SALT Alert: Texas Apportionment Rule Changes

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Texas has updated its rules regarding the sourcing of revenue for apportionment purposes.  The Comptroller has indicated that the change in the rules reflects statutory changes, court decisions, current guidance, update definitions and improve readability.

The amendments bring both favorable and adverse changes for taxpayers subject to the Texas Margins Tax, with changes to the sourcing provisions for receipts from services, including advertising services, transportation services and internet hosting, and receipts from sales of computer hardware and digital products, capital assets and investments, interests in single-member limited liability companies (SMLLCs) and sales of securities through an exchange.


The revised rules continue to require gross receipts to be sourced from sales of services to the location where the service is performed. If the service is performed both inside and outside of Texas for a single charge, the receipts are still allocated between performance locations based on the fair value of the service rendered at each location.

The revised rules define where a service is performed as the location of the receipts-producing end-product act or acts. If there is a receipts-producing, end-product act, the location of other acts will not be considered even if they are essential to the performance of the receipts-producing acts. If there is not a receipts-producing, end-product act, the locations of all essential acts may be considered. If the service was performed both inside and outside of Texas for a single charge, units of service, such as hours, may be considered. If costs are considered, costs should be limited to those directly related to the service and not overhead costs.

There is limited guidance in the revised rules as to what constitutes a receipts-producing, end-product act associated with a service and no examples to assist taxpayers in applying the concept.

Internet hosting

Based on legislation enacted in 2013 and effective for Texas Margin reports originally due on or after January 1, 2014, the revised rules provide that gross receipts from internet hosting services are sourced to the location of the customer.

Internet hosting services include, but are not limited to, data storage and retrieval, video gaming, database search services, processing of data and marketplace provider services. In the preamble to the revised rules, the Comptroller acknowledges that the examples extend beyond what ordinarily may be considered as internet hosting services. Thus, since the revision is effective for reports originally due on or after January 1, 2014, taxpayers will need to determine if their services constitute internet hosting and, if so, whether their sourcing determinations need to be revisited.

The customer’s location when purchasing internet hosting services is determined by where the purchaser, or the purchaser’s designee, consumes the service. Receipts from some services may be sourced to multiple customer locations or to multiple customers. The new provisions contain examples illustrating the application of this sourcing rule.

Computer hardware and digital property

The revised rules include new sourcing provisions for sales of “digital property,” which is defined as computer programs and any content in digital format that is either protected by copyright law or that is no longer protected by copyright law due solely to the passage of time. As outlined in the rules, the sourcing of such receipts is dependent upon how the digital property is transferred to the purchaser. The new sourcing rules for digital property can be summarized as follows:

Capital assets and investments

For Texas Margin reports due on or after January 1, 2021, only the “net gain” from the sale of a capital asset or investment is included in gross receipts. A “net loss” from the sale of a capital asset or investment is excluded from gross receipts. The net gain or net loss is determined on an asset-by-asset basis and a net loss from the sale of one asset may not be used to offset the net gain from the sale of another asset. The net gain from the sale of the capital asset or investment is sourced based on the type of asset or investment sold. This amendment is intended to reflect the Texas Supreme Court’s 2016 decision in Hallmark Marketing Co. v. Hegar.

Advertising services

The revised rules consolidate sourcing sales of advertising services for newspapers, magazines, radio, television and other media into a single rule. Sourcing of gross receipts from the dissemination of advertising is based upon the location of the advertising audience. If the locations of nationwide advertising audiences cannot be reasonably determined, then 8.7% of the gross receipts are sourced to Texas. Also, certain taxpayers are allowed the option to source advertising receipts for Texas Margin Tax   reports originally due before January 1, 2021 using the location of the transmitter, as originally provided in the prior rules.

Transportation services

The original rules allowed for sourcing of transportation receipts to Texas based on gross receipts or mileage. For Texas Margin Tax reports due on or after January 1, 2021, taxpayers must use gross receipts.

Sale of membership interest in a SMLLC

The revised rules incorporate previous guidance issued by the Comptroller regarding sales of interests in SMLLCs. The sale of an interest in an SMLLC is treated as the sale of an intangible, rather than a sale of the assets owned by the SMLLC (the federal treatment). The net gain on the sale of the SMLLC interest is sourced using the location of payor rule.

Freeman Law can help taxpayers with navigate these revised Texas apportionment rules.


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