CHAPTER 171. FRANCHISE TAX
TAX CODE
TITLE 2. STATE TAXATION
SUBTITLE F. FRANCHISE TAX
CHAPTER 171. FRANCHISE TAX
SUBCHAPTER A. DEFINITIONS; TAX IMPOSED
Sec. 171.0001. GENERAL DEFINITIONS. In this chapter:
(1) "Affiliated group" means a group of one or more entities in
which a controlling interest is owned by a common owner or
owners, either corporate or noncorporate, or by one or more of
the member entities.
(2) "Assigned employee" has the meaning assigned by Section
91.001, Labor Code.
(3) "Banking corporation" means each state, national, domestic,
or foreign bank, whether organized under the laws of this state,
another state, or another country, or under federal law,
including a limited banking association organized under Subtitle
A, Title 3, Finance Code, and each bank organized under Section
25(a), Federal Reserve Act (12 U.S.C. Sections 611-631) (edge
corporations), but does not include a bank holding company as
that term is defined by Section 2, Bank Holding Company Act of
1956 (12 U.S.C. Section 1841).
(4) "Beginning date" means:
(A) for a taxable entity chartered or organized in this state,
the date on which the taxable entity's charter or organization
takes effect; and
(B) for any other taxable entity, the date on which the taxable
entity begins doing business in this state.
(5) "Charter" includes a limited liability company's certificate
of organization, a limited partnership's certificate of limited
partnership, and the registration of a limited liability
partnership.
(6) "Client company" means:
(A) a person that contracts with a license holder under Chapter
91, Labor Code, and is assigned employees by the license holder
under that contract; or
(B) a client of a temporary employment service, as that term is
defined by Section 93.001(2), Labor Code, to whom individuals are
assigned for a purpose described by that subdivision.
(7) "Combined group" means taxable entities that are part of an
affiliated group engaged in a unitary business and that are
required to file a group report under Section 171.1014.
(8) "Controlling interest" means:
(A) for a corporation, either more than 50 percent, owned
directly or indirectly, of the total combined voting power of all
classes of stock of the corporation, or more than 50 percent,
owned directly or indirectly, of the beneficial ownership
interest in the voting stock of the corporation;
(B) for a partnership, association, trust, or other entity other
than a limited liability company, more than 50 percent, owned
directly or indirectly, of the capital, profits, or beneficial
interest in the partnership, association, trust, or other entity;
and
(C) for a limited liability company, either more than 50
percent, owned directly or indirectly, of the total membership
interest of the limited liability company or more than 50
percent, owned directly or indirectly, of the beneficial
ownership interest in the membership interest of the limited
liability company.
(9) "Internal Revenue Code" means the Internal Revenue Code of
1986 in effect for the federal tax year beginning on January 1,
2007, not including any changes made by federal law after that
date, and any regulations adopted under that code applicable to
that period.
(10) "Lending institution" means an entity that makes loans and:
(A) is regulated by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance
Corporation, the Commodity Futures Trading Commission, the Office
of Thrift Supervision, the Texas Department of Banking, the
Office of Consumer Credit Commissioner, the Credit Union
Department, or any comparable regulatory body;
(B) is licensed by, registered with, or otherwise regulated by
the Department of Savings and Mortgage Lending;
(C) is a "broker" or "dealer" as defined by the Securities
Exchange Act of 1934 at 15 U.S.C. Section 78c; or
(D) provides financing to unrelated parties solely for
agricultural production.
(11) "Management company" means a corporation, limited liability
company, or other limited liability entity that conducts all or
part of the active trade or business of another entity (the
"managed entity") in exchange for:
(A) a management fee; and
(B) reimbursement of specified costs incurred in the conduct of
the active trade or business of the managed entity, including
"wages and cash compensation" as determined under Sections
171.1013(a) and (b).
(11-a) "Natural person" means a human being or the estate of a
human being. The term does not include a purely legal entity
given recognition as the possessor of rights, privileges, or
responsibilities, such as a corporation, limited liability
company, partnership, or trust.
(12) "Retail trade" means the activities described in Division G
of the 1987 Standard Industrial Classification Manual published
by the federal Office of Management and Budget.
