My last post covered the first step in computing Texas Franchise Tax (calculating your “taxable margin”). That post can be found here. In this post, I’ll discuss the second step – apportioning taxable margin to Texas.
Applicable Tax Rates
Texas Tax Code § 171.101(a)(2) states that, following the determination of a taxable entity’s “taxable margin,” the taxable entity must apportion the taxable margin to the State of Texas as provided by Texas Tax Code § 171.106, which results in the entity’s “apportioned margin.” [1] Texas Tax Code § 171.106(a), in turn, sets out a “formula” for this apportionment [2]:
Gross Receipts from Business Done in Texas
Gross Receipts from Entire Business
- Gross Receipts from Business Done in Texas
The numerator of the “apportionment formula” is the total of the taxable entity’s gross receipts from business done in Texas during the applicable franchise tax year. Texas Tax Code § 171.103(a) includes a list of items included in this computation. At a general level, these include:
- Each sale of tangible personal property if the property is delivered or shipped to a buyer in Texas;
- Each service performed in Texas;
- Each rental of property situated in Texas;
- Each use of a patent, copyright, trademark, franchise, or license in Texas;
- Each sale of real property located in Texas, including royalties from oil, gas, or other mineral interests; and
- Other business done in Texas. [3]
The above list, and in particular the last item, are subject to very broad interpretation. For example, what constitutes “tangible personal property”? What is a “service” and when would it be considered to have been performed in Texas? What falls under the phrase “other business” done in Texas? Texas courts attempted to address these questions, most recently in the Texas Supreme Court’s 2022 decision in Sirius XM Radio, Inc. v. Hegar. [4]
- Gross Receipts from Entire Business
The denominator of the formula is the total of the taxable entity’s gross receipts from its entire business. Texas Tax Code § 171.105(a) states that this includes the sum of receipts from (i) each sale of the taxable entity’s tangible personal property, (ii) each service, rental, or royalty, or (iii) other business. [5]. While a comparatively simpler computation than the numerator, the same complexity and interpretation issues apply here.
In addition to the above, there are some adjustments that must be made in arriving at the proper apportionment formula. Texas Tax Code § 171.1055 sets out certain additional exclusions that must be accounted for:
- Any receipts excluded from the computation of “total revenue from entire business” under Texas Tax Code § 171.1011 (see my prior post for a discussion of this) may not be included in either the numerator or denominator of the apportionment computation;
- Any receipts derived from transactions between members of a combined group that are excluded under Texas Tax Code § 171.1014(c)(3) may not be included in the numerator of the apportionment calculation, with limited exception; and
- Any receipts derived from transactions between members of a combined group that are excluded under Texas Tax Code § 171.1014(c)(3) may not be included in the denominator of the apportionment calculation, at all. [6]
Once these adjustments are made, and the final figures are determined, the above formula will result in the taxable entity’s “apportionment factor.” This is then applied to “taxable margin” to arrive at the taxable entity’s “apportioned margin.”
Believe it or not, we’re not done yet – there is still one more step to determining the Texas Franchise Tax, fraught with its own complications, that will be discussed in a future post.
[1] Tex. Tax. Code § 171.101(a)(2).
[2] Tex. Tax Code § 171.106(a).
[3] Tex. Tax Code § 171.103(a).
[4] Sirius XM Radio, Inc. v. Hegar, 643 S.W.3d 402 (Tex. 2022).
[5] Tex. Tax Code § 171.105(a).
[6] Tex. Tax Code §§ 171.1055(a)-(c).
