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Texas Comptroller Amends Rule 3.591 Franchise Tax Sourcing of Receipts

Tax Development Feb 08, 2021

Texas Comptroller Amends Rule 3.591 Franchise Tax Sourcing of Receipts

The Texas Comptroller has adopted amendments to Rule 3.591 (34 Tex. Admin. Code § 3.591), addressing the computation and sourcing of receipts for purposes of computing the franchise tax apportionment formula. The adopted text is published in the January 15, 2021, issue of the Texas Register, 46 TexReg 460–472. 

Changes and Additions to Sourcing

Rule 3.591 provides substantial direction as to the proper sourcing of specific items to determine receipts from business done in Texas. The Comptroller’s interpretation of the relevant statutes in Tax Code Sections 171.103, .105, .1055, and .106, based on the type of receipt, is as follows:


  • Receipts are sourced to the location of the advertising audience with a default Texas rate of 8.7%.

Computer Hardware and Digital Property

  • Sales receipts of computer hardware, including any installed software and digital property fixed on physical media, are sourced under the general rule for tangible personal property;
  • Lease receipts from hardware, including installed software or digital property fixed on physical media, are sourced under the general rule for leases/subleases;
  • Sales or lease receipts of digital property not fixed on physical media are sourced under the general rule for intangibles;
  • Receipts from digital property delivered as a service are sourced under the general rule for services;
  • Receipts from digital property provided as part of an internet hosting service are sourced under the new internet hosting sourcing provision; and
  • Receipts from the use of digital property are sourced to the location of use under the provision for intangibles, such as royalties or licenses from the use of a patent, copyrighted material, trademark, or franchise. 

Financial Derivatives

  • Receipts from the settlement of financial derivatives contracts, including hedges, options, swaps, futures, and forward contracts and other risk management transactions, are sourced to the location of the payor.

Internet Hosting

  • Receipts from internet hosting are Texas receipts if the customer is located in Texas, which is based on where the customer or the purchaser’s designee consumes the service. A list of factors is provided to differentiate between access over the internet to computer services versus the purchase or lease of computer hardware or digital property [per the Comptroller, he relies on the Internal Revenue Service Notice of Proposed Rulemaking, “Classification of Cloud Transactions and Transactions Involving Digital Content,” 84 Fed. Reg. 40317 (August 14, 2019)]. A non-exhaustive list of services that are not internet hosting is also provided (discussed in the “Changes and Additions to Definitions” section).


  • Receipts from securities sold through an exchange in which the payor cannot be identified must use an increased rate of 8.7% (from 7.9%) for reports originally due on or after January 1, 2021.


  • The general rule is that Texas receipts include sales of services performed within Texas.
  • If a service is performed both outside and within Texas, the fair value of the services is sourced to the location of the specific receipts-producing, end-product act, or acts for which a customer contracts and pays to receive. According to the Comptroller, this rule applies to the location where an audience observes a performance or receives a subscription but not the location where an architect’s blueprint is delivered. 
  • If there is no receipts-producing, end-product act, or acts, such as for professional services, the location of non-receipt, albeit essential, support activities may be considered.
  • To the extent that the receipts-producing, end-product act, or acts approach is used, the agency’s approach resembles a market-sourcing model. To the extent it relies on essential activities, regardless of the receipt-producing, end-product act, it resembles a cost of performance model. To the extent neither approach is consistently followed, the agency’s approach is at risk of appearing indiscriminate and resembling an arbitrary and capricious model.

Single-Member LLC Company (SMLLC)

  • Receipts from the sale of an SMLLC by the sole owner is the sale of a membership interest, an intangible asset, sourced to the location of the payor.

Television Broadcaster Licensing Income

  • Receipts from broadcasting or other distributing film programming by any means are sourced to Texas if the legal domicile of the broadcaster’s customer is in this state. Broadcaster is defined to not include a cable service provider or direct broadcast satellite service.

