Texas Comptroller of Public Accounts    STAR System


200612856R



STAR SUPERSEDED WITHOUT SUMMARY 

Accession No.(s): 200612856R

Document superseded on: 08/15/2013 



STATE OF TEXAS
COMPTROLLER OF PUBLIC ACCOUNTS
FRANCHISE TAX

Section 3.557  Earned Surplus:  Apportionment

(a)  Section provisions. The provisions of this section apply to franchise tax 
reports originally due on or after January 1, 1992. 

(b)  Definitions. The following words and terms, when used in this section, 
shall have the following meanings, unless the context clearly indicates 
otherwise. 

(1)  Capital asset--Any asset, other than an investment, that is held for use 
in the production of income, and that is subject to depreciation, depletion, or 
amortization. 

(2)  Commercial domicile--The principal place from which the trade or business 
of the entity is directed. 

(3)  Corporation--Any entity upon which tax is imposed under Tax Code, sec. 
171.001. 

(4)  Employee retirement plan--A plan or other arrangement that qualifies under 
Internal Revenue Code, sec. 401(a) or that satisfies the requirement of 
Internal Revenue Code, sec. 403, or a government plan described in Internal 
Revenue Code, sec. 414(d). 

(5)  Gross receipts--All revenues that are recognized under the methods used 
for federal income tax purposes for the tax reporting period without deduction 
for the cost of property sold, materials used, labor performed, or other costs 
incurred, unless otherwise specifically provided for in this section or Tax 
Code, Chapter 171. 

(6)  Internal Revenue Code--The Internal Revenue Code (IRC) of 1986 in effect 
for a specified tax year as provided by Tax Code, sec. 171.001. Federal taxable 
income reported for federal income tax purposes may differ from reportable 
federal taxable income for franchise tax reporting purposes. To the extent that 
such differences exist, the applicable IRC must be used to report the 
differences. 

(A)  For reports that are originally due on or after January 1, 1998, the IRC 
in effect for the tax year beginning on or after January 1, 1996, and before 
January 1, 1997 applies. 

(B)  For reports that are originally due on or after January 1, 1996 and before 
January 1, 1998, the IRC in effect for the tax year beginning on or after 
January 1, 1994, and before January 1, 1995 applies. 

(C)  For reports that are originally due on or after January 1, 1992 and before 
January 1, 1996, the IRC in effect for the tax year beginning on or after 
January 1, 1990, and before January 1, 1991 applies. 

(7)  Investment--Any non-cash asset that is not a capital asset and that is 
neither held as inventory nor proceeds from the sale of inventory. 

(8)  Legal domicile--The legal domicile of a corporation is its state of 
incorporation. The legal domicile of a partnership or trust is the principal 
place of business of the partnership or trust. The principal place of business 
of a partnership or trust is the location of its day-to-day operations. If the 
day-to-day operations of the partnership or trust are conducted equally or 
fairly evenly in more than one state, then the principal place of business is 
the commercial domicile. 

(9)  Location of payor--The legal domicile of the payor. 

(10)  Revenue--Except as otherwise specifically provided for in this section or 
Tax Code, Chapter 171, revenue means the value of inflows of economic resources 
from separate legal entities for delivering or producing goods, rendering 
services, or carrying out other activities in the entity's operations to the 
extent included in computing federal taxable income under the method used for 
federal income tax purposes during the tax reporting period. 

(11)  Tax reporting period--For the purposes of this section, the period upon 
which the tax is based under Tax Code, sec. 171.1532 or sec. 171.0011. 

(c)  Apportionment formula. Unless otherwise required under Tax Code, Chapter 
171, or by this section or other sections promulgated under Tax Code, Chapter 
171, a corporation's earned surplus is apportioned to this state to determine 
the amount of franchise tax due by multiplying the corporation's earned surplus 
by a fraction, the numerator of which is the corporation's gross receipts from 
business done in this state and the denominator of which is the corporation's 
gross receipts from its entire business. Examples of methods of apportionment 
that are "otherwise required" include, but are not limited to the following: 

(1)  Certain items of income must be allocated as provided by Tax Code, sec. 
171.1061. 

