Texas Administrative Code › Title 34 - PUBLIC FINANCE › Part 1 - COMPTROLLER OF PUBLIC ACCOUNTS › Chapter 3 - TAX ADMINISTRATION › Subchapter V - FRANCHISE TAX › Section 3.590 - Margin: Combined Reporting

Current through Reg. 49, No. 28; July 12, 2024
(a) Effective date.
				  The provisions of this section apply to franchise tax reports originally due on
				  or after January 1, 2008.
(b)
				  Definitions. The following words and terms, when used in this section, shall
				  have the following meanings, unless the context clearly indicates otherwise.
(1) Affiliated group--Entities in which a
				  controlling interest is owned by a common owner, either corporate or
				  noncorporate, or by one or more of the member entities.
(2) Combined group--Taxable entities that are
				  part of an affiliated group engaged in a unitary business and that are required
				  to file a combined group report under Tax Code, §
											171.1014.
(A) A combined group may not include a
				  taxable entity that conducts business outside the United States if 80% or more
				  of the taxable entity's property and payroll are assigned to locations outside
				  the United States. If either the property factor or payroll factor is zero, the
				  denominator is one. For example, if Corporation Z has no property, but does
				  have payroll located entirely outside the United States, Corporation Z will not
				  be included in the combined group. The combined group may not include a taxable
				  entity that conducts business outside the United States and has no property or
				  payroll if 80% or more of the taxable entity's gross receipts are assigned to
				  locations outside the United States. See Tax Code, §
												171.1014.
(B) A combined group may not include an
				  exempt entity.
(C) A combined group
				  must include eligible entities even if those entities do not have nexus as
				  described in §
												3.586 of
				  this title (relating to Margin: Nexus).
(D) Eligible pass-through entities including
				  partnerships, limited liability companies taxed as partnerships under federal
				  law, limited liability companies that are disregarded under federal law and S
				  corporations are included in a combined group.
(E) Passive entities are not included in the
				  combined group; however, the pro rata share of net income from a passive entity
				  shall be included in total revenue to the extent it was not generated by the
				  margin of another taxable entity.
(3) Combined group report--A report that
				  includes the business of all members of the combined group.
(4) Controlling interest.
(A) Controlling interest means:
(i) for a corporation, either more than 50%,
				  owned directly or indirectly, of the total combined voting power of all classes
				  of stock of the corporation, or more than 50% owned directly or indirectly, of
				  the beneficial ownership interest in the voting stock of the
				  corporation;
(ii) for a
				  partnership, association, trust or other entity other than a limited liability
				  company, more than 50%, owned directly or indirectly, of the capital, profits,
				  or beneficial interest in the partnership, association, trust, or other
				  entity;
(iii) for a limited
				  liability company, either more than 50%, owned directly or indirectly, of the
				  total membership interest of the limited liability company or more than 50%,
				  owned directly or indirectly, of the beneficial ownership interest in the
				  membership interest of the limited liability company.
(B) Examples are as follows:
(i) Corporation A owns 10% of Corporation C
				  and 60% of Corporation B, which owns 41% of Corporation C. Corporation A has a
				  controlling interest in Corporation B and a controlling interest in Corporation
				  C of 51% of stock ownership because it has control of the stock owned by
				  Corporation B.
(ii) Corporation A
				  owns 10% of Limited Liability Company C and 15% of Corporation B, which owns
				  90% of Limited Liability Company C. Corporation A does not have controlling
				  interest in Limited Liability Company C and does not have a controlling
				  interest in Corporation B. Corporation B has a controlling interest in Limited
				  Liability Company C.
(iii)
				  Individual A owns 100% of 10 corporations, each of which owns 10% of
				  Partnership B. Individual A has a controlling interest in each of the ten
				  corporations and in Partnership B.
(iv) Corporation A holds a 70% interest in
				  Partnership B that owns 60% of Limited Liability Company C. Corporation A owns
				  the remaining 40% of Limited Liability Company C. Corporation A owns a
				  controlling interest in Partnership B and, taking into account Company A's
				  direct and indirect ownership of Limited Liability Company C, a 100%
				  controlling interest in Limited Liability Company C.
(v) Corporation A owns 10% of Limited
				  Liability Company C and 45% of Corporation B, which owns 90% of Limited
				  Liability Company C. Corporation A would hold a 10% interest in Limited
				  Liability Company C which would not constitute a controlling interest.
				  Corporation B has a controlling interest in Limited Liability Company
				  C.
(vi) Partnership P is owned
				  equally by Limited Liability Company A, Limited Liability Company B and Limited
				  Liability Company C. Three unrelated individuals each wholly owns one of the
				  limited liability companies. None of the limited liability companies owns more
				  than 50% of Partnership P. There is no controlling interest.
(vii) Individual A and Individual B each owns
				  50% of Partnership X. Individual A and Individual B each also owns 50% of
				  Partnership Y. Individual A and Individual B are not husband and wife. Since
				  neither individual owns more than 50% of each partnership, neither individual
				  has a controlling interest in the partnerships.
