Opinion ID: 895322
Heading Depth: 2
Heading Rank: 1

Heading: The Texas Franchise Tax

Text: The franchise tax is a tax on the privilege of doing business in Texas. Bullock v. National Bancshares Corp., 584 S.W.2d 268, 270 (Tex.1979), cert. denied, 444 U.S. 1016, 100 S.Ct. 667, 62 L.Ed.2d 645 (1980). It is imposed on each taxable entity that does business in this state or that is chartered or organized here. TEX. TAX CODE § 171.001(a); see also id. § 171.002 (defining taxable entity). Before 2008, the franchise tax was imposed on an entity's capital or earned surplus. See Act of May 30, 1997, 75th Leg., R. S., ch. 1185, §§ 5-6, 1997 Tex. Gen. Laws 4569, 4569-70. The tax code, however, presently imposes franchise tax on an entity's taxable margin. TEX. TAX.CODE §§ 171.002, .101; see Act of May 2, 2006, 79th Leg., 3rd C.S., ch.1, § 2, 2006 Tex. Gen. Laws 1, 6 (amending TEX. TAX CODE § 171.002). Because all of a company's capital, earned surplus, or taxable margin may not be attributable to business done in Texas, receipts must be apportioned between Texas and other jurisdictions. The tax code does this by multiplying an entity's capital, earned surplus, or taxable margin (depending on the applicable version of the code) by a fraction, the numerator of which consists of receipts from business done in Texas (Texas-sourced receipts), and the denominator of which consists of all receipts from business anywhere, including Texas. TEX. TAX.CODE § 171.006. In sourcing receipts to Texas, the tax code identifies business done in this state as the sum of the taxable entity's gross receipts from the following activities: (1) each sale of tangible personal property if the property is delivered or shipped to a buyer in this state regardless of the FOB point or another condition of the sale; (2) each service performed in this state, except that receipts derived from servicing loans secured by real property are in this state if the real property is located in this state; (3) each rental of property situated in this state; (4) the use of a patent, copyright, trademark, franchise, or license in this state; (5) each sale of real property located in this state, including royalties from oil, gas, or other mineral interests; and (6) other business done in this state. TEX. TAX CODE § 171.103(a) [2] (emphasis added) (hereafter referred to as the sourcing statute). The issue here is whether the revenue TGS earns licensing its seismic data library is appropriately sourced under subsection (4) as receipts from the use of a license in this state, id. § 171.103(a)(4) [3] or under subsection (6) as other business done in this state, id. § 171.103(a)(6). [4] If subsection (4) applies, the Comptroller has appropriately sourced the receipts. But if subsection (6) applies, as TGS maintains, the receipts must be sourced to the state of the customers' domicile under the location of the payor rule, and the Comptroller's assessment must be revised. See 34 Tex. Admin. Code § 3.549(e)(30)(B); id. § 3.557(e)(25)(B).