(13) "Savings and loan association" means a savings and loan
association or savings bank, whether organized under the laws of
this state, another state, or another country, or under federal
law.
(13-a) "Security," for purposes of Sections 171.1011(g),
171.1011(g-2), and 171.106(f) only, has the meaning assigned by
Section 475(c)(2), Internal Revenue Code, and includes
instruments described by Sections 475(e)(2)(B), (C), and (D) of
that code.
(14) "Shareholder" includes a limited liability company's member
and a limited banking association's participant.
(15) "Staff leasing services company" means:
(A) a business entity that offers staff leasing services, as
that term is defined by Section 91.001, Labor Code; or
(B) a temporary employment service, as that term is defined by
Section 93.001, Labor Code.
(16) "Total revenue" means the total revenue of a taxable entity
as determined under Section 171.1011.
(17) "Unitary business" means a single economic enterprise that
is made up of separate parts of a single entity or of a commonly
controlled group of entities that are sufficiently
interdependent, integrated, and interrelated through their
activities so as to provide a synergy and mutual benefit that
produces a sharing or exchange of value among them and a
significant flow of value to the separate parts. In determining
whether a unitary business exists, the comptroller shall consider
any relevant factor, including whether:
(A) the activities of the group members are in the same general
line, such as manufacturing, wholesaling, retailing of tangible
personal property, insurance, transportation, or finance;
(B) the activities of the group members are steps in a
vertically structured enterprise or process, such as the steps
involved in the production of natural resources, including
exploration, mining, refining, and marketing; or
(C) the members are functionally integrated through the exercise
of strong centralized management, such as authority over
purchasing, financing, product line, personnel, and marketing.
(18) "Wholesale trade" means the activities described in
Division F of the 1987 Standard Industrial Classification Manual
published by the federal Office of Management and Budget.
Amended by:
Acts 2006, 79th Leg., 3rd C.S., Ch.
1, Sec. 2, eff. January 1, 2008.
Acts 2007, 80th Leg., R.S., Ch.
1282, Sec. 1, eff. January 1, 2008.
Sec. 171.0002. DEFINITION OF TAXABLE ENTITY. (a) Except as
otherwise provided by this section, "taxable entity" means a
partnership, limited liability partnership, corporation, banking
corporation, savings and loan association, limited liability
company, business trust, professional association, business
association, joint venture, joint stock company, holding company,
or other legal entity. The term includes a combined group. A
joint venture does not include joint operating or co-ownership
arrangements meeting the requirements of Treasury Regulation
Section 1.761-2(a)(3) that elect out of federal partnership
treatment as provided by Section 761(a), Internal Revenue Code.
(b) "Taxable entity" does not include:
(1) a sole proprietorship;
(2) a general partnership:
(A) the direct ownership of which is entirely composed of
natural persons; and
(B) the liability of which is not limited under a statute of
this state or another state, including by registration as a
limited liability partnership;
(3) a passive entity as defined by Section 171.0003; or
(4) an entity that is exempt from taxation under Subchapter B.
(c) "Taxable entity" does not include an entity that is:
(1) a grantor trust as defined by Sections 671 and
7701(a)(30)(E), Internal Revenue Code, all of the grantors and
beneficiaries of which are natural persons or charitable entities
as described in Section 501(c)(3), Internal Revenue Code,
excluding a trust taxable as a business entity pursuant to
Treasury Regulation Section 301.7701-4(b);
(2) an estate of a natural person as defined by Section
7701(a)(30)(D), Internal Revenue Code, excluding an estate
taxable as a business entity pursuant to Treasury Regulation
Section 301.7701-4(b);
(3) an escrow;
(4) a real estate investment trust (REIT) as defined by Section
856, Internal Revenue Code, and its "qualified REIT subsidiary"
entities as defined by Section 856(i)(2), Internal Revenue Code,
provided that:
(A) a REIT with any amount of its assets in direct holdings of
real estate, other than real estate it occupies for business
purposes, as opposed to holding interests in limited partnerships
or other entities that directly hold the real estate, is a
taxable entity; and
(B) a limited partnership or other entity that directly holds
the real estate as described in Paragraph (A) is not exempt under
this subdivision, without regard to whether a REIT holds an
interest in it;
(5) a real estate mortgage investment conduit (REMIC), as
defined by Section 860D, Internal Revenue Code;
(6) a nonprofit self-insurance trust created under Chapter 2212,
Insurance Code, or a predecessor statute;
(7) a trust qualified under Section 401(a), Internal Revenue
Code; or
(8) a trust or other entity that is exempt under Section
501(c)(9), Internal Revenue Code.
