United States

Texas comptroller proposes retailer/wholesaler rule amendments

Further qualifications for taxpayer produced sales

TAX ALERT  | 

On May 20, 2016, the Texas Comptroller of Public Accounts published proposed amendments to section 3.584 of the franchise tax rules narrowing the applicability of the reduced retail and wholesale franchise tax rate.

Texas law provides a 50 percent reduction in the franchise tax rate for qualifying businesses primarily engaged in wholesale or retail trade. Primarily engaged in retail or wholesale activities requires that 1) the total revenue from retail or wholesale activities be greater than the total revenue from its activities in trades other than retail and wholesale, and 2) less than 50 percent of the total revenue from activities in retail or wholesale trade comes from the sale of products the taxpayer produces or products produced by an entity that is part of an affiliated group to which the taxable belongs.

The comptroller’s proposed amendments further define what ‘produces’ means for purposes of determining whether the taxpayer’s production revenue is under the 50 percent threshold. The first proposal provides that a taxable entity produces the product that it sells if it acquires the product and makes modifications to the product that increase the sales price of the product by more than 10 percent. The second proposal provides that a taxable entity produces the product it sells if the taxable entity manufactures, develops or creates tangible personal property that is incorporated into, installed in or becomes a component part of the product it sells.

Additionally, the amendments include two examples demonstrating how retailers in different sectors could qualify as producers under the second proposal above. A technology and software retailer will qualify as a producer if it produces an electronic device that it sells when the taxable entity produces a computer program, such as an application or operating system, which is installed in the device, even if the device is manufactured by an unrelated party. A pharmaceutical retailer could be considered a producer if it produces a drug that it sells when the taxable entity produces the active ingredient in the drug, even if the drug is manufactured by an unrelated party.

The comptroller also published proposed amendments to section 3.588, amending the rule to conform with the statutory language of ‘goods’ for franchise tax purposes. The amendments delete from the definition of goods the language that includes the 1) husbandry of animals, 2) the growing of crops, and 3) the severance of timber from realty. The comptroller explained that those items reference a specific provision relating to compensation paid to an undocumented worker and otherwise have no statutory basis for expanding the definition of goods.

If finalized, the proposed amendments to both sections 3.584 and 3.588 would be retroactively effective to Jan. 1, 2008. Taxpayers benefiting from the reduced retailer and wholesaler tax rate may be substantially impacted by this change, and should review their activities to determine whether they would still qualify for the reduced rate if the proposed amendments come into effect. The proposed amendments are currently subject to public comment and impacted taxpayers should consider whether to submit commentary.

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