TITLE 34. PUBLIC FINANCE

PART 1. COMPTROLLER OF PUBLIC ACCOUNTS

CHAPTER 3. TAX ADMINISTRATION

SUBCHAPTER V. FRANCHISE TAX

The Comptroller of Public Accounts proposes amendments to §3.587 concerning margin: total revenue. The comptroller amends the section to implement House Bill 446, Senate Bill 604, and Senate Bill 1243, 88th Legislature, 2023; House Bill 1195, House Bill 1520, House Bill 4492, and Senate Bill 1580, 87th Legislature, 2021; Senate Bill 1824, 86th Legislature, 2019; House Bill 3254, 85th Legislature, 2017; House Bill 500, House Bill 2451, House Bill 2766, and Senate Bill 1286, 83rd Legislature, 2013; Senate Bill 1, 82nd Legislature, First Called Session, 2011.

Throughout the section, the comptroller adds titles to statutory references and makes non-substantive changes to improve readability and clarity.

The comptroller amends subsection (b)(1)(H), relating to the actual cost of uncompensated care, to improve readability. The comptroller also restructures the subparagraph to provide guidance on how a single entity and a combined group compute the required adjustment to the cost of goods sold or the compensation deduction for the portion of the actual cost of uncompensated care excluded from total revenue.

Implementing House Bill 446, the comptroller amends paragraph (3), defining "health care institutions," to replace the term "the mentally retarded" with the term "individuals with an intellectual disability" and to replace the term "mental retardation" with the term "intellectual disabilities."

Implementing House Bill 500 and Senate Bill 604, the comptroller adds new paragraph (5) to define "landman services" pursuant to Tax Code, §171.1011(g-11) (Determination of Total Revenue from Entire Business). Subsequent paragraphs are renumbered accordingly.

The comptroller moves the definition of "product" in former paragraph (10) to clause (ii) in renumbered paragraph (15) defining "sales commission" because, in this section, the term "product" is used only in relation to sales commissions.

Implementing Senate Bill 1286, the comptroller adds new paragraph (11) to define "professional employer organization" pursuant to Tax Code, §171.0001 (Definitions) and §171.1011(k). Professional employer organization replaces the term "staff leasing services company" in former paragraph (13) which the comptroller deletes.

Implementing Senate Bill 1 and House Bill 3254, the comptroller adds new paragraph (12) to define "qualified courier and logistics company" pursuant to Tax Code, §171.1011(g-7).

The comptroller adds new paragraph (13) to define "qualified destination management company" pursuant to §171.1011(g-6) and as defined by Tax Code, §151.0565.

Implementing Senate Bill 1, the comptroller adds new paragraph (14) to define "qualified live event promotion company" pursuant to Tax Code, §171.0001(10-a), (10-b), and (11-b). Subsequent paragraphs are renumbered accordingly.

Implementing House Bill 500, the comptroller adds new paragraph (21) to define "vaccine" pursuant to Tax Code, §171.1011(p)(8).

The comptroller amends subsection (c)(3) titled "federal consolidated group" to remove the information related to a federal disregarded entity from the paragraph and add it, with changes, as new paragraph (10).

The comptroller amends subsections (c)(5) and (6) to replace the current titles with more appropriate titles.

The comptroller amends subsection (c)(8) to delete reference to "discounts" as House Bill 500 repealed Tax Code, §171.0021 (Discounts from Tax Liability for Small Businesses).

The comptroller retitles subsection (c)(9) "nontaxable revenue" and amends the paragraph to be consistent with Tax Code, §171.001(b) which provides that the franchise tax extends to the limits of the United States Constitution. Revenue that Texas cannot tax under the United States Constitution is not included in total revenue.

The comptroller adds subsection (c)(10), titled "federal disregarded entity," to include the information related to a federal disregarded entity the comptroller removed from subsection (c)(3). The amendment requires an entity that is disregarded for federal tax purposes to compute revenue for franchise tax as if it reported as a corporation for federal tax purposes. Under Treasury Regulation, §301.7701-3 (Classification of certain business entities) if an entity is disregarded for federal tax purposes, the only other option available for that entity's federal reporting is to report as an association, and therefore as a corporation.

The comptroller prospectively amends subsection (d), relating to computing total revenue. Tax Code, §171.0001(9) defines the term "Internal Revenue Code" by reference to the code in effect for the federal tax year beginning January 1, 2007. The current language of subsection (d) applies that definition to the federal tax form line items referenced in Tax Code, §171.1011, so that the line items must be recomputed to reflect the 2007 version of the Internal Revenue Code. After reexamining the language, the comptroller concludes that the definition of "Internal Revenue Code" only applies to computing the franchise tax where specifically stated in the statute. Because the Internal Revenue Code is not referenced in relation to the line items on the mentioned Internal Revenue Service forms when determining total revenue under Tax Code, §171.1011, the proposed rule uses the line items as they are reported under the then-current Internal Revenue Code. The former rule, tied to the 2007 Internal Revenue Code, is retained for prior report years.

Subsection (e) addresses exclusions from total revenue. The comptroller amends subsection (e)(1), regarding the exclusion of flow-through funds mandated by law or fiduciary duty, to add new subparagraph (D) to give examples of flow-through funds that are mandated by law.

