Franchise Tax Legislation on the Governor’s Desk

The 82nd Texas Legislature passed substantial franchise tax reform during its regular session, all of which is now on Governor Perry’s desk for consideration. The major franchise tax bill was HB 500 by Rep. Harvey Hilderbran (R-Kerrville), sponsored in the Senate by Sen. Glenn Hegar (R-Katy). HB 500 makes the following changes to the franchise tax:

Temporary rate reductions:

  • For returns due in 2014 franchise tax rates will be 0.4875% for retail and wholesale entities and 0.975% for all others
  • For returns due in 2015 tax rates will be 0.475% and 0.95% respectively, provided the State Comptroller certifies that sufficient revenues will be available
  • Rates return to the current 0.5% and 0.1% for returns filed after 2015

The $ 1 million revenue exemption has been made permanent and a $1 million deduction from revenue has been made one of the options to calculate taxable margin.  A taxpayer can select to deduct the statutory $1 million in lieu of deducting cost of goods sold or compensation. The $1 million is also adjusted for inflation every two years.

The compensation deduction limitation of $300,000 per person is also inflation adjusted.

Some new industries are now identified as retail/wholesale, eligible for the lower tax rate:

  • SIC 753 – Automotive repair shops
  • SIC 7353 – Heavy construction equipment rental or leasing
  • SIC 7359 – Equipment rental and leasing, not elsewhere classified
  • Rental-purchase agreement activities as defined in Chapter 92, Business and Commerce Code

Retail/wholesale electric utilities may not be part of a combined group that includes other types of retail/wholesale entities.

New flow-though revenue exemptions include:

  • Pharmacy network rebates
  • Landman services for Landman companies
  • Transportation or delivery costs incurred by:

Aggregate transporter
Barite transporters
Waterway transporters for waterway transportation costs

  • Cost of vaccines
  • Taxes and fees incurred by registered motor carriers
  • Relocation costs for entities moving to Texas

New cost of goods sold deductions:

  • Cost of transporting non-owned petroleum products through petroleum pipelines.
  • All costs of renting or showing movies for movie theaters.

The sections requiring a taxable entity that is a combined group to report information regarding the gross receipts of group members who do not have nexus with Texas (the so-called Finnegan method) are

For Internet hosting companies, Texas receipts will be only those receipts from customers located in Texas.

Insurance companies that pay a gross receipts tax will be exempt from the franchise tax.

Certain political subdivision corporations will be exempt from the franchise tax.

A new franchise tax credit is available for cost and expenses to rehabilitate certified historic structures.

Three other franchise tax bills await the governor’s signature:

  • HB 800 by Rep. Jim Murphy (R-Houston) and sponsored in the Senate by Sen. Bob Deuell (R-Greenville) which provides for both franchise tax credits and sales tax exemptions for certain research and development expenditures.
  • HB 2451 by Rep. Tracy King (D-Batesville) and sponsored in the Senate by Sen. Glenn Hegar (R-Katy) which provides a cost of goods sold deduction for crop dusters.
  • HB 2766 by Rep. Todd Hunter (R-Corpus Christi) and sponsored in the Senate by Sen. John Whitmire (D-Houston) which provides for a flow-through revenue exemption for real estate construction subcontractor payments and includes remediation as a qualified real estate construction service.

While the effective dates of most of the above provisions are September 1, 2013, certain provisions have different effective dates.

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