2023 Texas Statutes › Tax Code › Title 2 - State Taxation › Subtitle F - Franchise Tax; Credits › Chapter 171 - Franchise Tax › Subchapter C. Determination of Taxable Margin; Allocation and Apportionment › Section 171.1011. Determination of Total Revenue From Entire Business

Sec. 171.1011.  DETERMINATION OF TOTAL REVENUE FROM ENTIRE BUSINESS.  (a)  In this section, a 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.
(b)  In this section, a 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.
(c)  Except as provided by this section, and subject to Section 171.1014, for the purpose of computing its taxable margin under Section 171.101, the total revenue of a taxable entity is:
(1)  for a taxable entity treated for federal income tax purposes as a corporation, an amount 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 Section 171.1015(b); and
(B)  subtracting:
(i)  bad debt expensed for federal income tax purposes that corresponds to items of gross receipts included in Subsection (c)(1)(A) for the current reporting period or a past reporting period;
(ii)  to the extent included in Subsection (c)(1)(A), foreign royalties and foreign dividends, including amounts determined under Section 78 or Sections 951-964, Internal Revenue Code;
(iii)  to the extent included in Subsection (c)(1)(A), net distributive income from a taxable entity treated as a partnership or as an S corporation for federal income tax purposes;
(iv)  allowable deductions from Internal Revenue Service Form 1120, Schedule C, to the extent the relating dividend income is included in total revenue;
(v)  to the extent included in Subsection (c)(1)(A), items of income attributable to an entity that is a disregarded entity for federal income tax purposes; and
(vi)  to the extent included in Subsection (c)(1)(A), other amounts authorized by this section;
(2)  for a taxable entity treated for federal income tax purposes as a partnership, an amount 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 Section 171.1015(b); and
(B)  subtracting:
(i)  bad debt expensed for federal income tax purposes that corresponds to items of gross receipts included in Subsection (c)(2)(A) for the current reporting period or a past reporting period;
(ii)  to the extent included in Subsection (c)(2)(A), foreign royalties and foreign dividends, including amounts determined under Section 78 or Sections 951-964, Internal Revenue Code;
(iii)  to the extent included in Subsection (c)(2)(A), net distributive income from a taxable entity treated as a partnership or as an S corporation for federal income tax purposes;
(iv)  to the extent included in Subsection (c)(2)(A), items of income attributable to an entity that is a disregarded entity for federal income tax purposes; and
(v)  to the extent included in Subsection (c)(2)(A), other amounts authorized by this section; or
(3)  for a taxable entity other than a taxable entity treated for federal income tax purposes as a corporation or partnership, an amount determined in a manner substantially equivalent to the amount for Subdivision (1) or (2) determined by rules that the comptroller shall adopt.
(d)  Subject to Section 171.1014, a taxable entity that is part of a federal consolidated group shall compute its total revenue under Subsection (c) as if it had filed a separate return for federal income tax purposes.
(e)  A taxable entity that owns an interest in a passive entity shall exclude from the taxable entity's total revenue the taxable entity's share of the net income of the passive entity, but only to the extent the net income of the passive entity was generated by the margin of any other taxable entity.
(f)  A taxable entity shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), flow-through funds that are mandated by law or fiduciary duty to be distributed to other entities, including taxes collected from a third party by the taxable entity and remitted by the taxable entity to a taxing authority.
(g)  A taxable entity shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), only the following flow-through funds that are mandated by contract or subcontract to be distributed to other entities:
(1)  sales commissions to nonemployees, including split-fee real estate commissions;
(2)  the tax basis as determined under the Internal Revenue Code of securities underwritten; and
(3)  subcontracting payments made under a contract or subcontract entered into 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.
(g-1)  A taxable entity that is a lending institution shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), proceeds from the principal repayment of loans.
(g-2)  A taxable entity shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), the tax basis as determined under the Internal Revenue Code of securities and loans sold.