(2)  For reports that are originally due on or after January 1, 1992, 
corporations that have taxable earned surplus that is derived, directly or 
indirectly from the sale of services to or on behalf of a regulated investment 
company as defined by Internal Revenue Code, sec. 851(a), should refer to Tax 
Code, sec. 171.106(c), relating to the apportionment of gross receipts from 
services for regulated investment companies. 

(3)  For reports originally due on or after January 1, 1999, corporations that 
have taxable earned surplus that is derived, directly or indirectly, from the 
sale of management, administration, or investment services to an employee 
retirement plan, as defined in subsection (b)(4) of this section should refer 
to Tax Code, sec. 171.106(d), relating to the apportionment of gross receipts 
from services for employee retirement plans. 

(d)  General rules for reporting gross receipts. 

(1)  A corporation that files an annual report must report gross receipts based 
on the business done by the corporation beginning with the day after the date 
upon which the previous report was based, and ending with the last accounting 
period that ends in the year before the year in which the report is originally 
due. 

(2)  A corporation that files an initial report must report gross receipts 
based on its activities beginning with the date on which the corporation begins 
to do business in Texas, as described in sec. 3.554 of this title (relating to 
Earned Surplus: Nexus), or files its Texas charter, and ending on the last 
accounting period ending date that is at least 60 days before the original due 
date of the initial report; if no such date exists, then ending on the date 
that is the last day of a calendar month and that is nearest to the end of the 
corporation's first year of business in Texas. 

(3)  A corporation must report gross receipts based solely on its own earned 
surplus; consolidated reporting is prohibited. For example, a corporation that 
joins in filing a consolidated federal income tax return based on consolidated 
federal income tax provisions must report taxable income deferred on sales to 
other members of the consolidated group as though no consolidated federal 
income tax return had been filed. 

(4)  When a corporation computes gross receipts for apportionment, the 
corporation is deemed to have elected to use the same methods that the 
corporation used in filing its federal income tax return. 

(5)  Any item of revenue that is excluded from net taxable earned surplus under 
Texas law or United States law is excluded from gross receipts everywhere and 
gross receipts in Texas. For example, any amount that is excluded from earned 
surplus under Internal Revenue Code, sec. 78 or secs. 951-964, is excluded from 
gross receipts. 

(6)  Corporations that report federal taxable income under a long-term contract 
method must report revenues that are recognized for federal income tax purposes 
without reduction for the cost of property sold, materials used, labor 
performed, or other costs incurred. For example, a contractor that uses the 
percentage-of-completion method to report a construction contract for federal 
income tax purposes would recognize the portion of the total contract price 
that the contractor used in computing gross income on the appropriate federal 
income tax return. 

(7)  If the installment method is used to report sales of property, then the 
seller should include the revenues recognized for federal income tax purposes, 
unless the property sold is a capital asset or investment. If the property sold 
is a capital asset or investment, then the net gain that is included in federal 
taxable income must be used in computing receipts. 

(8)  Revenues that the receiver of a corporation in receivership collects or 
otherwise obtains are gross receipts of the corporation. 

(9)  If the comptroller determines that commonly controlled affiliated 
corporations have not entered into a transaction on an arm's length basis, then 
the comptroller may distribute or allocate income and deductions from such 
transaction as necessary to prevent franchise tax avoidance, provided that such 
adjustments are authorized under application of principles that are found in 
Internal Revenue Code, sec. 482, and regulations thereunder. 

(10)  A corporation that uses a 52-53 week accounting year end and that has an 
accounting year that ends during the first four days of January of the year in 
which the report is originally due may use the preceding December 31 as the 
date through which taxable earned surplus is computed. 

(11)  Gross receipts that relate to income that is described in Tax Code, sec. 
171.1061 are allocated to a state and are not included in gross receipts 
everywhere or Texas gross receipts for apportionment purposes. 

