200704932L


April 26, 2007


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Dear *********:

Thank you for your letter regarding House Bill 3 (HB 3) and the travel agent 
industry.

As you are aware, Section 171.1011 of HB 3 computes total revenue for franchise 
tax purposes by referencing specific income line numbers from federal income 
tax return forms.  Therefore, a taxable entity’s total revenue for franchise 
tax purposes is determined by the methodology the entity chooses to report its 
income on its federal income tax return, as long as that methodology is 
appropriate under Federal income tax law.  

You stated in your letter that Federal income tax law allows a taxpayer to 
report on the income lines of its federal income tax return its revenue using 
either the “gross” or “net” method.  “Gross” reporting includes funds which are 
not considered gross income of the taxpayer under federal income tax law.  In 
contrast, “net” reporting excludes funds that are not gross income of the 
taxpayer. 

For example, if a $1000 airline ticket is booked for a customer and the travel 
agent’s commission is $50, then the travel agent would be correct in putting 
the $50 amount on line 1c of its Internal Revenue Service (IRS) Form 1120.  In 
other words, under the “net” method, the $50, not the entire $1050 the customer 
paid for the ticket and commission, would be included in the travel agent’s 
total revenue for franchise tax purposes.  Conversely, if $1050 were included 
on line 1c of IRS Form 1120 under the “gross” method, then $1,050 would be 
included in the travel agent’s total revenue for franchise tax purposes.  

If you need any additional information, please call our toll free line at (800) 248-4093.

Sincerely,

William Hamner
Director of Tax Administration


ACCESSION NUMBER: 200704932L  
SUPERSEDED: N  
DOCUMENT TYPE: L   
DATE: 04/26/2007  
TAX TYPE: FRANCHISE