(d) An entity that can file as a sole proprietorship for federal
tax purposes is not a sole proprietorship for purposes of
Subsection (b)(1) and is not exempt under that subsection if the
entity is formed in a manner under the statutes of this state,
another state, or a foreign country that limit the liability of
the entity.
Amended by:
Acts 2007, 80th Leg., R.S., Ch.
1282, Sec. 2, eff. January 1, 2008.
Sec. 171.0003. DEFINITION OF PASSIVE ENTITY. (a) An entity is
a passive entity only if:
(1) the entity is a general or limited partnership or a trust,
other than a business trust;
(2) during the period on which margin is based, the entity's
federal gross income consists of at least 90 percent of the
following income:
(A) dividends, interest, foreign currency exchange gain,
periodic and nonperiodic payments with respect to notional
principal contracts, option premiums, cash settlement or
termination payments with respect to a financial instrument, and
income from a limited liability company;
(B) distributive shares of partnership income to the extent that
those distributive shares of income are greater than zero;
(C) capital gains from the sale of real property, gains from the
sale of commodities traded on a commodities exchange, and gains
from the sale of securities; and
(D) royalties, bonuses, or delay rental income from mineral
properties and income from other nonoperating mineral interests;
and
(3) the entity does not receive more than 10 percent of its
federal gross income from conducting an active trade or business.
(a-1) In making the computation under Subsection (a)(3), income
described by Subsection (a)(2) may not be treated as income from
conducting an active trade or business.
(b) The income described by Subsection (a)(2) does not include:
(1) rent; or
(2) income received by a nonoperator from mineral properties
under a joint operating agreement if the nonoperator is a member
of an affiliated group and another member of that group is the
operator under the same joint operating agreement.
Amended by:
Acts 2006, 79th Leg., 3rd C.S., Ch.
1, Sec. 2, eff. January 1, 2008.
Acts 2007, 80th Leg., R.S., Ch.
1282, Sec. 3, eff. January 1, 2008.
Sec. 171.0004. DEFINITION OF CONDUCTING ACTIVE TRADE OR
BUSINESS. (a) The definition in this section applies only to
Section 171.0003.
(b) An entity conducts an active trade or business if:
(1) the activities being carried on by the entity include one or
more active operations that form a part of the process of earning
income or profit; and
(2) the entity performs active management and operational
functions.
(c) Activities performed by the entity include activities
performed by persons outside the entity, including independent
contractors, to the extent the persons perform services on behalf
of the entity and those services constitute all or part of the
entity's trade or business.
(d) An entity conducts an active trade or business if assets,
including royalties, patents, trademarks, and other intangible
assets, held by the entity are used in the active trade or
business of one or more related entities.
(e) For purposes of this section:
(1) the ownership of a royalty interest or a nonoperating
working interest in mineral rights does not constitute conduct of
an active trade or business;
(2) payment of compensation to employees or independent
contractors for financial or legal services reasonably necessary
for the operation of the entity does not constitute conduct of an
active trade or business; and
(3) holding a seat on the board of directors of an entity does
not by itself constitute conduct of an active trade or business.
Amended by:
Acts 2006, 79th Leg., 3rd C.S., Ch.
1, Sec. 2, eff. January 1, 2008.
Acts 2007, 80th Leg., R.S., Ch.
1282, Sec. 4, eff. January 1, 2008.
Sec. 171.001. TAX IMPOSED. (a) A franchise tax is imposed on
each taxable entity that does business in this state or that is
chartered or organized in this state.
(b) The tax imposed under this chapter extends to the limits of
the United States Constitution and the federal law adopted under
the United States Constitution.
(c) The tax imposed under this section or Section 171.0011 is
not imposed on an entity if, during the period on which the
report is based, the entity qualifies as a passive entity as
defined by Section 171.0003.
