The Texas Margin Tax – H.B. 500

In 2013 the Texas Legislature enacted H.B. 500 which provided for a temporary margin tax rate reduction, a new minimum deduction, expanded deductions, new credits for certain taxpayers, and customer-based sourcing for Internet hosting receipts. The law went into effect January 1, 2014.

A franchise tax (or margin tax) is imposed on all taxable entities. Under H.B. 500 a “taxable entity” means a partnership, limited liability partnership, corporation, banking corporation, savings and loan association, limited liability company, business trust, professional association, business association, joint venture, joint stock company, holding company, or other legal entity. The term includes a combined group. A joint venture does not include joint operating or co-ownership arrangements meeting the requirements of Treasury Regulation Section 1.761-2(a)(3) that elect out of federal partnership treatment as provided by Section 761(a), Internal Revenue Code.

For all taxable entities under this legislation, the revised tax base is the taxable entity’s margin defined as the lowest of the following:

  1. Total revenue less cost of goods sold;
  2. Total revenue less compensation; or
  3. Total revenue times 70%.

The margin tax is imposed at 0.5% on retail and wholesale trade businesses and 1% on all other taxpayers. The rate could be reduced provided the probable revenue estimates as certified by the Comptroller are calculated to offset any revenue lost by the rate reduction. In that event, H.B. 500 establishes temporary rate reductions as follows:

  1. 2014 – 0.4875% for retailers or wholesalers, and 0.975% for other taxpayers.
  2. 2015 – 0.4750% for retailers or wholesalers, and 0.950% for other taxpayers.

The rate for reports due in 2014 was actually reduced as indicated above. It is estimated by the Comptroller that probable revenue for the fiscal period applicable to 2015 will be sufficient to also allow for the rate reduction for 2015.

A taxable entity is primarily engaged in retail or wholesale trade if: (1) the total revenue from its activities in retail or wholesale trade is greater than the total revenue from its activities in trades other than the retail and wholesale trade; and (2) less than 50% of the total revenue from activities in retail or wholesale trade comes from the sale of products it produces or products produced by an entity that is part of an affiliated group to which the taxable entity also belongs, except for those businesses under Major Group 58 (eating and drinking establishments); and (3) the taxable entity does not provide retail or wholesale utilities, including telecommunication services, electricity, or gas.

Under H.B. 500, the retail or wholesale trade definition was expanded to include automotive repair shops, equipment rent-to-own transactions, and rental or leasing of tools, party and event supplies, furniture, or heavy construction equipment.

H.B. 500 adds certain deductions from margin tax apportioned to operations in Texas, including deductions for cost of solar energy devices, cost of clean coal projects, and relocation costs by certain taxable entities. H.B. 500 also provides for certain exclusions from revenue and amends the calculation of cost of goods as it applies to pipeline companies under certain circumstances, and as it applies to movie theaters. There is also a $1 million deduction from total revenue for small businesses.

The new sales sourcing rule for internet hosting companies provides that, for reports due on or after January 1, 2014, receipts are considered derived in Texas only if the consumer of the service is located in Texas.

The enactment of H.B. 500 created many changes to the margin tax and cost of goods rule, most of which are favorable to certain businesses. As a result of the more complicated margin tax and cost of goods sold calculations under this legislation, affected taxpayers should review these matters for previously filed returns, audits and future returns for potential refund claims and/or tax savings.

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