(e)  Treatment of specific items in the computation of receipts. 

(1)  Agency reimbursements. Reimbursements from a principal to a corporation 
that acts as the principal's agent for charges that the agent incurs on behalf 
of the principal, are not gross receipts. Amounts identified as reimbursements 
that exceed actual expenses paid to a third party are gross receipts. 

(2)  Bad debt recoveries. Bad debt recoveries are not gross receipts. 

(3)  Capital assets and investments. Net gains and losses from sales of 
investments and capital assets must be added to determine the total receipts 
from such transactions. 

(A)  If the combination of net gains and losses results in a net loss, the 
corporation must report zero gross receipts from such transactions. 

(B)  If the combination of net gains and losses results in a net gain, and both 
Texas and out-of-state sales have occurred, then a separate calculation of net 
gains and losses on Texas sales must be made. If the Texas net gain exceeds the 
total net gain, then the Texas net gain to report equals the total net gain. 
Net gain on sales of intangibles held as capital assets or investments is 
apportioned to the location of the payor. Examples of intangibles include, but 
are not limited to, stocks, bonds, commodities, futures contracts, patents, 
copyrights, licenses, trademarks, franchises, goodwill, and general receivable 
rights. 

(4)  Capital loss carrybacks and carryforwards. The excess of capital losses 
over capital gains that are carried back or carried forward for federal income 
tax purposes must be used in the computation of receipts in the year of the 
actual loss, not in the year to which such loss is actually used as a carryback 
or carryforward. 

(5)  Membership or enrollment fees paid for access to benefits. Membership or 
enrollment fees paid for access to benefits are receipts from the sale of an 
intangible asset and are apportioned to the legal domicile of the payor. 

(6)  Computer services and programs. Receipts from the sale of computer 
software services are apportioned to the location where the services are 
performed. Receipts from the sale of a computer program (as the term "computer 
program" is defined in sec. 3.308 of this title (relating to 
Computers--Hardware, Software, Services, and Sales)) are receipts from the sale 
of an intangible asset and are apportioned to the legal domicile of the payor. 

(7)  Condemnation. Revenues from condemnation that result from the taking of 
property are gross receipts that are apportioned based on the location of the 
property condemned. 

(8)  Debt forgiveness. If a creditor releases any part of a debt, then the 
amount that the creditor forgives is a gross receipt that is apportioned to the 
legal domicile of the creditor. 

(9)  Debt retirement. Revenues from the retirement of a corporation's own 
indebtedness, such as through the corporation's purchase of its own bonds at a 
discount, are gross receipts that are apportioned to the corporation's state of 
incorporation. The indebtedness is treated as an investment in the 
determination of the amount of gross receipts. 

(10)  Deemed sales of assets under Internal Revenue Code, sec. 338. Amounts 
that are deemed to have been received by the target corporation are treated as 
sales of assets by the target corporation, and are apportioned according to 
rules that otherwise apply to sales of such assets under Tax Code, Chapter 171, 
or this section. For the purposes of this paragraph, the purchaser of the 
target's stock is considered the purchaser of the assets. 

(11)  Demurrage charges. Demurrage charges for the detention or storage of 
equipment that is used in the transportation of goods and merchandise in 
interstate commerce are Texas receipts to the extent that the detention or 
storage occurs in Texas. 

(12)  DISC or FSC. A DISC (domestic international sales corporation) or FSC 
(foreign sales corporation) is treated in the same manner as any other 
corporation, except that a commission DISC or FSC may elect to use the earned 
surplus apportionment factor of its parent if the parent is doing business in 
Texas under the guidelines that are outlined in sec. 3.554 of this title 
(relating to Earned Surplus: Nexus). Receipts from the sale of tangible 
personal property by a corporation to a DISC or FSC that is located in Texas 
are not Texas receipts, if the tangible personal property flows uninterrupted 
from the selling corporation to a foreign purchaser who is located outside of 
Texas. If a DISC or FSC assembles, packages, repackages, modifies, stores, or 
otherwise takes physical delivery of tangible personal property in Texas, then 
the receipts from the sale of the tangible personal property are Texas receipts 
to the selling corporation.