Implementing House Bill 2766, the comptroller amends paragraph (2) regarding the exclusion of flow-through funds mandated by contract. The comptroller adds "subcontract" to the mandate and "remediation" to the list of real property activities for which subcontracting payments are allowed as flow-through funds pursuant to Tax Code, §171.1011(g). The comptroller adds new subparagraph (C)(i)-(iii) to provide guidance from Titan Transp., LP v. Combs, 433 S.W.3d 625 (Tex. App-Austin 2014, pet. denied) and Hegar v. Gulf Copper & Mfg. Corp., 601 S.W.3d (Tex. 2020) in determining which payments are flow-through funds and what activities are included by the phrase - in connection with. The comptroller adds language in clause (iii) so that the terms are consistent with §3.588, concerning Margin: Cost of Goods Sold.

The comptroller amends paragraph (5)(A) to add "or persons" to "other entities" to make clear that qualifying payments distributed to individuals are also excluded from total revenue. The comptroller amends subparagraph (B), regarding the exclusion of reimbursements of certain expenses incurred in providing legal services, to provide guidance on what costs are general operating expenses and not excludable.

Implementing House Bill 500, the comptroller amends paragraph (6) to add a provision allowing an exclusion from total revenue for pharmacy networks pursuant to Tax Code, §171.1011(g-4).

Implementing Senate Bill 1286, the comptroller amends paragraph (7) to refer to a "professional employer organization" instead of a "staff leasing services company" pursuant to Tax Code, §171.1011(k).

The comptroller amends paragraph (10)(A)(i) to allow health care providers an exclusion from total revenue for capitation awards from the Centers for Medicare & Medicaid Services transferred to the taxable entity from an entity within the health care provider's corporate structure pursuant to STAR Accession No. 201207010L (July 13, 2012).

The comptroller amends paragraph (13) to make clear that the qualifications for excluding revenue from a low-producing oil well or low-producing gas well are determined independently.

The comptroller amends the definition of "qualified destination management company" in paragraph (14) to improve readability and deletes references to statutory definitions that are incorporated into this section through the amendment.

Implementing Senate Bill 1, the comptroller adds new paragraph (15) to provide guidance on the exclusion from total revenue allowed to qualified live event promotion companies pursuant to Tax Code, §171.1011(g-5).

Also implementing Senate Bill 636, the comptroller adds new paragraph (16) to provide guidance on the exclusion from total revenue allowed to qualified courier and logistics companies pursuant to Tax Code, §171.1011(g-7).

Implementing House Bill 500, the comptroller adds new paragraph (17) to provide guidance on the exclusion from total revenue allowed to aggregate transportation companies pursuant to Tax Code, §171.1011(g-8).

Implementing House Bill 500, the comptroller adds new paragraph (18) to provide guidance on the exclusion from total revenue allowed to barite transportation companies pursuant to Tax Code, §171.1011(g-10).

Implementing House Bill 500, the comptroller adds new paragraph (19) to provide guidance on the exclusion from total revenue allowed to landman services companies pursuant to Tax Code, §171.1011(g-11).

Implementing House Bill 500, the comptroller adds new paragraph (20) to provide guidance on the exclusion from total revenue for the cost paid for a vaccine pursuant to Tax Code, §171.1011(u).

Implementing House Bill 500, the comptroller adds new paragraph (21) to provide guidance on the exclusion from total revenue allowed to waterway transportation companies pursuant to Tax Code, §171.1011(v).

Implementing House Bill 2451, the comptroller adds new paragraph (22) to provide guidance on the exclusion from total revenue allowed to agricultural aircraft operation companies pursuant to Tax Code, §171.1011(w-1).

Implementing House Bill 500, the comptroller adds new paragraph (23) to provide guidance on the exclusion from total revenue allowed to motor carrier companies pursuant to Tax Code, §171.1011(x).

Implementing Senate Bill 1824, the comptroller adds new paragraph (24) to provide guidance on the exclusion from total revenue allowed to performing rights societies pursuant to Tax Code, §171.1011(g-12).

Implementing House Bill 1195, the comptroller adds new paragraph (25) to allow an exclusion from total revenue for qualifying loan and grant proceeds received for COVID-19 relief pursuant to Tax Code, §171.10131.

Implementing Senate Bill 1243, the comptroller adds new paragraph (26) to allow an exclusion from total revenue for qualifying grant proceeds received for broadband deployment in Texas pursuant to Tax Code, §171.10132.

Implementing House Bill 1520, House Bill 4492, and Senate Bill 1580, the comptroller adds subsection (f), exempting certain transactions and receipts related to the financing of the extraordinary costs incurred by gas and electric providers during Winter Storm Uri.

Brad Reynolds, Chief Revenue Estimator, has determined that during the first five years that the proposed amended rule is in effect, the rule: will not create or eliminate a government program; will not require the creation or elimination of employee positions; will not require an increase or decrease in future legislative appropriations to the agency; will not require an increase or decrease in fees paid to the agency; will not increase or decrease the number of individuals subject to the rule's applicability; and will not positively or adversely affect this state's economy.

Mr. Reynolds also has determined that the proposed amended rule would benefit the public by conforming the rule to current statute. This rule is proposed under Tax Code, Title 2, and does not require a statement of fiscal implications for small businesses or rural communities. The proposed amended rule would have no significant fiscal impact on the state government, units of local government, or individuals. There would be no anticipated significant economic cost to the public.

