Texas Comptroller of Public Accounts    STAR System


201004006L




Determining if an Entity is Eligible for the 0.5 Percent Rate

Specific instructions for determining if an entity is eligible for the 0.5 
percent tax rate are provided in Texas Tax Code Section 171.002. Subsection (b) 
of this section allows a rate of 0.5 percent of taxable margin for those 
taxable entities primarily engaged in wholesale and retail trade as described 
in Division F and G of the 1987 Standard Industrial Classification (SIC) 
Manual. Subsection (c) provides three steps to determine if an entity is 
primarily engaged in retail or wholesale trade.

The first step, Tax Code Section 171.002(c)(1), involves analyzing and 
separating total revenue by SIC classification to determine if total revenue 
from activities in retail or wholesale trade is greater than the total revenue 
from activities in trades other than retail or wholesale trade.

Example:
A taxable entity sells Swiss watches and offers repair services for these 
watches. This entity must compare its total revenue from the sale of watches 
(retail - under SIC Industry No. 5944) to its total revenue from the repair of 
watches (service - under SIC Industry No. 7631). If the total revenue from its 
activities in retail trade (the sale of watches) is greater than the total 
revenue from its activities in service trade (the repair of watches), the 
entity has passed the first of three tests for being primarily engaged in 
retail or wholesale trade. If the total revenue from its activities in service 
trade (the repair of watches) is greater than the total revenue from its 
activities in retail trade (the sale of watches), then the entity is not 
primarily engaged in retail or wholesale trade and is not eligible for the 0.5 
percent tax rate.

For the second step, Tax Code Section 171.002(c)(2), an entity must determine 
if less than 50 percent of the total revenue from its 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 also belongs (this does not apply to total revenue from activities 
described by Major Group 58: Eating and Drinking Places). If 50 percent or more 
of its total revenue is from the sale of products it produces or from products 
produced by an affiliate, the entity is not primarily engaged in retail or 
wholesale trade.

Continuing with the above example:
Assume the entity's total revenue from the sale of watches is greater than its 
total revenue from the repair of watches. More than 90 percent of the store's 
total revenue from the sale of watches comes from the sale of watches produced 
by its affiliate, as defined in Tax Code Section 171.0001(1), a manufacturer 
based in Switzerland.

Because 50 percent or more of the store's total revenue from retail comes from 
the sale of products manufactured by an affiliate (the affiliate does not have 
to be a member of the combined group to disqualify the group for the 0.5 
percent rate), the entity is not primarily engaged in retail trade and is not 
eligible for the 0.5 percent tax rate.

The third step, Tax Code Section 171.002(c)(3), does not allow taxable entities 
that provide retail and wholesale utilities (including telecommunications 
services, electricity, or gas) to be considered primarily engaged in retail or 
wholesale trade. As a result, these entities are not eligible for the 0.5 
percent tax rate.

To summarize, a taxable entity will qualify for the 0.5 percent tax rate if the 
entity 1) has total revenue from activities in retail or wholesale trade that 
is greater than the total revenue from activities in other trades; 2) does not 
produce, and does not have an affiliate that produces, products that account 
for 50 percent or more of the entity's total revenue from retail or wholesale 
trade; and 3) does not provide retail or wholesale utilities.




ACCESSION NUMBER: 201004006L
SUPERSEDED: N
DOCUMENT TYPE: L
DATE: 04/01/2010
TAX TYPE: FRANCHISE