(13)  Dividends and/or interest. 

(A)  Dividends that are recognized as a reduction of the taxpayer's basis in 
stock of a corporation for federal income tax purposes are not gross receipts. 
Dividends that exceed the taxpayer's basis for federal income tax purposes that 
are recognized as a capital gain are treated as dividends for apportionment 
purposes. 

(B)  The following are excluded from Texas receipts and receipts everywhere: 

(i)  dividends from a subsidiary, associate, or affiliated corporation that 
does not transact a substantial portion of its business or regularly maintain a 
substantial portion of its assets in the United States; 

(ii)  Schedule C special deductions that are excluded from taxable earned 
surplus; 

(iii)  dividends and/or interest on federal obligations that are excluded from 
earned surplus under sec. 3.555(k) of this title (relating to Earned Surplus: 
Computation); 

(iv)  interest that is exempt from federal income tax. 

(C)  Dividends and/or interest that are received from a corporation are 
apportioned to the state of incorporation of the payor. 

(D)  Dividends and/or interest that are received from a national bank are 
apportioned to Texas if the bank's principal place of business is located in 
Texas. Dividends and/or interest that are received from a bank that is 
organized under the Texas Banking Code are apportioned to Texas. 

(E)  Dividends and interest from other sources are apportioned to the legal 
domicile of the payor, unless otherwise required under Tax Code, Chapter 171, 
this section, or other rules that have been promulgated under Tax Code, Chapter 
171. 

(F)  For reports that are originally due before January 1, 2000, dividends 
and/or interest that a banking corporation or savings and loan association 
receives are apportioned to the commercial domicile of the banking corporation 
or savings and loan association. For reports that are originally due on or 
after January 1, 2000, dividends and/or interest that a banking corporation or 
savings and loan association receives are apportioned to the legal domicile of 
the payor. 

(G)  For reports that are originally due on or after January 1, 2002, a banking 
corporation may exclude from its Texas gross receipts interest that is earned 
on federal funds and interest that is earned on securities that are sold under 
an agreement to repurchase and that are held in a correspondent bank that is 
domiciled in Texas, but the banking corporation must include the interest in 
its gross receipts everywhere. See sec. 3.560 of this title (Relating to 
Banking Corporations). 

(14)  Exchanges of property. Exchanges of property are included in gross 
receipts to the extent that the exchange is recognized as a taxable transaction 
for federal income tax purposes. Such exchange must be included in receipts 
based on the gross exchange value, unless otherwise required under this 
section. 

(15)  Federal enclave. All revenues from a corporation's sales, services, 
leases, or other business activities that are transacted on a federal enclave 
that is located in Texas are Texas receipts, unless otherwise excepted. 

(16)  Freight charges. Customer's reimbursements to the seller for freight 
charges that the seller paid to a third party for goods and merchandise that 
have been shipped to a customer are not gross receipts when the charges are 
entered as a separate item on the sales invoice, if the reimbursement does not 
exceed the actual expenses paid to the third party. 

(17)  Health care supplies and food. Revenues from sales of health care 
supplies and food are included in the computation of receipts everywhere and 
Texas receipts in the same manner as revenues from any other sale of tangible 
personal property. 

(18)  Insurance proceeds. 

(A)  Business interruption insurance proceeds are gross receipts when the 
proceeds are intended to replace lost profits. Such receipts are apportioned to 
the legal domicile of the payor of the proceeds. 

(B)  Revenues from fire and casualty insurance proceeds are apportioned to the 
location of the damaged or destroyed property. 

(19)  Intercorporate expense allocations. Expense allocations by a corporation 
among one or more related entities (other than income taxes that are allocable 
to the applicable corporation)--whether recorded as management fees, 
administrative overhead, interest, accounting services, legal services, or 
other designations--are gross receipts to the corporation that allocates the 
expenses, unless an agency relationship exists. 

