Texas Margin Tax
Steven Moore
Attorney
Jackson Walker LLP
Texas Aggregates and Concrete Association
58th Annual Meeting
June 27, 2012
Franchise Tax
2
Franchise Tax: Cost of Goods Sold
Historical Background
1) Franchise (a/k/a “Margin”) tax adopted in 2006
2) First returns due May 15, 2008
3) Tax did not raise as much tax revenue as fiscal
note projected (short $1.5 billion per year)
4) Comptroller began a broad audit program and
announced that lack of compliance on COGS is
one culprit for revenue shortfall
5) Several TACA members are under audit
3
Franchise Tax: Basic Calculation
Gross Revenue (-)
Cost of Goods Sold or
Compensation or
30% of Gross Revenue
X
Texas Gross Receipts
1% X
All US Gross Receipts
4
Franchise Tax: Cost of Goods Sold
Includes (Comptroller Rule 3.588 Edited)
“All direct costs of acquiring or producing goods,” including:
1) labor
2) materials purchased or consumed
3) handling costs, processing, assembling,
repackaging, and inbound transportation
4) storage- including carrying, storing, or
warehousing
5) depreciation, depletion, and amortization
necessary for production
6) leasing equipment or facilities for production
7) repairing and maintaining equipment or facilities
for production
5
Franchise Tax: Cost of Goods Sold
Includes (Comptroller Rule 3.588 Edited)
8) research costs, directly related to production
9) deterioration of goods
10) obsolescence of goods
11) spoilage and abandonment, including
reclamation
12) preproduction direct costs
13) postproduction direct costs including storage
and handling
14) insurance on plant and equipment directly used
in production
6
Franchise Tax: Cost of Goods Sold
Includes (Comptroller Rule 3.588 Edited)
15)
16)
17)
18)
insurance on produced goods
utilities directly used in production
quality control
licensing fees for franchise, trademark,
corporate plan, procedure, or recipe for goods
19) 4% of indirect or administrative overhead costs
20) taxes paid in relation to acquiring or producing
any material
21) taxes paid in relation to services that are direct
cost of production
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Franchise Tax: Costs Not Included
(Edited)
1) leasing equipment or facilities not used for
2)
3)
4)
5)
6)
7)
production of the goods
selling
distribution, including outbound transportation
costs
advertising
idle facility expenses
interest, including interest on debt incurred or
continued during production period to finance
production of goods
any compensation paid to undocumented worker
used for production of goods
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Sample Texas Comptroller FAQs/
Responses on Cost of Goods Sold
3.
Is the calculation for COGS like federal
reporting and industry calculations?
No, allowable costs to be included in COGS are
specifically defined for franchise tax reporting
purposes in TTC 171.1012.
4. What costs are included in computation of
COGS?
Allowable costs for COGS generally include costs
related to acquisition and production of tangible
personal property or real property. See Rule 3.588
for detailed listing of costs that may be included in
COGS.
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Sample Texas Comptroller FAQs/
Responses on Cost of Goods Sold
5. What costs are not allowed in computation of
COGS?
COGS does not include selling costs, distribution costs,
advertising costs, officer compensation and payments
made to undocumented workers. See Rule 3.588 for
detailed listing of costs that are not included in COGS.
23. Can the labor to install tangible personal property
be included in COGS?
Labor to install tangible personal property outside of
manufacturing process, unless part of “construction,
improvement,
remodeling,
repair
or
industrial
maintenance of real property,” is not allowed as part of
cost of goods sold deduction. See Rule 3.588(b)(7).
(Updated 06/19/08)
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Texas Franchise Tax:
Cost of Goods Sold / Property Taxes
Comptroller Policy Letter with Accession No. 201002890L
“You ask if real estate taxes can be deducted as cost of good sold
(COGS) when real estate taxes relate to manufacturing building.
Franchise tax rule 3.588 Margin: Cost of Goods Sold (COGS)
addresses question. Property taxes on manufacturing facilities are not
specifically allowed under either rule 3.588(d) or (e). However, they are
also not specifically excluded under rule 3.588(g).
Therefore, they may be included in indirect and administrative costs
that entity can demonstrate are allocable to acquisition or production of
goods. See franchise tax rule 3.588(f).”
_______________________
This limits deduction to 4% of indirect or administrative overhead costs
per year.
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Franchise Tax: COGS Audit Issues
(1) Salaried individuals providing direct
labor?
(2) What is scope of “direct labor”?
(3) Does worker have to “touch”
manufacturing equipment?
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Franchise Tax: COGS Audit Issues
(4) Mixer, cab and chassis
(5) PTO fuel
(6) Drive train fuel
a. Fuel to jobsite
b. Fuel to return
13
Franchise Tax: COGS Audit Issues
(7) Driver pay
a. While in cab
b. While at job site
(8) Repair and maintenance for
(i) mixer
(ii) cab and chassis
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Franchise Tax: COGS Audit Issues
Compare Texas sales tax ruling on mixers:
“…mobile transit mixer unit purchased
separately from cab/chassis…qualifies
for the [manufacturing] exemption.”
Comptroller Accession 200803078L
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Franchise Tax: COGS Audit Issues
Industry Manufacturing Standards:
ASTM
C94
TxDOT
421
ACI
301
All of these support fact that
manufacturing occurs during transit.
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TACA Working DRAFT Position
1. Salaried or hourly labor should be analyzed on
substantive basis to determine compensation that
meets reasonable definition of “direct labor costs.”
2. Mixer trucks and powering cab/chassis should be
allowed direct manufacturing cost because
manufacturing occurs during delivery and normally
during back haul, either to continue to process
product
or
prevent
damage
to
mixer.
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TACA Working DRAFT Position
3. Driver pay should be allocated on some reasonable
basis with ???% allocated to direct manufacturing
labor and ???% allocated to nondeductible
outbound transportation cost.
4. Fuel cost should be allocated on some reasonable
basis with ???% allocated to direct manufacturing
cost and ???% allocated to nondeductible outbound
transportation cost.
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TACA Working DRAFT Position
5.
Dump trucks would not be deductible.
6.
Repair and maintenance for mixer trucks would be
deductible at ???%.
7.
Other support?
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2013 Texas Legislature
28
2013: State Tax Issues
What is a tax increase?
(a) provisions that raise tax rates or
impose a new tax
vs.
(b) provisions that effectively raise tax
rates or expand tax bases by
eliminating exemptions or deductions
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2013: Technical Corrections
Legislators might take the position that
2013 changes to the franchise tax to
cause it to raise the money they thought it
would have raised when originally passed
are not tax increases.
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2013: Franchise Tax
Esoteric But Important
Franchise Tax Issues
1. Texas Supreme Court holding in Allcat
opens the door for traditional income
based tax on business entities in Texas.
2. The Bullock amendment does not ban
entity level income tax on partnerships.
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Texas Margin Tax
Steven Moore
Attorney
Jackson Walker LLP
Questions?