You may submit comments on the proposal to Jenny Burleson, Director, Tax Policy Division, P.O. Box 13528, Austin, Texas 78711-3528 or to the email address: tp.rule.comments@cpa.texas.gov. The comptroller must receive your comments no later than 30 days from the date of publication of the proposal in the Texas Register.

This amendment is proposed under Tax Code, §111.002 (Comptroller's Rules; Compliance; Forfeiture), which provides the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of the provisions of Tax Code, Title 2.

The amendment implements Tax Code, §§171.0001 (General Definitions), 171.1011 (Determination of Total Revenue from Entire Business), 171.10131 (Provisions Related to Certain Money Received for COVID-19 Relief), and 171.10132 (Provisions Related to Certain Grants Received for Broadband Deployment in Texas); Utilities Code, §§39.607 (Tax Exemption), 39.658 (Tax Exemption), 41.161 (Tax Exemption), and 104.375 (Tax Exemption); and Government Code, §1232.1072 (Issuance of Obligations for Financing Customer Rate Relief Property).

§ 3.587. Margin: Total Revenue.

(a) Effective date. The provisions of this section apply to franchise tax reports originally due on or after January 1, 2008, except as otherwise noted.

(b) Definitions. The following words and terms, when used in this section, [shall] have the following meanings, unless the context clearly indicates otherwise.

(1) Actual cost of uncompensated care--The amount determined by multiplying Operating Expenses by the Uncompensated Care Ratio where:

(A) operating expenses are the amounts reported on line 2 (cost of goods sold) and line 21 (total deductions), Internal Revenue Service Form 1065; [or] the amounts reported on line 2 (cost of goods sold) and line 20 (total deductions), Internal Revenue Service Form 1120S; or the corresponding line items from any other federal form filed, less any items that have already been subtracted from total revenue (e.g., bad debts);

(B) uncompensated care ratio means uncompensated care charges less partial payments divided by total charges;

(C) uncompensated care charges are the [standard] charges for health care services where the provider has not received any payment or where the provider has received partial payment that does not cover the cost of the health care provided to the patient. Uncompensated care charges do not include any portion of a charge that the health care provider has no right to collect under a private health care plan, under an agreement with an individual for a specific amount, or under the charge limitations imposed by the programs described in subsection (e)(10)(A)(i) - (iii) of this section;

(D) [standard] charges must be comparable to the charges applied to services provided to all patients of the health care provider;

(E) partial payment is an amount that has been received toward uncompensated care charges that does not cover the cost of the services provided;

(F) total charges are charges for all health care services, including uncompensated care;

(G) records that clearly identify each patient, the procedure performed, and the [standard] charge for such a service, as well as payments received from each patient must be maintained by the health care provider for all uncompensated care;

(H) a corresponding adjustment must be made to reduce the cost of goods sold deduction calculated under §3.588 of this title (relating to Margin: Cost of Goods Sold) or the compensation deduction calculated under §3.589 of this title (relating to Margin: Compensation) for the portion of the cost of goods sold or compensation that has been excluded from total revenue.[:]

(i) For a single taxable entity,

(I) [(i)] the cost of goods sold adjustment is equal to [deduction is reduced by subtracting the product of] the cost of goods sold deduction [under §3.588 of this title (relating to Margin: Cost of Goods Sold)] multiplied by the uncompensated care ratio; and

(II) [(ii)] the compensation adjustment is equal to [deduction is reduced by subtracting the product of] the compensation deduction [and benefits amounts under §3.589 of this title (relating to Margin: Compensation)] multiplied by the uncompensated care ratio.

(2) Federal obligations--

(A) stocks and other direct obligations of, and obligations unconditionally guaranteed by, the United States government and United States government agencies; and

(B) direct obligations of a United States government-sponsored agency.

(3) Health care institution--An ambulatory surgical center; an assisted living facility licensed under Health and Safety Code, Chapter 247 (Assisted Living Facilities); an emergency medical services provider; a home and community support services agency; a hospice; a hospital; a hospital system; an intermediate care facility for individuals with an intellectual disability [the mentally retarded] or a home and community-based services waiver program for persons with intellectual disabilities [mental retardation] adopted in accordance with the federal Social Security Act, §1915(c) (42 U.S.C. §1396n) (Compliance with State plan and payment); a birthing center; a nursing home; an end stage renal disease facility licensed under Health and Safety Code, §251.011 (License Required); or a pharmacy.

(4) Health care provider--Any taxable entity that participates in the Medicaid program, Medicare program, Children's Health Insurance Program (CHIP), state workers' compensation program, or TRICARE military health system as a provider of health care services.

(6) [(5)] Lending institution--An entity that makes loans; and

(A) is regulated by the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, the Office of Thrift Supervision, the Texas Department of Banking, the Office of Consumer Credit Commissioner, the Credit Union Department, or any comparable regulatory body;

(B) is licensed by, registered with, or otherwise regulated by the Department of Savings and Mortgage Lending;

(C) is a "broker" or "dealer" as defined by the Securities Exchange Act of 1934 at 15 U.S.C. §78c (Definitions and application); or

(D) provides financing to unrelated parties solely for agricultural production.