(20)  Leases and subleases. 

(A)  Revenues from the lease or sublease (or rental or subrental) of real 
property are apportioned to the location of the property. 

(B)  Revenues from the lease or sublease (or rental or subrental) of tangible 
personal property are apportioned to the location of the property. If the 
property is used both inside and outside Texas, then lease payments are 
apportioned based on the number of days that the tangible personal property was 
used in Texas divided by the number of days that the tangible personal property 
was used everywhere. If the amount of revenue that is due under the lease is 
based on mileage, then the lease payments are apportioned based on the number 
of miles in Texas divided by the number of miles everywhere. 

(C)  If a lump sum is charged for leased or subleased (or rented or subrented) 
property that is located both inside and outside Texas, then the allocation of 
such revenue is based on the rental value of each item of property. 

(D)  Revenues from the lease or sublease (or rental or subrental) of a vessel 
that engages in commerce are apportioned to Texas based on the number of days 
that the vessel is engaged in commerce in Texas waters divided by the number of 
days that the vessel is engaged in commerce everywhere. 

(E)  If a lease, sublease, rental, or subrental of real property or tangible 
personal property is treated as a sale for federal income tax purposes, then 
the receipts from the transaction are apportioned in the same manner as a sale. 
Any portion of the payments that the contracting parties designate as interest 
is interest receipts. 

(21)  Litigation awards. Revenues that are realized from litigation awards are 
gross receipts that are apportioned to the legal domicile of the payor of the 
proceeds; however, if the litigation awards are intended to replace receipts 
for which another apportionment rule is provided in this section, then the 
apportionment must be made in accordance with that rule. For example, if a 
corporation sues a Delaware corporation to recover on a sale of goods delivered 
to a Texas location, then a judgment for the amount of that sale would not 
convert the receipts from Texas receipts to Delaware receipts. See subsection 
(f) of this section for the apportionment of receipts from judgments, 
compromises, or settlements that relate to natural gas production. 

(22)  Loan principal. The principal of a loan that is received or repaid is not 
a gross receipt. However, if the loan is treated as inventory of the seller for 
federal income tax purposes, then the gross proceeds of the sale of that loan 
are considered gross receipts. 

(23)  Newspapers or magazines. All advertising revenues of a newspaper or 
magazine, including those revenues derived from out-of-state advertisements, 
are apportioned to Texas based on the number of newspapers or magazines 
distributed in Texas. All other receipts must be apportioned in accordance with 
the apportionment rules otherwise set out in this section. For example, 
receipts from sales of newspapers or magazines are to be apportioned based on 
paragraph (37) of this subsection. 

(24)  Partnership or joint venture. A corporation that is a partner or joint 
venturer must apportion its share of a partnership or joint venture's income 
that is included in the corporation's federal taxable income as follows: 

(A)  for reports that are originally due on or after January 1, 2002, a 
corporation's share of the gross receipts of a partnership or joint venture 
must be apportioned as though the corporation directly earned the receipts. 
Only a partnership's or joint venture's gross receipts that generated income 
that is included in the corporation's federal taxable income are used as the 
corporation's gross receipts. 

(B)  For reports that are originally due before January 1, 2002, a corporation 
may either use the method provided by subparagraph (A) of this paragraph or use 
the corporation's share of the partnership or joint venture's net federal 
taxable income as the corporation's gross receipts. If the corporation's share 
of the partnership's or joint venture's net federal taxable income is used as 
the corporation's gross receipts, then the corporation should apportion it 
based on the principal place of business of the partnership or joint venture. 

(25)  Patents, copyrights, and other intangible rights. 

(A)  Receipts from the use of intangibles. 

(i)  Revenues from a patent royalty are included in Texas receipts to the 
extent that the patent is utilized in production, fabrication, manufacturing, 
or other processing in Texas. 

(ii)  Revenues from a copyright royalty are included in Texas receipts to the 
extent that the copyright is utilized in printing or other publication in 
Texas. 