(g-3)  A taxable entity that provides legal services shall exclude from its total revenue:
(1)  to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), 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 on behalf of a claimant by the claimant's attorney:
(A)  damages due the claimant;
(B)  funds subject to a lien or other contractual obligation arising out of the representation, other than fees owed to the attorney;
(C)  funds subject to a subrogation interest or other third-party contractual claim; and
(D)  fees paid an attorney in the matter who is not a member, partner, shareholder, or employee of the taxable entity;
(2)  to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), reimbursement of the taxable entity's expenses incurred in prosecuting a claimant's matter that are specific to the matter and that are not general operating expenses; and
(3)  $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.
(g-4)  A taxable entity that is a pharmacy cooperative shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), 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 from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), reimbursements, pursuant to contractual agreements, for payments to pharmacies in the pharmacy network.
(g-5)  A taxable entity that is a qualified live event promotion company shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), a payment made to an artist in connection with the provision of a live entertainment event or live event promotion services.
(g-6)  A taxable entity that is a qualified destination management company as defined by Section 151.0565 shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), payments made to other persons to provide services, labor, or materials in connection with the provision of destination management services as defined by Section 151.0565.
(g-7)  A taxable entity that is a qualified courier and logistics company shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), subcontracting payments made by the taxable entity to nonemployee agents for the performance of delivery services on behalf of the taxable entity.  For purposes of this subsection, "qualified courier and logistics company" means a taxable entity that:
(1)  receives at least 80 percent of the taxable entity's annual total revenue from its entire business from a combination of at least two of the following courier and logistics services:
(A)  expedited same-day delivery of an envelope, package, parcel, roll of architectural drawings, box, or pallet;
(B)  temporary storage and delivery of the property of another entity, including an envelope, package, parcel, roll of architectural drawings, box, or pallet; and
(C)  brokerage of same-day or expedited courier and logistics services to be completed by a person or entity under a contract that includes a contractual obligation by the taxable entity to make payments to the person or entity for those services;
(2)  during the period on which margin is based, is registered as a motor carrier under Chapter 643, Transportation Code, and if the taxable entity operates on an interstate basis, is registered as a motor carrier or broker under the motor vehicle registration system established under 49 U.S.C. Section 14504a or a similar federal registration program that replaces that system during that period;
(3)  maintains an automobile liability insurance policy covering individuals operating vehicles owned, hired, or otherwise used in the taxable entity's business, with a combined single limit for each occurrence of at least $1 million;
(4)  maintains at least $25,000 of cargo insurance;
(5)  maintains a permanent nonresidential office from which the courier and logistics services are provided or arranged;
(6)  has at least five full-time employees during the period on which margin is based;
(7)  is not doing business as a livery service, floral delivery service, motor coach service, taxicab service, building supply delivery service, water supply service, fuel or energy supply service, restaurant supply service, commercial moving and storage company, or overnight delivery service; and
(8)  is not delivering items that the taxable entity or an affiliated entity sold.
(g-8)  A taxable entity that is primarily engaged in the business of transporting aggregates shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), subcontracting payments made by the taxable entity to independent contractors for the performance of delivery services on behalf of the taxable entity.  In this subsection, "aggregates" means any commonly recognized construction material removed or extracted from the earth, including dimension stone, crushed and broken limestone, crushed and broken granite, other crushed and broken stone, construction sand and gravel, industrial sand, dirt, soil, cementitious material, and caliche.
(g-10)  A taxable entity that is primarily engaged in the business of transporting barite shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), subcontracting payments made by the taxable entity to nonemployee agents for the performance of transportation services on behalf of the taxable entity.  For purposes of this subsection, "barite" means barium sulfate (BaSO4), a mineral used as a weighing agent in oil and gas exploration.
