Texas Legislature Provides Franchise Tax Relief

DALLAS, June 3, 2013 /PRNewswire/ -- The Texas Legislature has sent Governor Rick Perry the first major franchise tax relief bill since the revised Texas franchise tax was enacted seven years ago. House Bill 500 ("HB 500"), an omnibus franchise tax reform bill, provides for temporary tax rate reductions and a new method of computing taxable margin, continues the small-business exemption (which was scheduled to be phased-out), allows deductions for certain flow-through funds, addresses issues with cost of goods sold for two industries, and simplifies reporting requirements. Most provisions of the bill are effective for reports due after December 31, 2013.

(Logo: http://photos.prnewswire.com/prnh/20110726/DA41187LOGO)

Governor Perry has until June 17, 2013 to sign or veto the bill or permit it to take effect without his signature. The bill includes the following:

Temporary Rate Cut

HB 500 temporarily lowers the franchise tax rate for 2014 to 0.975% (from 1%). Qualifying retailers and wholesalers may use 0.4875% (from 0.5%) for 2014. Taxpayers with total revenue of $10 million or less may continue to elect to use the "E-Z" computation and pay the E-Z rate of 0.575%.

If the Comptroller certifies that there is sufficient revenue, qualifying retailers and wholesalers may use a further reduced rate of 0.475% for 2015 tax reports. The 2015 rate for taxpayers will be 0.95%. Taxpayers that qualify for E-Z may elect to use the E-Z rate of 0.575%.

Small Business Exemption

New Option for Determining Taxable Margin

HB 500 allows a taxpayer to compute taxable margin based on:

• Total revenue minus $1 million,
• Total revenue minus 30%,
• Total revenue less cost of goods sold for qualifying taxpayers, or
• Total revenue less compensation.

Flow-Through Funds Excluded from Revenue

HB 500 allows the following industries to subtract certain flow-through funds from revenue:

• A pharmacy network may exclude reimbursements for payments to pharmacies in the pharmacy network;
• An aggregate transportation company may subtract payments to independent contractors hauling aggregates for the transportation company;
• A barite transportation company may subtract payments to subcontractors hauling barite for the transportation company;
• A landman company may exclude payments to subcontractors providing landman services for the company;
• A healthcare provider or other taxpayer who provides vaccinations may exclude amounts paid for the vaccines;
• A marine transportation company that does not use cost of goods sold to compute its taxable margin may exclude direct costs of providing transportation services as provided by Section 171.1012; and
• A carrier registered under Chapter 643, Transportation Code, may exclude from its total revenue flow-through revenue derived from taxes and fees.

Cost of Goods Sold Deductions

• A pipeline that gathers, stores, transports, or processes crude oil, petroleum products, natural gas condensate, and natural gas liquids may subtract as a cost of goods sold its depreciation, operations, and maintenance costs related to its services. "Processing" is defined as the physical or mechanical removal, separation, or treatment of crude oil, finished petroleum products, natural gas, condensate, and natural gas liquids, after those materials are produced from the earth. Processing does not include the chemical or biological transformation of those materials.
• Movie theaters may deduct as cost of goods sold the amounts they pay for the right to exhibit a movie. HB 500 states that this provision is a clarification of existing law. It becomes effective September 1, 2013.

Special Deductions and Credits

• Taxpayers relocating their home offices to Texas will be permitted to deduct their relocation costs from their apportioned margin. The deduction is not available if the taxpayer did business in Texas before relocating and/or was a part of a unitary group and a member of the group was doing business in Texas. The deduction must be taken on the business's first franchise tax report. Taxpayers taking the deduction must keep proof of the deducted relocation costs. It becomes effective September 1, 2013.
• A taxpayer may be eligible for a credit for eligible expenses incurred in the rehabilitation of a certified historic structure. The taxpayer must have an ownership interest in the structure and invest $5,000 or more in rehabilitation expenditures. The credit is limited to 25% of the eligible expenses, and unused credits may be carried forward five reports. The credit will take effect January 1, 2015.

Other Changes

• Insurance companies that pay premium taxes are exempt from the franchise tax. HB 500 clarifies that the existing exemption includes out-of-state insurance companies that do not do business in Texas and that pay premium or occupation taxes to other states. As exempt entities, these companies are not included in the combined group of any non-exempt affiliate filing a franchise tax return in Texas.
• Corporations formed by local governments to purchase electricity for the local entities are exempt.
• HB 500 expands the definition of a retailer to include auto-repair shops, companies that sell goods using rental-to-own agreements, and businesses that rent or lease tools, party and event supplies, furniture, or heavy construction equipment. Retailers pay a lower tax rate.
• A receipt from Internet hosting is a receipt for business done in this state if the customer is in Texas.
• A taxpayer that sells electricity must file a separate franchise tax report from affiliates that do not sell electricity.
• Effective with the 2014 report, taxpayers are no longer required to provide information regarding the gross receipts of members of their combined group if the members are not doing business in Texas.

About Ryan
Ryan is an award-winning global tax services firm, with the largest indirect tax practice in North America and the seventh largest corporate tax practice in the United States. Headquartered in Dallas, Texas, the Firm provides a comprehensive range of state, local, federal, and international tax advisory and consulting services on a multi-jurisdictional basis, including audit defense, tax recovery, credits and incentives, tax process improvement and automation, tax appeals, tax compliance, and strategic planning. Ryan is a three-time recipient of the International Service Excellence Award from the Customer Service Institute of America (CSIA) for its commitment to world-class client service. Empowered by the dynamic myRyan work environment, which is widely recognized as the most innovative in the tax services industry, Ryan's multi-disciplinary team of more than 1,600 professionals and associates serves over 9,000 clients in 40 countries, including many of the world's most prominent Global 5000 companies. More information about Ryan can be found at www.ryan.com.

TECHNICAL INFORMATION CONTACTS:

Susan Traylor Bittick
Principal
Ryan
512.476.0022
[email protected]

Eric L. Stein
Principal
Ryan
512.476.0022
[email protected] 

Available Topic Expert(s): For information on the listed expert(s), click appropriate link.
Susan Bittick
http://www.profnetconnect.com/susanbittick

SOURCE Ryan