(iii)  Revenues that the owner of a trademark, franchise, or license receives 
are apportioned as follows: 

(I)  for reports that are originally due before January 1, 1998, revenues are 
apportioned based on the location of the payor; 

(II)  for reports that are originally due on or after January 1, 1998, revenues 
are included as Texas receipts to the extent the trademark, franchise or 
license is used in Texas. 

(iv)  Revenues from the sale or licensing of computer programs are apportioned 
to Texas in accordance with paragraph (6) of this subsection. 

(B)  Sales. Sales of intangibles are apportioned based on the location of 
payor. 

(26)  Purchase discounts and allowances. Returns, discounts, and allowances 
that are granted to a purchaser are not gross receipts to the purchaser even if 
refunds are given in cash. 

(27)  Radio/television. All advertising revenues of a radio or television 
station that broadcasts or transmits from a location in Texas constitute Texas 
receipts, even though some of the listening or viewing audiences are located 
outside Texas. All other receipts must be apportioned in accordance with the 
apportionment rules otherwise set out in this section. 

(28)  Real property. Revenues from the sale, lease, rental, sublease, or 
subrental of real property are apportioned to the location of the property. 

(29)  Sales and services. If a transaction involves elements of both a sale of 
tangible personal property and a service, but no documentation exists to show 
separate charges for the sale and service elements, then the comptroller may 
determine the amounts that are allocable to each element based on fair values 
or on any available evidence. 

(30)  Sales discounts. Cash or trade discounts that a seller allows reduce 
gross sales of the seller in the computation of gross receipts. 

(31)  Sales returns and allowances. Sales returns and allowances that a seller 
allows reduce gross sales of the seller in the computation of gross receipts. 

(32)  Sales taxes. State or local sales taxes that are imposed on the customer, 
but are collected by a seller are not gross receipts of the seller. However, 
discounts that a seller is allowed to take in remittance of the collected sales 
tax are gross receipts to the seller. 

(33)  Services. Receipts from a service are apportioned to the location where 
the service is performed. If services are performed both inside and outside 
Texas, then such receipts are Texas receipts on the basis of the fair value of 
the services that are rendered in Texas. 

(A)  For reports that are originally due on or after January 1, 1992, 
corporations that have taxable earned surplus that is derived, directly or 
indirectly, from the sale of services to or on behalf of a regulated investment 
company should refer to Tax Code, sec. 171.106(c), for information on 
apportionment of such taxable earned surplus. 

(B)  For reports that are originally due on or after January 1, 1999, 
corporations that have taxable earned surplus that is derived, directly or 
indirectly, from the sale of management, administration, or investment services 
to an employee retirement plan as defined in subsection (b)(4) of this section 
should refer to Tax Code, sec. 171.106(d), for information on apportionment of 
such taxable earned surplus. 

(C)  Receipts from services that a defense readjustment project performs in a 
defense economic readjustment zone are not Texas receipts. 

(D)  For reports due on or after April 21, 2006, receipts from the servicing of 
loans secured by real property are apportioned to the location of the real 
property that secures the loan being serviced.

(34)  Services procurement. Revenues for the procurement of services are 
apportioned to the place where the service procurement is performed. 

(35)  Stocks. Receipts from the sale of securities are apportioned based on the 
location of the payor. If securities are sold through a stock exchange, and the 
buyer cannot be identified, then 6.5% of the net gain (or gross sales price, if 
securities are inventory) is a Texas receipt. If the securities are 
investments, see paragraph (3) of this subsection regarding the computation of 
receipts.

(36)  Subsidies or grants. Proceeds of subsidies or grants that a corporation 
receives from a governmental agency are gross receipts, except when the funds 
are required to be expended dollar-for-dollar (i.e., passed through) to third 
parties on behalf of the agency. Receipts from a governmental subsidy or grant 
are apportioned in the same manner as the item to which the subsidy or grant 
was attributed. For example, if a corporation qualifies for a grant to conduct 
research for the government, then the receipts from that grant are receipts 
from a service and are apportioned to the location where the research is 
performed. 