(g-11)  A taxable entity that is primarily engaged in the business of performing landman services shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), subcontracting payments made by the taxable entity to nonemployees for the performance of landman services on behalf of the taxable entity.  In this subsection, "landman services" means:
(1)  performing title searches for the purpose of determining ownership of or curing title defects related to oil, gas, other energy sources, or other related mineral or petroleum interests;
(2)  negotiating the acquisition or divestiture of mineral rights for the purpose of the exploration, development, or production of oil, gas, other energy sources, or other related mineral or petroleum interests; or
(3)  negotiating or managing the negotiation of contracts or other agreements related to the ownership of mineral interests for the exploration, exploitation, disposition, development, or production of oil, gas, other energy sources, or other related mineral or petroleum interests.
(g-12)  A taxable entity that is a performing rights society that licenses the public performance of nondramatic musical works on behalf of a copyright owner shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), payments made to the public performance rights holder and the copyright owner for whom the taxable entity licenses the public performance.
(h)  If the taxable entity belongs to an affiliated group, the taxable entity may not exclude payments described by Subsection (f), (g), (g-1), (g-2), (g-3), or (g-4) that are made to entities that are members of the affiliated group.
(i)  Except as provided by Subsection (g), a payment made under an ordinary contract for the provision of services in the regular course of business may not be excluded.
(j)  Any amount excluded under this section may not be included in the determination of cost of goods sold under Section 171.1012 or the determination of compensation under Section 171.1013.
(k)  A taxable entity that is a professional employer organization shall exclude from its total revenue payments received from a client for wages, payroll taxes on those wages, employee benefits, and workers' compensation benefits for the covered employees of the client.
(l)  For purposes of Subsection (g)(1):
(1)  "Sales commission" means:
(A)  any form of compensation paid to a person for engaging in an act for which a license is required by Chapter 1101, Occupations Code; 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.
(2)  "Principal" means a person who:
(A)  manufactures, produces, imports, distributes, or acts as an independent agent for the distribution of a product for sale;
(B)  uses a sales representative to solicit orders for the product; and
(C)  compensates the sales representative wholly or partly by sales commission.
(m)  A taxable entity shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), dividends and interest received from federal obligations.
(m-1)  A taxable entity that is a management company shall exclude from its total revenue 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 Sections 171.1013(a) and (b).
(n)  Except as provided by Subsection (o), a taxable entity that is a health care provider shall exclude from its total revenue:
(1)  to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), the total amount of payments the health care provider received:
(A)  under the Medicaid program, Medicare program, Indigent Health Care and Treatment Act (Chapter 61, Health and Safety Code), and Children's Health Insurance Program (CHIP);
(B)  for professional services provided in relation to a workers' compensation claim under Title 5, Labor Code; and
(C)  for professional services provided to a beneficiary rendered under the TRICARE military health system; and
(2)  the actual cost to the health care provider for any 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.
(n-1)  The comptroller shall adopt rules governing:
(1)  the computation of the actual cost to a health care provider of any uncompensated care provided under Subsection (n)(2); and
(2)  the audit requirements related to the computation of those costs.
(o)  A health care provider that is a health care institution shall exclude from its total revenue 50 percent of the amounts described by Subsection (n).
(p)  In this section:
(1)  "Federal obligations" means:
(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.
(2)  "Health care institution" means:
(A)  an ambulatory surgical center;
(B)  an assisted living facility licensed under Chapter 247, Health and Safety Code;
(C)  an emergency medical services provider;
(D)  a home and community support services agency;
(E)  a hospice;
(F)  a hospital;
(G)  a hospital system;
(H)  an intermediate care facility for individuals with an intellectual disability or a home and community-based services waiver program for individuals with an intellectual disability adopted in accordance with Section 1915(c) of the federal Social Security Act (42 U.S.C. Section 1396n);
(I)  a birthing center;
(J)  a nursing home;
(K)  an end stage renal disease facility licensed under Section 251.011, Health and Safety Code; or
(L)  a pharmacy.
(3)  "Health care provider" means a 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.
(4)  "Obligation" means 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.
(4-a)  "Pro bono services" means the direct provision of legal services to the poor, without an expectation of compensation.
(4-b)  Repealed by Acts 2007, 80th Leg., R.S., Ch. 1282, Sec. 37(2), eff. January 1, 2008.
