200810209L



AWM 08122481

October 23, 2008

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

Thank you for your May 1, 2008 email regarding the revised Texas franchise tax. 
I apologize for the delay in responding to your inquiry.

You ask in your message what are the differences in cost of goods sold (COGS) 
for federal income tax reporting purposes and income statement purposes.

Texas Tax Code (TTC) Section 171.1012 provides guidance for computing COGS for 
franchise tax reporting purposes.  This section starts out by defining goods as 
"real or tangible personal property sold in the ordinary course of business."  
It does not include the sale of a service.  As a result, many entity's in the 
service industry will not be eligible to compute margin using COGS.

In addition, subsection 171.1012(e) states "the cost of goods sold does not 
include the following costs in relation to the taxable entity's goods: 

"(1) the cost of renting or leasing equipment, facilities, or real property 
that is not used for the production of the goods; 

"(2) selling costs, including employee expenses related to sales; 

"(3) distribution costs, including outbound transportation costs; 

"(4) advertising costs; 

"(5) idle facility expense; 

"(6) rehandling costs; 

"(7) bidding costs, which are the costs incurred in the solicitation of 
contracts ultimately awarded to the taxable entity; 

"(8) unsuccessful bidding costs, which are the costs incurred in the 
solicitation of contracts not awarded to the taxable entity; 

"(9) interest, including interest on debt incurred or continued during the 
production period to finance the production of the goods; 

"(10) income taxes, including local, state, federal, and foreign income taxes, 
and franchise taxes that are assessed on the taxable entity based on income; 

"(11) strike expenses, including costs associated with hiring employees to 
replace striking personnel, but not including the wages of the replacement 
personnel, costs of security, and legal fees associated with settling strikes; 

"(12) officers' compensation; 

"(13) costs of operation of a facility that is: 

"(A) located on property owned or leased by the federal government; and 

"(B) managed or operated primarily to house members of the armed forces of the 
United States; and 

"(14) any compensation paid to an undocumented worker used for the production 
of goods. As used in this subdivision: (A) "undocumented worker" means a person 
who is not lawfully entitled to be present and employed in the United States; 
and (B) "goods" includes the husbandry of animals, the growing and harvesting 
of crops, and the severance of timber from realty."

Many of these costs are included for federal income tax reporting purposes.  As 
a result, the amount reported for franchise tax purposes will, more often than 
not, be different that the amount reported for federal tax purposes and for 
financial accounting purposes.  Only in very rare circumstances will the 
amounts be the same for all purposes.

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: 200810209L
SUPERSEDED: N
DOCUMENT TYPE: L
DATE: 10/23/2008
TAX TYPE: FRANCHISE