(37)  Tangible personal property. Examples of transactions that involve the 
sale of tangible personal property and result in Texas receipts include, but 
are not limited to, the following: 

(A)  the sale of tangible personal property that is delivered in Texas to a 
purchaser. Delivery is complete upon transfer of possession or control of the 
property to the purchaser, an employee of the purchaser, or transportation 
vehicles that the purchaser leases or owns. FOB point, location of title 
passage, and other conditions of the sale are not relevant to the determination 
of Texas gross receipts; 

(B)  the sale of tangible personal property that is delivered in Texas to an 
employee or transportation agent of an out-of-state purchaser. A carrier is an 
employee or agent of the purchaser if the carrier is under the supervision and 
control of the purchaser with respect to the manner in which goods are 
transported; 

(C)  the sale and delivery in Texas of tangible personal property that is 
loaded into a barge, truck, airplane, vessel, tanker, or any other means of 
conveyance that the purchaser of the property leases and controls or owns. The 
sale of tangible personal property that is delivered in Texas to an independent 
contract carrier, common carrier, or freight forwarder that a purchaser of the 
property hires results only in gross receipts everywhere if the carrier 
transports or forwards the property to the purchaser outside this state; 

(D)  the sale of tangible personal property with delivery to a common carrier 
outside Texas, and shipment by that common carrier to a purchaser in Texas; 

(E)  the sale of oil or gas to an interstate pipeline company, with delivery in 
Texas; 

(F)  the sale of tangible personal property that is delivered in Texas to a 
warehouse or other storage facility that the purchaser owns or leases; 

(G)  the sale of tangible personal property that is delivered to and stored in 
a warehouse or other storage facility in Texas at the purchaser's request, as 
opposed to a necessary delay in transit, even though the property is 
subsequently shipped outside Texas; 

(H)  the drop shipment of tangible personal property in Texas. A drop shipment 
is a shipment of tangible personal property from a seller directly to a 
purchaser's customer, at the request of the purchaser, without passing through 
the hands of the purchaser. This results in Texas gross receipts for the seller 
and the purchaser; 

(I)  sales to which the throwback rule applies. Each sale of tangible personal 
property that is shipped from this state to a purchaser in another state in 
which the seller is not subject to taxation (known as the "throwback rule"). 
This subparagraph controls if it conflicts with any other provision of this 
section. Another state means a state of the United States, the District of 
Columbia, Puerto Rico, or any territory or possession of the United States. A 
corporation or limited liability company is subject to taxation in another 
state if the corporation or limited liability company is chartered or organized 
in that state or has sufficient contact with that state such that a tax on net 
income could be imposed on the corporation or limited liability company without 
violating 15 United States Code sec. 381 (i.e., Public Law 86-272). Sales into 
another state where the seller merely holds a certificate of authority are 
treated as sales to which the throwback rule applies. Voluntary payment of tax 
to another state or the inclusion of a corporation or limited liability company 
in another entity's state combined or consolidated income tax return does not, 
by itself, cause the corporation or limited liability company to be subject to 
taxation in another state. The selling corporation or limited liability company 
must be subject to taxation in the other state during the accounting year upon 
which the tax is based. Delivery of tangible personal property to another state 
by use of motor vehicles that the seller owns, leases or rents does not subject 
the seller to taxation in the other state, and the throwback rule applies, 
effective for reports that are due originally on or after January 1, 2003. The 
corporation or limited liability company has the burden of proof that the 
company is subject to taxation in the other state (see sec. 3.554 of this title 
(relating to Earned Surplus: Nexus)). 

(38)  Tax refunds. Tax refunds are not gross receipts. However, interest that 
is awarded on tax refunds are gross receipts. 

(39)  Telephone companies. 

(A)  Revenues from telephone calls that both originate and terminate in Texas 
are Texas receipts. 

(B)  Revenues from telephone calls that originate in Texas but terminate 
outside of Texas or that originate outside of Texas, but terminate in Texas are 
excluded from Texas receipts. 