(7) [(6)] Management company--A corporation, limited liability company, or other limited liability entity that conducts all or part of the active trade or business of another entity ("the managed entity") in exchange for a management fee and reimbursement of specified costs incurred in the conduct of the active trade or business of the managed entity, including wages and cash compensation as determined under Tax Code, §171.1013(a) and (b) (Determination of Compensation). To qualify as a management company:

(A) the entity must perform active and substantial management and operational functions, control and direct the daily operations and provide services such as accounting, general administration, legal, financial or similar services; or

(B) if the entity does not conduct all of the active trade or business of an entity, the entity must conduct all operations, as provided in subparagraph (A) of this paragraph, for a distinct revenue-producing component of the entity.

(8) [(7)] Net distributive income--The net amount of income, gain, deduction, or loss relating to a pass-through entity or disregarded entity reportable to the owners for the tax year of the entity.

(9) [(8)] Obligation--Any bond, debenture, security, mortgage-backed security, pass-through certificate, or other evidence of indebtedness of the issuing entity. The term does not include a deposit, a repurchase agreement, a loan, a lease, a participation in a loan or pool of loans, a loan collateralized by an obligation of a United States government agency, or a loan guaranteed by a United States government agency.

(10) [(9)] Pro bono services--The direct provision of legal services to the poor, without an expectation of compensation.

(15) [(11)] Sales commission--

(A) any form of compensation paid to a person for engaging in an act for which a license is required by Occupations Code, Chapter 1101 (Real Estate Brokers and Sales Agent); or

(B) compensation paid to a sales representative by a principal in an amount that is based on the amount or level of certain orders for or sales of the principal's product and that the principal is required to report on Internal Revenue Service Form 1099-MISC (or would have been reported if the amount had met the Internal Revenue Service minimum reporting requirement).

(C) For [for] purposes of this paragraph: [defining sales commission,]

(i) a "principal" is a person who[:]

[(i)] manufactures, produces, imports, distributes, or acts as an independent agent for the distribution of a product for sale;

[(ii)] uses a sales representative to solicit orders for the product; and

[(iii)] compensates the sales representative wholly or partly by sales commission.

(16) [(12)] Security--The meaning assigned by Internal Revenue Code, §475(c)(2) (Security defined), and includes instruments described by Internal Revenue Code, §475(e)(2)(B), (C), and (D) (Commodity).

(17) [(14)] Tiered partnership arrangement--An ownership structure in which any of the interests in one taxable entity treated as a partnership or an S corporation for federal income tax purposes (a "lower tier entity") are owned by one or more other taxable entities (an "upper tier entity").

(18) [(15)] United States government--Any department or ministry of the federal government, including a federal reserve bank. The term does not include a state or local government, a commercial enterprise owned wholly or partly by the United States government, or a local governmental entity or commercial enterprise whose obligations are guaranteed by the United States government.

(19) [(16)] United States government agency--An instrumentality of the United States government whose obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the United States government. The term includes the Government National Mortgage Association, the Department of Veterans Affairs, the Federal Housing Administration, the Farmers Home Administration, the Export-Import Bank, the Overseas Private Investment Corporation, the Commodity Credit Corporation, the Small Business Administration, and any successor agency.

(20) [(17)] United States government-sponsored agency--An agency originally established or chartered by the United States government to serve public purposes specified by the United States Congress but whose obligations are not explicitly guaranteed by the full faith and credit of the United States government. The term includes the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Farm Credit System, the Federal Home Loan Bank System, the Student Loan Marketing Association, and any successor agency.

(c) General rules for reporting total revenue.

(1) Variant of form. Any reference to an Internal Revenue Service form includes a variant of the form. For example, a reference to Form 1120 includes Forms 1120-A, 1120-S, and other variants of Form 1120. A reference to an Internal Revenue Service form also includes any subsequent form with a different number or designation that substantially provides the same information as the original form.

(2) Amount reportable. Any reference to an amount reportable as income on a line number on an Internal Revenue Service form is the amount entered to the extent the amount entered complies with federal income tax law and includes the corresponding amount entered on a variant of the form, or a subsequent form, with a different line number to the extent the amount entered complies with federal income tax law.

(3) Federal consolidated group. A taxable entity that is part of a federal consolidated group computes [or is a disregarded entity shall compute] its total revenue as if it had filed a separate return for federal income tax purposes[; provided, however, that a disregarded entity may combine its revenue, cost of goods sold, compensation and gross revenue with its parent as provided by §3.590(d)(6) of this title (relating to Margin: Combined Reporting)]. Information [Further information] on combined reporting [entities] can be found in §3.590 of this title (relating to Margin: Combined Reporting).

(4) Passive entity. A taxable entity shall [will] include its share of net distributive income from a passive entity, but only to the extent the net income of the passive entity was not generated by any other taxable entity.

(5) Treatment of total revenue exclusions for cost of goods sold and compensation [Exclusions from total revenue].

(A) Any expense excluded from total revenue (e.g., flow-through funds or the cost of uncompensated care allowed under subsection (e) of this section) may not be included in the determination of cost of goods sold (see §3.588 of this title) or the determination of compensation (see §3.589 of this title).

(B) Net distributive income that is subtracted from total revenue may not be included in the determination of compensation.

(6) Ordinary contract for [Contract] services. Except as provided by subsection (e)(2) of this section, a payment received under an ordinary contract for the provision of services in the ordinary course of business may not be excluded from the calculation of total revenue.