Acts 1981, 67th Leg., p. 1691, ch. 389, Sec. 1, eff. Jan. 1,
1982. Amended by Acts 1991, 72nd Leg., ch. 901, Sec. 53(a), eff.
Aug. 26, 1991; Acts 1991, 72nd Leg., 1st C.S., ch. 5, Sec. 8.01,
eff. Jan. 1, 1992; Acts 1993, 73rd Leg., ch. 765, Sec. 7, eff.
Aug. 30, 1993; Acts 1995, 74th Leg., ch. 914, Sec. 12, eff. Sept.
1, 1995; Acts 1995, 74th Leg., ch. 1002, Sec. 1, eff. Jan. 1,
1996; Acts 1997, 75th Leg., ch. 1185, Sec. 1, eff. Jan. 1, 1998;
Acts 1999, 76th Leg., ch. 184, Sec. 1, eff. Jan. 1, 2000; Acts
2003, 78th Leg., ch. 209, Sec. 31, 32, eff. Oct. 1, 2003.
Amended by:
Acts 2006, 79th Leg., 3rd C.S., Ch.
1, Sec. 2, eff. January 1, 2008.
Acts 2007, 80th Leg., R.S., Ch.
1282, Sec. 5, eff. January 1, 2008.
Sec. 171.0011. ADDITIONAL TAX. (a) Except as provided by
Section 171.001(c), an additional tax is imposed on a taxable
entity that for any reason becomes no longer subject to the tax
imposed under this chapter.
(b) The additional tax is equal to the appropriate rate under
Section 171.002 of the taxable entity's taxable margin computed
on the period beginning on the day after the last day for which
the tax imposed on taxable margin or net taxable earned surplus
was computed and ending on the date the taxable entity is no
longer subject to the tax imposed under this chapter.
(c) The additional tax imposed and any report required by the
comptroller are due on the 60th day after the date the taxable
entity becomes no longer subject to the tax imposed under this
chapter.
(d) Except as otherwise provided by this section, the provisions
of this chapter apply to the tax imposed under this section.
(e) Repealed by Acts 2007, 80th Leg., R.S., Ch. 1282, Sec.
37(1), eff. January 1, 2008.
Added by Acts 1991, 72nd Leg., 1st C.S., ch. 5, Sec. 8.02, eff.
Jan. 1, 1992. Amended by Acts 1993, 73rd Leg., ch. 546, Sec. 1,
eff. Jan. 1, 1994.
Amended by:
Acts 2006, 79th Leg., 3rd C.S., Ch.
1, Sec. 2, eff. January 1, 2008.
Acts 2007, 80th Leg., R.S., Ch.
1282, Sec. 6, eff. January 1, 2008.
Acts 2007, 80th Leg., R.S., Ch.
1282, Sec. 37(1), eff. January 1, 2008.
Sec. 171.002. RATES; COMPUTATION OF TAX. (a) Subject to
Sections 171.003 and 171.1016 and except as provided by
Subsection (b), the rate of the franchise tax is one percent of
taxable margin.
(b) Subject to Sections 171.003 and 171.1016, the rate of the
franchise tax is 0.5 percent of taxable margin for those taxable
entities primarily engaged in retail or wholesale trade.
(c) A taxable entity is primarily engaged in retail or wholesale
trade only if:
(1) the total revenue from its activities in retail or wholesale
trade is greater than the total revenue from its activities in
trades other than the retail and wholesale trades;
(2) except as provided by Subsection (c-1), less than 50 percent
of the 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 also belongs; and
(3) the taxable entity does not provide retail or wholesale
utilities, including telecommunications services, electricity, or
gas.
(c-1) Subsection (c)(2) does not apply to total revenue from
activities in a retail trade described by Major Group 58 of the
Standard Industrial Classification Manual published by the
federal Office of Management and Budget.
Text of subsection as amended by Acts 2009, 81st Leg., R.S., Ch.
286, Sec. 1
Text of subsection effective until December 31, 2011
(d) A taxable entity is not required to pay any tax and is not
considered to owe any tax for a period if:
(1) the amount of tax computed for the taxable entity is less
than $1,000; or
(2) the amount of the taxable entity's total revenue from its
entire business is less than or equal to $1 million or the amount
determined under Section 171.006 per 12-month period on which
margin is based.
