Texas Comptroller of Public Accounts    STAR System


201001011L




Clarification of Certain Eligibility Requirements for the 0.5 Percent Tax Rate

Tax Code Section 171.002(c)(2) does not allow the 0.5 percent tax rate to 
taxable entities engaged in retail or wholesale trade if 50 percent or more of 
the entity's total revenue from activities in retail or wholesale trade comes 
from the sale of products it produces or products produced by an entity that is 
part of an affiliated group to which the taxable entity belongs.

Many retail and wholesale taxpayers have questioned whether the modifications 
they make to goods acquired for resale rise to the level of production and may, 
therefore, make them ineligible for the 0.5 percent tax rate.

Rule 3.584(d)(3) was amended recently to clarify that, in determining if an 
entity is eligible for the retail/wholesale (0.5 percent) tax rate, a product 
is not considered to be produced if the taxpayer's modifications to the 
acquired product do not increase the sales price of the product by more than 10 
percent.

Example 1: A taxable entity is a retailer in the business of selling baseball 
caps that are embroidered at the shop to a customer's specifications. The 
entity purchases the baseball caps from a manufacturer and sells them, without 
embroidery, for $10 each. An embroidered cap sells for $18. The entity is 
considered to be the producer of the embroidered caps since the modifications 
made to them increases the sales price by 80 percent. If the sale of the 
embroidered caps accounts for 50 percent or more of the entity's total revenue, 
the entity would not be eligible for the 0.5 percent tax rate because 50 
percent or more of the entity's total revenue comes from the sale of products 
it produces.

Example 2: A taxable entity is a retailer in the business of selling men's 
dress shirts. The dress shirts sell for $60 each. A customer may purchase a 
dress shirt that is personalized with a monogram for $65. Monogramming the 
shirt is not considered production because the modifications made to the shirt 
increase its sales price by less than 8.5 percent. This retailer will not lose 
its eligibility for the 0.5 percent tax rate because of its shirt monogramming 
activities.

The loss of an entity's eligibility for the 0.5 percent tax rate does not 
affect the entity's eligibility to deduct the cost of goods sold to determine 
margin. Retailers, wholesalers and producers (and any entity that sells real or 
tangible personal property in the ordinary course of business) may elect to 
deduct the cost of goods sold to determine margin.




ACCESSION NUMBER: 201001011L
SUPERSEDED: N
DOCUMENT TYPE: L
DATE: 01/01/2010
TAX TYPE: FRANCHISE