The Texas Legislature has sent Governor Rick Perry the first major franchise tax relief bill since the revised Texas franchise tax was enacted seven years ago. House Bill 500 (“HB 500”), an omnibus franchise tax reform bill, provides for temporary tax rate reductions and a new method of computing taxable margin, continues the small-business exemption (which was scheduled to be phased-out), allows deductions for certain flow-through funds, addresses issues with cost of goods sold for two industries, and simplifies reporting requirements. Most provisions of the bill are effective for reports due after December 31, 2013.
Governor Perry has until June 17, 2013 to sign or veto the bill or permit it to take effect without his signature. The bill includes the following:
Temporary Rate Cut
HB 500 temporarily lowers the franchise tax rate for 2014 to 0.975% (from 1%). Qualifying retailers and wholesalers may use 0.4875% (from 0.5%) for 2014. Taxpayers with total revenue of $10 million or less may continue to elect to use the “E-Z” computation and pay the E-Z rate of 0.575%.
If the Comptroller certifies that there is sufficient revenue, qualifying retailers and wholesalers may use a further reduced rate of 0.475% for 2015 tax reports. The 2015 rate for taxpayers will be 0.95%. Taxpayers that qualify for E-Z may elect to use the E-Z rate of 0.575%.
Small Business Exemption
A taxpayer whose total revenue is $1 million or less must file a report but is not required to pay franchise tax. The small business exemption was scheduled to be reduced to $600,000 in 2014. HB 500 repealed the scheduled reduction and continues the exemption for companies with revenue of $1 million or less.
New Option for Determining Taxable Margin
HB 500 allows a taxpayer to compute taxable margin based on:
- Total revenue minus $1 million,
- Total revenue minus 30%,
- Total revenue less cost of goods sold for qualifying taxpayers, or
- Total revenue less compensation.
Flow-Through Funds Excluded from Revenue
HB 500 allows the following industries to subtract certain flow-through funds from revenue:
- A pharmacy network may exclude reimbursements for payments to pharmacies in the pharmacy network;
- An aggregate transportation company may subtract payments to independent contractors hauling aggregates for the transportation company;
- A barite transportation company may subtract payments to subcontractors hauling barite for the transportation company;
- A landman company may exclude payments to subcontractors providing landman services for the company;
- A healthcare provider or other taxpayer who provides vaccinations may exclude amounts paid for the vaccines;
- A marine transportation company that does not use cost of goods sold to compute its taxable margin may exclude direct costs of providing transportation services as provided by Section 171.1012; and
- A carrier registered under Chapter 643, Transportation Code, may exclude from its total revenue flow-through revenue derived from taxes and fees.
Cost of Goods Sold Deductions
- A pipeline that gathers, stores, transports, or processes crude oil, petroleum products, natural gas condensate, and natural gas liquids may subtract as a cost of goods sold its depreciation, operations, and maintenance costs related to its services. “Processing” is defined as the physical or mechanical removal, separation, or treatment of crude oil, finished petroleum products, natural gas, condensate, and natural gas liquids, after those materials are produced from the earth. Processing does not include the chemical or biological transformation of those materials.
- Movie theaters may deduct as cost of goods sold the amounts they pay for the right to exhibit a movie. HB 500 states that this provision is a clarification of existing law. It becomes effective September 1, 2013.
Special Deductions and Credits
- Taxpayers relocating their home offices to Texas will be permitted to deduct their relocation costs from their apportioned margin. The deduction is not available if the taxpayer did business in Texas before relocating and/or was a part of a unitary group and a member of the group was doing business in Texas. The deduction must be taken on the business’s first franchise tax report. Taxpayers taking the deduction must keep proof of the deducted relocation costs. It becomes effective September 1, 2013.
- A taxpayer may be eligible for a credit for eligible expenses incurred in the rehabilitation of a certified historic structure. The taxpayer must have an ownership interest in the structure and invest $5,000 or more in rehabilitation expenditures. The credit is limited to 25% of the eligible expenses, and unused credits may be carried forward five reports. The credit will take effect January 1, 2015.
Other Changes
- Insurance companies that pay premium taxes are exempt from the franchise tax. HB 500 clarifies that the existing exemption includes out-of-state insurance companies that do not do business in Texas and that pay premium or occupation taxes to other states. As exempt entities, these companies are not included in the combined group of any non-exempt affiliate filing a franchise tax return in Texas.
- Corporations formed by local governments to purchase electricity for the local entities are exempt.
- HB 500 expands the definition of a retailer to include auto-repair shops, companies that sell goods using rental-to-own agreements, and businesses that rent or lease tools, party and event supplies, furniture, or heavy construction equipment. Retailers pay a lower tax rate.
- A receipt from Internet hosting is a receipt for business done in this state if the customer is in Texas.
- A taxpayer that sells electricity must file a separate franchise tax report from affiliates that do not sell electricity.
- Effective with the 2014 report, taxpayers are no longer required to provide information regarding the gross receipts of members of their combined group if the members are not doing business in Texas.