Changes and Additions to Definitions

Other than sourcing, changes were also made to the definitions. The rule adds a definition of “inventory” and amends the definition of “investments.” However, these changes were not based upon legislation but upon Comptroller unpromulgated policy applicable to an unrelated issue. An issue currently being addressed in the courts relates to the application of Tax Code § 171.106(f), which applies to a loan or security that is “treated as inventory of the seller for federal income tax purposes.”

The new definition of “inventory” includes the statement that “[s]ecurities and loans held for investment, hedging, or risk management purposes are not inventory.” The definition of “investment” does not discuss for what purpose an asset is held, but broadly covers “[a]ny non-cash asset that is not a capital asset or inventory.” Generally, investments are held for speculation or profit. However, the purpose of hedging and risk management is to offset potential gains or losses from changes in the price of goods, interest rates, or currency conversion rates, etc. 

Though not included in the definition section of the rule, new subparagraphs have been added to discuss “internet hosting,” which is described as including “real-time, nearly real-time, and on-demand access over the internet to computer services such as: (i) data storage and retrieval; (ii) video gaming; (iii) database search services; (iv) entertainment streaming services; (v) processing of data; and (vi) marketplace provider services.” It is described as not including “(i) telecommunications services; (ii) cable television services; (iii) internet connectivity service; (iv) internet advertising services; or (iv) internet access solely to download digital content for storage and use on the customer’s computer or other electronic device.”

Changes to How Receipts Are Computed

A computation change was made to the determination of net gains and losses from the sale of capital assets and investments. The amended Rule 3.591 changes the Comptroller’s longstanding interpretation of what it means to include “only the net gain.” Though recent caselaw found that a taxpayer is not required to include a net loss from the sale of investments and capital assets in its apportionment factor denominator to offset other types of receipts, the amended rule ignores not only a cumulative net loss from the sale of capital assets and investments but also ignores every loss at the transactional level. The result is that only the gains are included in gross receipts, and losses do not impact either receipts in Texas or from an entity’s entire business. If most of the receipts from an entity’s sale of capital assets and investments are sourced outside of Texas, the revised approach will be favorable. However, if an entity has Texas losses, the revised treatment of ignoring losses could substantially inflate the margin apportioned to Texas. 

The related Comptroller comment in the Preamble is that “[t]he addition of only net gain involves fewer transactions than the addition of net gains and net losses, and it is the offsetting of gains with losses that could result in the exclusion of a material segment of a taxpayer’s business.” Further, the agency’s comment is that “[i]f the loss offsets the gain for apportionment purposes, the company will have no Texas receipts and a zero Texas apportionment factor even though it had substantial business activity in the State,” which it concludes is an “absurd result.” However, if the franchise tax is imposed on the value of the privilege of conducting business in the state, the amount of activity is not relevant if the value of exercising the privilege is zero.

Another change was initially proposed to remove the alternate transportation receipts sourcing method based on mileage for reports due on or after January 1, 2021. However, that change has been withdrawn. Instead, the language was slightly modified to reflect that the mileage option uses only “compensated mileage” in transporting goods or passengers in both the numerator and denominator of the Texas receipts computation.

Effective Date

Based on existing language, the Rule provisions are applicable to franchise tax reports due on or after January 1, 2008, except as otherwise stated. The change to the sourcing of receipts from internet hosting is effective January 1, 2014, based on the reference to House Bill 500, 83rd Legislature, 2013, and the change to the sourcing of broadcaster’s licensing receipts is effective January 1, 2018, based on the reference to House Bill 2896, 84th Legislature, 2015.

Some of the above changes are expressly delayed until the reports that are originally due on or after January 1, 2021. However, the recordkeeping to support the change could relate to a transaction that occurred in the past. Such “delayed” changes include sourcing to the audience location of advertising receipts attributable to a radio or television station transmitter in Texas; increasing to 8.7% in the Texas percentage of unidentified buyers of securities sold over an exchange; and disallowing the offset of losses against gains from the sale of a capital asset or investment for both receipts from Texas and the entire business (which requires a sale-by-sale analysis rather than a cumulative determination).


Eric L. Stein

Sandi Farquharson

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