(7) Payment to affiliated group members. If the taxable entity belongs to an affiliated group, the taxable entity may not exclude from the calculation of total revenue any payments described by subsection (e)(1) - (6) of this section that are made to entities that are members of the affiliated group.

(8) Tiered partnership provision. This provision is not mandatory. Subject to the following subparagraphs, a lower tier entity in a tiered partnership arrangement may exclude from total revenue the amount of total revenue reported to an upper tier entity. If a lower tier entity chooses to file under the tiered partnership provision, the lower tier entity may report total revenue to any or all of its upper tier entities. The total revenue reported to an upper tier entity must equal the upper tier entity's ownership percentage of the lower tier entity's entire total revenue.

(A) Reporting requirements. The lower tier entity must submit a report to the comptroller showing the amount of total revenue that each upper tier entity must include with the upper tier entity's own total revenue. Each upper tier entity must submit a report to the comptroller showing the amount of the lower tier entity's total revenue that was passed to the upper tier entity and is included in the total revenue of the upper tier entity.

(B) Nontaxable upper tier entity. This paragraph does not apply to that percentage of the total revenue attributable to an upper tier entity by a lower tier entity if the upper tier entity is not subject to the tax under this chapter. In this case, the lower tier entity cannot report total revenue to the nontaxable upper tier entity and the lower tier entity cannot exclude this total revenue from its franchise tax report.

(C) Eligibility for no tax due[, discounts] and the E-Z Computation. The no tax due thresholds[, discounts] and the E-Z Computation do not apply to an upper or lower tier entity if, before the attribution of any total revenue by a lower tier entity to upper tier entities under this section, the lower tier entity does not meet the criteria. See §3.584(d)(7) [§3.584(d)(8)] of this title (relating to Margin: Reports and Payments).

(D) Not a partnership distribution. Total revenue reported from a lower tier entity to an upper tier entity under the provisions of Tax Code, §171.1015(b) (Reporting for Certain Partnerships in Tiered Partnership Arrangement), is not a distribution from a partnership.

(E) Combined reporting. The tiered partnership provision is not an alternative to combined reporting. Combined reporting is mandatory for taxable entities that meet the ownership and unitary criteria. See §3.590 of this title. Therefore, the tiered partnership provision is not allowed if the lower tier entity is included in a combined group.

(F) Accounting period. If the lower tier entity and an upper tier entity have different accounting periods, the upper tier entity must allocate the revenue reported from the lower tier entity to the accounting period that the upper tier entity's report is based on.

(G) Lower tier entity no tax due. For reports originally due on or after January 1, 2010, if the lower tier entity owes no tax before the attribution of total revenue to the upper tier entities, filing under the tiered partnership provision is not allowed.

(9) Nontaxable revenue [Allocated revenue]. Revenue that Texas cannot tax [because the activities generating that item of revenue do not have sufficient unitary connection with the entity's other activities conducted in Texas] under the United States Constitution is not included in total revenue.

(d) Total [Reporting total] revenue. The line items in this subsection refer to line items on the 2006 Internal Revenue Service forms. A reference to a line item on the 2006 Internal Revenue Service forms includes any line item on a subsequent form with a different number or designation that substantially provides the same information as the line item on the 2006 Internal Revenue Service forms. For reports originally due prior to January 1, 2026, total revenue is based on the equivalent line numbers from the corresponding federal return, the amounts of which are [In computing total revenue for a subsequent report year, total revenue should be based on the equivalent line numbers from the corresponding federal report and] computed based on the Internal Revenue Code of 1986 in effect for the federal tax year beginning on January 1, 2007. For reports originally due on or after January 1, 2026 total revenue is based on the equivalent line numbers from the corresponding federal return.

(1) Corporations. For the purpose of computing its taxable margin, the total revenue of a taxable entity treated as a corporation for federal income tax purposes is computed by:

(A) adding:

(i) the amount reportable as income on line 1c, Internal Revenue Service Form 1120;

(ii) the amounts reportable as income on lines 4 through 10, Internal Revenue Service Form 1120; and

(iii) any total revenue reported by a lower tier entity as includable in the taxable entity's total revenue under Tax Code, §171.1015(b); and

(B) subtracting, to the extent included in the calculation under subparagraph (A) of this paragraph:

(i) bad debt expensed for federal income tax purposes that corresponds to items of gross receipts included for the current reporting period or a past reporting period;

(ii) foreign royalties and foreign dividends, including amounts determined under Internal Revenue Code, §78 (Dividends received from certain foreign corporations by domestic corporations choosing foreign tax credit) or §§951 - 964 (Controlled Foreign Corporations);

(iii) net distributive income from a taxable entity treated as a partnership or as an S corporation for federal income tax purposes, except as provided by subsection (c)(4) of this section;

(iv) allowable deductions from Internal Revenue Service Form 1120, Schedule C, to the extent the relating dividend income is included in total revenue;

(v) items of income attributable to an entity that is a disregarded entity for federal income tax purposes; and

(vi) other amounts authorized by subsection (e) of this section.