(C)  Revenues from telecommunication services other than those services in 
subparagraph (A) or (B) of this paragraph are Texas receipts if the services 
are performed in Texas. For example, a telephone company that provides a long 
distance carrier access to the telephone company's local exchange network in 
Texas is performing a service in Texas. Any fee that the telephone company 
charges the long distance carrier for access to the local exchange network in 
Texas is a Texas receipt regardless of whether the access is related to an 
interstate call. For reports originally due before January 1, 2003, a fee that 
is charged to obtain access to a local exchange network in Texas and that is 
based on the duration of an interstate telephone call may be excluded from 
Texas receipts. 

(40)  Texas waters. Revenues from transactions that occur in Texas waters are 
Texas receipts. Texas waters are considered to extend to 10.359 statute miles, 
or nine nautical miles, from the Texas coastline. 

(41)  Transportation companies. Transportation companies must report Texas 
receipts from transportation services in intrastate commerce by: 

(A)  the inclusion of revenues that are derived from the transportation of 
goods or passengers in intrastate commerce; or 

(B)  the multiplication of total transportation receipts by total mileage in 
the transportation of goods and passengers that move in intrastate commerce 
within Texas divided by total mileage everywhere. 

(42)  Trusts. Distributions to a corporation that is the beneficiary of a trust 
are apportioned to the legal domicile of the trust. See subsection (b)(8) of 
this section regarding the legal domicile of a trust. 

(f)  Natural Gas Production. 

(1)  Revenues that a gas producer realizes from the contract price of gas that 
the gas producer produces and that the purchaser takes pursuant to the terms of 
sales are gross receipts and are apportioned to Texas, if the gas is delivered 
in Texas. 

(2)  Revenues that a gas producer realizes from a purchaser's payment under a 
sale or purchase contract for gas to be produced even if no gas is produced and 
delivered to the purchaser, are gross receipts and are apportioned to the legal 
domicile of the payor. 

(3)  Revenues that a gas producer realizes from a purchaser's payments to 
terminate a gas purchase contract are gross receipts and are apportioned to the 
legal domicile of the payor. 

(4)  Revenues that a gas producer realizes from a contract amendment that 
relates to the price of the gas sold are gross receipts from the sales of gas 
and are apportioned to Texas if delivery is made to a location in Texas. 
Revenues that the gas producer realizes from a contract amendment that relates 
to a provision other than the price of gas sold are gross receipts and are 
apportioned to the legal domicile of the payor. 

(5)  Revenues that a gas producer realizes from litigation awards for a breach 
of contract, reimbursements for litigation-related expenses (e.g., documented 
attorney's fees or court costs), or interest (upon which the parties have 
agreed, that the records of the producer reflects, or in an amount that a court 
has ordered) are gross receipts and are apportioned to the legal domicile of 
the payor. 

(6)  Revenues that a gas producer realizes from a judgment, compromise, or 
settlement relating to the recovery of a contract price of gas produced are 
gross receipts and are apportioned to Texas to the extent the contract 
specified delivery to a location in Texas. Revenues that a gas producer 
realizes from a judgment, compromise, or settlement that relates to several 
claims or causes of action shall be prorated based upon the documented amounts 
due under the contract for each claim or cause of action according to the 
records of the producer. For example, a settlement sum of $100,000 for a 
pricing dispute of $25,000 and for failure to pay for gas not taken in the 
amount of $225,000, would result in receipts of $10,000 from gas sales (100,000 
X 25,000/250,000) and receipts from other business of $90,000 (100,000 X 
225,000/250,000). Records of the producer shall include, but are not limited to 
the following: contracts, settlement agreements, accounting records and 
entries, court pleadings and worksheets, including calculations reflecting 
settlement amounts.

Effective Date:  December 28, 2006.
Filed with Secretary of State:  December 8, 2006.




ACCESSION NUMBER: 200612856R
SUPERSEDED: Y
DOCUMENT TYPE: R
DATE: 12/28/2006
TAX TYPE: FRANCHISE