(C) Other circumstances. In addition to the
				  foregoing tests, the comptroller may consider any other circumstances that tend
				  to demonstrate that the more than 50% direct or indirect common ownership test
				  was met or was not met.
(D)
				  Membership termination. Membership in an affiliated group shall be treated as
				  terminated in any year, or fraction thereof, in which the conditions listed in
				  this paragraph are not met, except as follows:
(i) when an affiliate is sold, exchanged, or
				  otherwise disposed of, the membership in an affiliated group shall not be
				  terminated if the requirements of this paragraph are again met immediately
				  after the sale, exchange, or disposition.
(ii) The comptroller may treat the affiliated
				  group as remaining in place if the conditions of this paragraph are again met
				  within a period not to exceed two years.
(E) Attribution. Except as otherwise
				  provided, an entity is owned when a controlling interest is directly held or
				  the interest is constructively owned. An individual constructively owns stock
				  that is owned by his or her spouse.
(F) Membership in more than one group. If an
				  entity is a member of more than one affiliated group, the entity is treated as
				  a member of the affiliated group (or part thereof) with respect to which it has
				  a unitary relationship. If the entity has a unitary relationship with more than
				  one of those affiliated groups, it shall elect to be treated as a member of
				  only one group. The election shall remain in effect until the unitary business
				  relationship between the entity and the other members ceases, or unless revoked
				  with approval of the comptroller.
(5) Reporting entity--The combined group's
				  choice of an entity that is:
(A) the parent
				  entity, if it is part of the combined group, or
(B) the entity that:
(i) is included within the combined
				  group;
(ii) is subject to Texas'
				  taxing jurisdiction; and
(iii) has
				  the greatest Texas business activity during the first period upon which the
				  first report is based, as measured by the Texas receipts after eliminations for
				  that period.
(6) Unitary business--A single economic
				  enterprise that is made up of separate parts of a single entity or of a
				  commonly controlled group of entities that are sufficiently interdependent,
				  integrated, and interrelated through their activities so as to provide a
				  synergy and mutual benefit that produces a sharing or exchange of value among
				  them and a significant flow of value to the separate parts. In determining
				  whether a unitary business exists, the comptroller shall consider any relevant
				  factor, including:
(A) whether:
(i) activities of the group members are in
				  the same general line, such as manufacturing, wholesaling, retailing of
				  tangible personal property, transportation, or finance;
(ii) the activities of the group members are
				  steps in a vertically structured enterprise or process, such as the steps
				  involved in the production of natural resources, including exploration, mining,
				  refining, and marketing; or
(iii)
				  the members are functionally integrated through the exercise of strong
				  centralized management, such as authority over purchasing, financing, product
				  line, personnel, and marketing.
(B) Other factors. In addition, the
				  comptroller may consider other factors that may be applicable, including
				  guidelines in Supreme Court decisions that presume activities are unitary. All
				  affiliated entities are presumed to be engaged in a unitary business.
(C) New entities. When a taxable entity
				  acquires another entity, a presumption exists for finding a unitary
				  relationship during the first reporting period. Any party may rebut such
				  presumption by proving that the taxable entities were not unitary. If such
				  presumption is rebutted, then the taxable entities shall not be considered
				  unitary as of the date of acquisition. When a taxable entity forms another
				  taxable entity, a unitary relationship exists as of the date of formation
				  unless the business is not unitary on a longer term basis. An acquired entity
				  is required to file a report for the period prior to acquisition.
(D) Non-arm's-length prices. Goods or
				  services or both are supplied at non-arm's length prices between or among
				  entities. Existence of arm's-length pricing between entities, however, does not
				  indicate lack of unity.
(E)
				  Existence of benefits from joint, shared or common activity. A discount,
				  cost-saving or other benefit can be shown to result from joint purchases,
				  leaseholds, or other forms of joint, shared or common activities between or
				  among entities.
(F) Relationships
				  of joint, shared or common activity to income-producing operations. In
				  determining whether a joint, shared, or common activity is indicative of a
				  unitary relationship, consideration shall be given to the nature and character
				  of the basic operations of each entity. Such consideration shall include, but
				  not be limited to, the entity's sources of supply, its goods or services
				  produced or sold, its labor force, and market to determine whether the joint,
				  shared, or common activity is directly beneficial to, related to, or reasonably
				  necessary to the income-producing activities of the unitary business.
(G) Holding entities. The tests for a unitary
				  business established by this section apply in determining whether a holding
				  entity is included or excluded from a unitary business.
(7) United States--The 50 states and the
				  District of Columbia. It also includes the territorial waters of the United
				  States and the seabed and subsoil of those submarine areas that are adjacent to
				  the territorial waters of the United States and over which the United States
				  has exclusive rights, in accordance with international law, with respect to the
				  exploration for or exploitation of natural resources. It also includes the
				  possessions and territories of the United States and the Commonwealth of Puerto
				  Rico.