(2) S corporations. For the purpose of computing its taxable margin, the total revenue of a taxable entity treated as an S corporation for federal income tax purposes is computed by:

(A) adding:

(i) the amount reportable as income on line 1c, Internal Revenue Service Form 1120S;

(ii) the amounts reportable as income on lines 4 and 5, Internal Revenue Service Form 1120S;

(iii) the amounts reportable as income on lines 3a and 4 through 10, Internal Revenue Service Form 1120S, Schedule K;

(iv) the amounts reportable as income on lines 17 and 19, Internal Revenue Service Form 8825; and

(v) any total revenue reported by a lower tier entity as includable in the taxable entity's total revenue under Tax Code, §171.1015(b); and

(B) subtracting, to the extent included in the calculation under subparagraph (A) of this paragraph:

(i) bad debt expensed for federal income tax purposes that corresponds to items of gross receipts included for the current reporting period or a past reporting period;

(ii) foreign royalties and foreign dividends, including amounts determined under Internal Revenue Code, §78 or §§951 - 964;

(iii) net distributive income from a taxable entity treated as a partnership or as an S corporation for federal income tax purposes, except as provided by subsection (c)(4) of this section;

(iv) items of income attributable to an entity that is a disregarded entity for federal income tax purposes; and

(v) other amounts authorized by subsection (e) of this section.

(3) Partnerships. For the purpose of computing its taxable margin, the total revenue of a taxable entity treated as a partnership for federal income tax purposes is computed by:

(A) adding:

(i) the amount reportable as income on line 1c, Internal Revenue Service Form 1065;

(ii) the amounts reportable as income on lines 4, 6, and 7, Internal Revenue Service Form 1065;

(iii) the amounts reportable as income on lines 3a and 5 through 11, Internal Revenue Service Form 1065, Schedule K;

(iv) the amounts reportable as income on line 17, Internal Revenue Service Form 8825;

(v) the amounts reportable as income on line 11, plus line 2 or line 45, Internal Revenue Service Form 1040, Schedule F; and

(vi) any total revenue reported by a lower tier entity as includable in the taxable entity's total revenue under Tax Code, §171.1015(b); and

(B) subtracting, to the extent included in the calculation under subparagraph (A) of this paragraph:

(i) bad debt expensed for federal income tax purposes that corresponds to items of gross receipts included for the current reporting period or a past reporting period;

(ii) foreign royalties and foreign dividends, including amounts determined under Internal Revenue Code, §78 or §§951 - 964;

(iii) net distributive income from a taxable entity treated as a partnership or as an S corporation for federal income tax purposes, except as provided by subsection (c)(4) of this section;

(iv) items of income attributable to an entity that is a disregarded entity for federal income tax purposes; and

(v) other amounts authorized by subsection (e) of this section.

(4) Trusts. For the purpose of computing its taxable margin, the total revenue of a taxable entity treated as a trust for federal income tax purposes is computed by:

(A) adding:

(i) the amount reportable as income on lines 1, 2a, 3, 4, 7, and 8 of Internal Revenue Service Form 1041;

(ii) the amount reportable as income on lines 3, 4, 32, and 37 of Internal Revenue Service Form 1040, Schedule E;

(iii) the amounts reportable as income on line 11, plus line 2 or line 45, Internal Revenue Service Form 1040, Schedule F; and

(iv) any total revenue reported by a lower tier entity as includable in the taxable entity's total revenue under Tax Code, §171.1015(b); and

(B) subtracting, to the extent included in the calculation under subparagraph (A) of this paragraph:

(i) bad debt expensed for federal income tax purposes that corresponds to items of gross receipts included for the current reporting period or a past reporting period;

(ii) foreign royalties and foreign dividends, including amounts determined under Internal Revenue Code, §78 or §§951 - 964;

(iii) net distributive income from a taxable entity treated as a partnership or as an S corporation for federal income tax purposes, except as provided by subsection (c)(4) of this section;

(iv) items of income attributable to an entity that is a disregarded entity for federal income tax purposes; and

(v) other amounts authorized by subsection (e) of this section.

(5) Single member limited liability company (SMLLC) [(LLC)] filing as a sole proprietorship. For the purpose of computing its taxable margin, the total revenue of a taxable entity registered as a single member limited liability company and filing as a sole proprietorship for federal income tax purposes is computed by:

(A) adding:

(i) the amount reportable as income on line 3 of Internal Revenue Service, Form 1040, Schedule C;

(ii) the amount reportable as income on line 17, Internal Revenue Service Form 4797, to the extent that it relates to the SMLLC [LLC];

(iii) ordinary income or loss from partnerships, S corporations, estates and trusts, Internal Revenue Service Form 1040, Schedule E, to the extent that it relates to the SMLLC [LLC];

(iv) the amount reportable as income on line 16 of Internal Revenue Service Form 1040, Schedule D, to the extent that it relates to the SMLLC [LLC];

(v) the amounts reportable as income on lines 3 and 4, Internal Revenue Service Form 1040, Schedule E, to the extent that it relates to the SMLLC [LLC];

(vi) the amounts reportable as income on line 11, plus line 2 or line 45, Internal Revenue Service Form 1040, Schedule F, to the extent that it relates to the SMLLC [LLC];

(vii) the amount reportable as income on line 6 of Internal Revenue Service Form 1040, Schedule C, that has not already been included in this subparagraph; and

(viii) any total revenue reported by a lower tier entity as includable in the taxable entity's total revenue under Tax Code, §171.1015(b); and

(B) subtracting, to the extent included in the calculation under subparagraph (A) of this paragraph:

(i) bad debt expensed for federal income tax purposes that corresponds to items of gross receipts included for the current reporting period or a past reporting period;

(ii) foreign royalties and foreign dividends, including amounts determined under Internal Revenue Code, §78 or §§951 - 964;

(iii) net distributive income from a taxable entity treated as a partnership or as an S corporation for federal income tax purposes, except as provided by subsection (c)(4) of this section;

(iv) items of income attributable to an entity that is a disregarded entity for federal income tax purposes; and

(v) other amounts authorized by subsection (e) of this section.

