%, in recognition of the low profit margins basic to the industry Activities may be described in multiple divisions of the SIC Manual Renting tangible personal property Other Services

15 APPORTIONMENT Location of payor for sourcing intangibles Application of Joyce in Texas Entities that have a nexus with the state Carefully monitor nexus creating activities Three Factor Apportionment? Chapter 141: UDITPA three factor apportionment Prior law: Chapter 141 does not apply to Chapter 171

16 TEXAS UNIQUE UNITARY GROUP A single economic enterprise that is made up of separate parts of a single entity or of a commonly controlled group of entities that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts Texas-specific group? Constitutional versus statutory analysis Presumption of unity Multiple groups

17 TEXAS UNIQUE UNITARY GROUP Controlling interest definition: Corporation with more than 50% of direct or indirect ownership of the total combined voting power or beneficial ownership of voting stock Partnership or other entity with more than 50% of the direct or indirect ownership of the capital, profits or beneficial interest Comptroller Rule If more than one unitary relationship, company may elect Election remains in place until relationship ceases or revoked by Comptroller

18 NEED FOR TAX SHARING AGREEMENTS AND INDEMNIFICATION Need for Texas-specific tax sharing agreements Tax on flow through entities Unitary, combined filing Gross income tax Joint and several liability

19 NEED FOR TAX SHARING AGREEMENTS AND INDEMNIFICATION Acquired companies Distressed companies

20 PLANNING OPPORTUNITIES Texas Margin Tax Reviews Refund claims Voluntary Disclosure Structural Changes Tax Sharing Agreements Statute of limitations is running!

21 QUESTIONS?? Please remember to complete and return your CLE Evaluation Forms within five days to or fax: (216)