200810208L



AWM 08121758

October 21, 2008

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

Thank you for your April 29, 2008 email regarding the revised Texas franchise 
tax. I apologize for the lengthy delay in responding to your message.

You asked several questions about the tax as it relates to transportation 
companies.

As you are aware, Texas Tax Code (TTC) Section 171.101 states that a company 
will compute its margin in one of three ways:

* Total Revenue times 70%;

* Total Revenue minus Cost of Goods Sold; or

* Total Revenue minus Compensation.

A taxable entity will pay franchise tax based on the lower of these three 
computations.
 
TTC 171.1011 and franchise tax rule 3.587, Margin: Total Revenue, provide 
specific guidance on the computation of total revenue. The law and rules 
identify the line items on a federal income tax report form that must be 
included in the computation of total revenue as a starting point. The law and 
the rule then provide for a laundry list of items that may be excluded from 
total revenue. This includes bad debts, foreign royalties and foreign 
dividends, and net distributive income from a taxable entity treated as a 
partnership or as an S corporation for federal income tax purposes.  In 
addition, there are specific exclusions for flow through funds. Unfortunately, 
the flow through funds described [171.1011(f) and (g)] will not generally apply 
to a transportation company.

TTC Section 171.1012 addresses the determination of cost of goods sold (COGS) 
in computing margin. This section defines "goods" as real or tangible personal 
property in the ordinary course of business; it does not include the 
performance of a service. As a result, a transportation company will not be 
allowed to use COGS in computing its margin because it generally provides a 
service; it does not sell "goods."

Franchise tax rule 3.591, Margin: Apportionment, addresses how revenue from a 
transportation service will be sourced to Texas for apportionment. Subsection 
(e)(31) of the rule reads as follows:

"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 within Texas; 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."

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
(800) 531-5441, ext. 34612
(512) 463-4612




ACCESSION NUMBER: 200810208L
SUPERSEDED: N
DOCUMENT TYPE: L
DATE: 10/21/2008
TAX TYPE: FRANCHISE