(6) Other taxable entities. For a taxable entity other than a taxable entity treated for federal income tax purposes as a corporation, S corporation, partnership, trust, or single member limited liability company filing as a sole proprietorship, the total revenue shall [will] be an amount determined in a manner substantially equivalent to the amount calculated for the entities listed in this subsection.

(e) Exclusions from total revenue. Except as otherwise provided in this section and only to the extent included in the calculation of total revenue under subsection (d)(1) - (6) of this section, the following items shall be excluded from total revenue:

(1) Flow-through funds mandated by law or fiduciary duty. Flow-through funds that are mandated by law or fiduciary duty to be distributed to other entities or persons, including taxes collected from a third party by the taxable entity and remitted by the taxable entity to a taxing authority.[;]

(A) Allowed exclusions include, but are not limited to, taxes imposed by law on a third party but collected by the taxable entity and remitted by it to a taxing authority. Examples include, but are not limited to, state sales tax and the Texas hotel occupancy tax.

(B) For excise taxes, only those entities that collect and remit the tax to the taxing authority may exclude the tax from total revenue. Excise taxes include, but are not limited to, motor fuels taxes and tobacco taxes.

(C) Taxes imposed by law on the taxable entity itself are not allowed as flow-through funds and cannot be excluded from total revenue. Examples include, but are not limited to, the Texas mixed beverage gross receipts tax and the Texas franchise tax.

(2) Flow-through funds mandated by contract or subcontract. Flow-through funds that are mandated by contract or subcontract to be distributed to other entities or persons are[,] limited to:

(A) sales commissions, as that term is defined by subsection (b)(15) [(b)(11)] of this section, to non-employees, including split-fee real estate commissions;

(B) the tax basis as determined under the Internal Revenue Code of securities underwritten; and

(C) subcontracting payments made under a contract or subcontract entered into [handled] by the taxable entity to provide services, labor, or materials in connection with the actual or proposed design, construction, remodeling, remediation, or repair of improvements on real property or the location of the boundaries of real property. For the purpose of this paragraph, a payment is a subcontracting payment when the following requirements are met:[;]

(3) Principal repayments. A taxable entity that is a lending institution shall exclude the principal repayment of loans.[;]

(4) Tax basis of securities and loans. A taxable entity shall exclude the tax basis, as determined under the Internal Revenue Code, of securities and loans sold.[;]

(5) Legal services. A taxable entity that provides legal services shall exclude:

(A) the following flow-through funds that are mandated by law, contract, or fiduciary duty to be distributed to the claimant by the claimant's attorney or to other entities or persons on behalf of a claimant by the claimant's attorney:

(i) damages due the claimant;

(ii) funds subject to a lien or other contractual obligation arising out of the representation, other than fees owed to the attorney;

(iii) funds subject to a subrogation interest or other third-party contractual claim; and

(iv) fees paid an attorney in the matter who is not a member, partner, shareholder, or employee of the taxable entity;

(B) reimbursement of the taxable entity's expenses incurred in prosecuting a claimant's matter that are specific to the matter, are reimbursed on a dollar-for-dollar basis, and [that] are not estimated amounts, such as general operating expenses; and

(C) regardless of whether it was included in the calculation of total revenue under subsection (d) of this section, $500 per pro bono services case handled by the attorney, but only if the attorney maintains records of the pro bono services for auditing purposes in accordance with the manner in which those services are reported to the State Bar of Texas.[;]

(6) Pharmacy cooperative or network. A taxable entity that is a pharmacy cooperative shall exclude flow-through funds from rebates from pharmacy wholesalers that are distributed to the pharmacy cooperative's shareholders. A taxable entity that provides a pharmacy network shall exclude reimbursements, pursuant to contractual agreements, for payments to pharmacies in the pharmacy network.[;]

(7) Professional employer organization [Staff leasing services company]. A taxable entity that is a professional employer organization [staff leasing services company] shall exclude payments received from a client [company] for wages, payroll taxes on those wages, employee benefits, and workers' compensation benefits for the covered employees of [assigned to] the client [company]. A professional employer organization [staff leasing services company] cannot exclude payments received from a client [company] for payments made to independent contractors assigned to the client [company] and reportable on Internal Revenue Service Form 1099.[;]

(8) Dividends and interest from federal obligations. A taxable entity shall exclude dividends and interest received from federal obligations.[;]

(9) Management company. A taxable entity that is a management company shall exclude reimbursements of specified costs incurred in its conduct of the active trade or business of a managed entity, including wages and cash compensation as determined under Tax Code, §171.1013(a) and (b).[;]

(10) Health care provider. A taxable entity that is a health care provider shall exclude:

(A) the total amount of payments, including co-payments and deductibles from the patient or supplemental insurance, received:

