200805201L



AWM 08052050

May 21, 2008

To: **************
**************

Dear **************:

Thank you for your February 14, 2008 email regarding the revised Texas 
franchise tax with the margin calculation. I apologize for the delay in 
responding to your inquiry.

You asked for information on how the revised tax base for the Franchise Tax 
would be calculated for an entity who owns real estate (Office, Retail, 
Industrial, apartments) in Texas. You also asked if the net operating income is 
used and if REITs are exempt from the Franchise tax.

The revised franchise tax is based on a calculation called ‘margin.’  Margin is 
computed in one of three ways:

*  Total revenue times 70%;
*  Total revenue minus cost of goods sold; or  
*  Total revenue minus compensation.

Qualifying entities (those with $10 million or less in total revenue) may elect 
to report their tax using the E-Z computation.  Entities with total revenue of 
$300,000 or less will owe no tax and may file a no tax due report.  

Any type of partnership or a trust (other than a business trust) could qualify 
as a passive entity and not be subject to the franchise tax.  See rule 3.582 
for additional information on passive entities.

A taxable entity that owns real estate in Texas will typically include in the 
computation of total revenue gross rental income.  Because this type of entity 
typically does not sell real or tangible personal property in the ordinary 
course of business, it would not be eligible for the cost of goods sold 
deduction.

Texas Tax Code Section 171.0002(c)(4) states that the term “taxable entity” 
does not include the following:

“A real estate investment trust (REIT) as defined by Section 856, Internal 
Revenue Code, and its "qualified REIT subsidiary" entities as defined by 
Section 856(i)(2), Internal Revenue Code, provided that:

(A)  a REIT with any amount of its assets in direct holdings of real estate, 
other than real estate it occupies for business purposes, as opposed to holding 
interests in limited partnerships or other entities that directly hold the real 
estate, is a taxable entity; and

(B)  a limited partnership or other entity that directly holds the real estate 
as described in Paragraph (A) is not exempt under this subdivision, without 
regard to whether a REIT holds an interest in it.”

If the REIT does not meet the specific criteria listed in the tax code, then it 
will be considered a taxable entity.

Additional information about the franchise tax calculation can be found on our 
website.  You will find links to the franchise tax statute, adopted rules, 
frequently asked questions (FAQs), tax forms and publication 98-806, Revised 
Franchise Tax Overview, on our web site at 
http://window.state.tx.us/taxinfo/franchise/.  You will also find a link on 
this site to a calculator that may be used to estimate a taxable entity's 
potential tax liability based on the margin calculation.

This response is based on current law and the facts and information presented.  
If there are different or additional facts, the response may change.  

If you have any additional questions, please email us at 
tax.help@cpa.state.tx.us.

Sincerely,


Janet Spies
Franchise Tax Policy
Texas Comptroller of Public Accounts




ACCESSION NUMBER: 200805201L
SUPERSEDED: N
DOCUMENT TYPE: L
DATE: 05/21/2008
TAX TYPE: FRANCHISE