Text of subsection as amended by Acts 2009, 81st Leg., R.S., Ch.
286, Sec. 2
Text of subsection effective on January 01, 2012
(d) A taxable entity is not required to pay any tax and is not
considered to owe any tax for a period if:
(1) the amount of tax computed for the taxable entity is less
than $1,000; or
(2) the amount of the taxable entity's total revenue from its
entire business is less than or equal to $600,000 or the amount
determined under Section 171.006 per 12-month period on which
margin is based.
Acts 1981, 67th Leg., p. 1691, ch. 389, Sec. 1, eff. Jan. 1,
1982. Amended by Acts 1984, 68th Leg., 2nd C.S., ch. 31, art. 3,
part D, Sec. 1, eff. May 1, 1985; Acts 1987, 70th Leg., 2nd C.S.,
ch. 5, art. 2, pt. 1, Sec. 1, eff. Jan. 1, 1988; Acts 1987, 70th
Leg., 2nd C.S., ch. 5, art. 2, pt. 2, Sec. 1, eff. Jan. 1, 1990;
Acts 1991, 72nd Leg., 1st C.S., ch. 5, Sec. 8.031(a), eff. Jan.
1, 1992; Acts 1997, 75th Leg., ch. 1185, Sec. 2, eff. Jan. 1,
1998; Acts 1999, 76th Leg., ch. 394, Sec. 10, eff. Jan. 1, 2000.
Amended by:
Acts 2006, 79th Leg., 3rd C.S., Ch.
1, Sec. 2, eff. January 1, 2008.
Acts 2007, 80th Leg., R.S., Ch.
1282, Sec. 7, eff. January 1, 2008.
Acts 2009, 81st Leg., R.S., Ch.
286, Sec. 1(a), eff. January 1, 2010.
Acts 2009, 81st Leg., R.S., Ch.
286, Sec. 2(a), eff. January 1, 2012.
Sec. 171.0021. DISCOUNTS FROM TAX LIABILITY FOR SMALL
BUSINESSES.
Text of subsection effective until January 01, 2012
(a) A taxable entity is entitled to a discount of the tax
imposed under this chapter that the taxable entity is required to
pay after determining its taxable margin under Section 171.101,
applying the appropriate rate of the tax under Section 171.002(a)
or (b), and subtracting any other allowable credits, as follows:
(1) for a taxable entity for which the total revenue from its
entire business is greater than $300,000 but less than $400,000,
the taxable entity is entitled to a discount of 80 percent;
(2) for a taxable entity for which the total revenue from its
entire business is equal to or greater than $400,000 but less
than $500,000, the taxable entity is entitled to a discount of 60
percent;
(3) for a taxable entity for which the total revenue from its
entire business is equal to or greater than $500,000 but less
than $700,000, the taxable entity is entitled to a discount of 40
percent; and
(4) for a taxable entity for which the total revenue from its
entire business is equal to or greater than $700,000 but less
than $900,000, the taxable entity is entitled to a discount of 20
percent.
Text of subsection effective on January 01, 2012
(a) A taxable entity is entitled to a discount of the tax
imposed under this chapter that the taxable entity is required to
pay after determining its taxable margin under Section 171.101,
applying the appropriate rate of the tax under Section 171.002(a)
or (b), and subtracting any other allowable credits, as follows:
(1) for a taxable entity for which the total revenue from its
entire business is greater than $600,000 but less than $700,000,
the taxable entity is entitled to a discount of 40 percent; and
(2) for a taxable entity for which the total revenue from its
entire business is equal to or greater than $700,000 but less
than $900,000, the taxable entity is entitled to a discount of 20
percent.
(b) The amounts under Subsection (a) are subject to adjustment
as provided by Section 171.006.
Added by Acts 2007, 80th Leg., R.S., Ch.
1282, Sec. 8, eff. January 1, 2008.
Amended by:
Acts 2009, 81st Leg., R.S., Ch.
286, Sec. 3(a), eff. January 1, 2012.