(i) under the Medicaid program, Medicare program, Indigent Health Care and Treatment Act (Health and Safety Code, Chapter 61), and Children's Health Insurance Program (CHIP), including any plans under these programs and capitation awards from the Centers for Medicare & Medicaid Services transferred from another entity in the health care provider's corporate structure;

(ii) for professional services provided in relation to a workers' compensation claim under Labor Code, Title 5 (Texas Workers' Compensation Act);

(iii) for professional services provided to a beneficiary rendered under the TRICARE military health system, including any plans under this program;

(iv) from a third-party agent or administrator for revenue earned under clauses (i) - (iii) of this subparagraph; and

(B) the actual costs, regardless of whether it was included in the calculation of total revenue under subsection (d)(1) - (6) of this section, of uncompensated care provided, but only if the provider maintains records of the uncompensated care for auditing purposes and, if the provider later receives payment for all or part of that care, the provider adjusts the amount excluded for the tax year in which the payment is received.

(11) Health care institution. A health care provider that is a health care institution shall exclude 50% of the exclusion described in paragraph (10) of this subsection.

(12) Federal government and armed forces. A taxable entity shall exclude all revenue received that is directly derived from the operation of a facility that is:

(A) located on property owned or leased by the federal government; and

(B) managed or operated primarily to house members of the armed forces of the United States.

(13) Oil and gas revenue from low-producing wells. [During the dates, certified by the comptroller, in which the monthly average closing price of West Texas Intermediate crude oil is below $40 per barrel and the average closing price of gas is below $5 per MMBtu, as recorded on the New York Mercantile Exchange (NYMEX), a taxable entity shall exclude total revenue received from oil or gas produced from:]

(A) During the dates certified by the comptroller in which the monthly average closing price of West Texas Intermediate crude oil is below $40 per barrel, as recorded on the New York Mercantile Exchange, a taxable entity shall exclude revenue received from the sale of oil produced from an oil well designated by the Railroad Commission of Texas or similar authority of another state whose production averages less than 10 barrels a day over a 90-day period.[; and]

(B) During the dates certified by the comptroller in which the average closing price of gas is below $5 per MMBtu, as recorded on the New York Mercantile Exchange, a taxable entity shall exclude revenue received from the sale of gas produced from a gas well designated by the Railroad Commission of Texas or similar authority of another state whose production averages less than 250 mcf a day over a 90-day period.

(14) Qualified destination management company. Effective for reports originally due on or after January 1, 2010, a taxable entity that is a qualified destination management company [as defined by Tax Code, §151.0565] shall exclude [from its total revenue] payments made to other entities or persons to provide services, labor, or materials in connection with the provision of destination management services [as defined in Tax Code, §151.0565].

The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.

Filed with the Office of the Secretary of State on August 4, 2025.

TRD-202502745

Jenny Burleson

Director, Tax Policy

Comptroller of Public Accounts

Earliest possible date of adoption: September 14, 2025

For further information, please call: (512) 475-2220

SUBCHAPTER NN. FIREWORKS TAX

The Comptroller of Public Accounts proposes the repeal of §3.1281, concerning fireworks tax. The comptroller repeals this section following the passage of Senate Bill 761, 84th Legislature, 2015, effective September 1, 2015, which repealed Tax Code, Chapter 161 (Fireworks Tax).

After filing the report and paying the fireworks tax, due August 20, 2015, fireworks sellers are no longer required to file a report and pay this tax. This period is now outside the four-year statute of limitations for assessments and refund claims. See Tax Code, §111.107(a) (When Refund or Credit Is Permitted) and §111.201 (Assessment Limitation).

Brad Reynolds, Chief Revenue Estimator, has determined that during the first five years that the proposed rule repeal is in effect, the repeal: will not create or eliminate a government program; will not require the creation or elimination of employee positions; will not require an increase or decrease in future legislative appropriations to the agency; will not require an increase or decrease in fees paid to the agency; will not increase or decrease the number of individuals subject to the rule's applicability; and will not positively or adversely affect this state's economy.

Mr. Reynolds also has determined that the proposed rule repeal would benefit the public by conforming the rule to current statute. This rule is proposed under Tax Code, Title 2, and does not require a statement of fiscal implications for small businesses or rural communities. The proposed rule repeal would have no fiscal impact on the state government, units of local government, or individuals. There would be no anticipated economic cost to the public.

You may submit comments on the proposal to Jenny Burleson, Director, Tax Policy Division, P.O. Box 13528 Austin, Texas 78711 or to the email address: tp.rule.comments@cpa.texas.gov. The comptroller must receive your comments no later than 30 days from the date of publication of the proposal in the Texas Register.

This repeal is proposed under Tax Code, §111.002 (Comptroller's Rules; Compliance; Forfeiture), which provides the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of the provisions of Tax Code, Title 2 (State Taxation), as well as taxes, fees, and other charges that the comptroller administers under other law.

This proposal implements the repeal of Tax Code Chapter 161 (Fireworks Tax).

§ 3.1281. Fireworks Tax.

The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.

Filed with the Office of the Secretary of State on August 4, 2025.

TRD-202502738

Jenny Burleson

Director, Tax Policy

Comptroller of Public Accounts

Earliest possible date of adoption: September 14, 2025

For further information, please call: (512) 475-2220