(5)  "United States government" means 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.
(6)  "United States government agency" means 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.
(7)  "United States government-sponsored agency" means 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.
(8)  "Vaccine" means a preparation or suspension of dead, live attenuated, or live fully virulent viruses or bacteria, or of antigenic proteins derived from them, used to prevent, ameliorate, or treat an infectious disease.
(q)  A taxable entity shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), all revenue received that is directly derived from the operation of a facility that is:
(1)  located on property owned or leased by the federal government;  and
(2)  managed or operated primarily to house members of the armed forces of the United States.
(r)  A taxable entity shall exclude, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), total revenue received from oil or gas produced, during the dates certified by the comptroller pursuant to Subsection (s), from:
(1)  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
(2)  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.
(s)  The comptroller shall certify dates during 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).
(t)  The comptroller shall adopt rules as necessary to accomplish the legislative intent prescribed by this section.
(u)  A taxable entity shall exclude from its total revenue the actual cost paid by the taxable entity for a vaccine.
(v)  A taxable entity primarily engaged in the business of transporting goods by waterways that does not subtract cost of goods sold in computing its taxable margin shall exclude from its total revenue direct costs of providing transportation services by intrastate or interstate waterways to the same extent that a taxable entity that sells in the ordinary course of business real or tangible personal property would be authorized by Section 171.1012 to subtract those costs as costs of goods sold in computing its taxable margin, notwithstanding Section 171.1012(e)(3).
(w-1)  A taxable entity primarily engaged in the business of providing services as an agricultural aircraft operation, as defined by 14 C.F.R. Section 137.3, shall exclude from its total revenue the cost of labor, equipment, fuel, and materials used in providing those services.
(x)  A taxable entity that is registered as a motor carrier under Chapter 643, Transportation Code, shall exclude from its total revenue, to the extent included under Subsection (c)(1)(A), (c)(2)(A), or (c)(3), flow-through revenue derived from taxes and fees.
Amended by:
Acts 2006, 79th Leg., 3rd C.S., Ch. 1 (H.B. 3), Sec. 5, eff. January 1, 2008.
Acts 2007, 80th Leg., R.S., Ch. 1282 (H.B. 3928), Sec. 12, eff. January 1, 2008.
Acts 2007, 80th Leg., R.S., Ch. 1282 (H.B. 3928), Sec. 13, eff. January 1, 2008.
Acts 2007, 80th Leg., R.S., Ch. 1282 (H.B. 3928), Sec. 37(2), eff. January 1, 2008.
Acts 2009, 81st Leg., R.S., Ch. 1360 (S.B. 636), Sec. 3(a), eff. January 1, 2010.
Acts 2011, 82nd Leg., 1st C.S., Ch. 4 (S.B. 1), Sec. 45.03, eff. January 1, 2012.
Acts 2013, 83rd Leg., R.S., Ch. 117 (S.B. 1286), Sec. 25, eff. September 1, 2013.
Acts 2013, 83rd Leg., R.S., Ch. 1006 (H.B. 2451), Sec. 1, eff. January 1, 2014.
Acts 2013, 83rd Leg., R.S., Ch. 1034 (H.B. 2766), Sec. 1, eff. January 1, 2014.
Acts 2013, 83rd Leg., R.S., Ch. 1232 (H.B. 500), Sec. 7, eff. January 1, 2014.
Acts 2013, 83rd Leg., R.S., Ch. 1232 (H.B. 500), Sec. 8, eff. January 1, 2014.
Acts 2017, 85th Leg., R.S., Ch. 703 (H.B. 3254), Sec. 1, eff. January 1, 2018.
Acts 2019, 86th Leg., R.S., Ch. 447 (S.B. 1824), Sec. 1, eff. June 4, 2019.
Acts 2023, 88th Leg., R.S., Ch. 30 (H.B. 446), Sec. 13.01, eff. September 1, 2023.
Acts 2023, 88th Leg., R.S., Ch. 197 (S.B. 604), Sec. 3, eff. January 1, 2024.