Sec. 171.003. INCREASE IN RATE REQUIRES VOTER APPROVAL. (a) An
increase in a rate provided by Section 171.002(a) or (b) takes
effect only if approved by a majority of the registered voters
voting in a statewide referendum held on the question of
increasing the rate. The referendum must specify the increased
rate or rates.
(b) This section does not apply to a decrease in a rate provided
by Section 171.002(a) or (b). If a rate is decreased, this
section applies to any subsequent increase in that rate.
(c) This section does not apply to any change in the tax imposed
by this chapter in relation to:
(1) the manner in which the tax is computed, including the
determination of margin and taxable margin and any allowable
deductions or credits;
(2) the manner in which the tax is administered or enforced; or
(3) the applicability of the tax to certain entities.
Amended by:
Acts 2006, 79th Leg., 3rd C.S., Ch.
1, Sec. 2, eff. January 1, 2008.
Sec. 171.006. ADJUSTMENT OF ELIGIBILITY FOR NO TAX DUE,
DISCOUNTS, AND COMPENSATION DEDUCTION. (a) In this section,
"consumer price index" means the average over a state fiscal
biennium of the Consumer Price Index for All Urban Consumers
(CPI-U), U.S. City Average, published monthly by the United
States Bureau of Labor Statistics, or its successor in function.
(b) Beginning in 2010, on January 1 of each even-numbered year,
the amounts prescribed by Sections 171.002(d)(2), 171.0021, and
171.1013(c) are increased or decreased by an amount equal to the
amount prescribed by those sections on December 31 of the
preceding year multiplied by the percentage increase or decrease
during the preceding state fiscal biennium in the consumer price
index and rounded to the nearest $10,000.
(c) The amounts determined under Subsection (b) apply to a
report originally due on or after the date the determination is
made.
(d) The comptroller shall make the determination required by
this section and may adopt rules related to making that
determination.
(e) A determination by the comptroller under this section is
final and may not be appealed.
Amended by:
Acts 2006, 79th Leg., 3rd C.S., Ch.
1, Sec. 2, eff. January 1, 2008.
Acts 2007, 80th Leg., R.S., Ch.
1282, Sec. 9, eff. January 1, 2008.
Acts 2007, 80th Leg., R.S., Ch.
1282, Sec. 10, eff. January 1, 2008.
Sec. 171.1016. E-Z COMPUTATION AND RATE. (a) Notwithstanding
any other provision of this chapter, a taxable entity whose total
revenue from its entire business is not more than $10 million may
elect to pay the tax imposed under this chapter in the amount
computed and at the rate provided by this section rather than in
the amount computed and at the tax rate provided by Section
171.002.
(b) The amount of the tax for which a taxable entity that elects
to pay the tax as provided by this section is liable is computed
by:
(1) determining the taxable entity's total revenue from its
entire business, as determined under Section 171.1011;
(2) apportioning the amount computed under Subdivision (1) to
this state, as provided by Section 171.106, to determine the
taxable entity's apportioned total revenue; and
(3) multiplying the amount computed under Subdivision (2) by the
rate of 0.575 percent.
(c) A taxable entity that elects to pay the tax as provided by
this section may not take a credit, deduction, or other
adjustment that is not specifically authorized by this section.
(d) Section 171.0021 applies to a taxable entity that elects to
pay the tax as provided by this section.
(e) A reference in this chapter or other law to the rate of the
franchise tax means, as appropriate, the rate under Section
171.002 or, for a taxable entity that elects to pay the tax as
provided by this section, the rate under this section.
Added by Acts 2007, 80th Leg., R.S., Ch.
1282, Sec. 19, eff. January 1, 2008.
SUBCHAPTER B. EXEMPTIONS
Sec. 171.051. APPLICATION FOR EXEMPTION; EFFECTIVE DATE. (a)
Except as provided by Subsection (c) of this section, a
corporation may apply for an exemption under this subchapter by
filing with the comptroller, as provided by the rules of the
comptroller, evidence of the corporation's qualifications for the
exemption.
(b) If a corporation files the evidence establishing the
corporation's qualifications for an exemption within 15 months
after the last day of the calendar month in which the
corporation's charter or certificate of authority is dated, the
exemption is recognized, if it is finally established, as of the
date of the charter or certificate.
(c) The exemption provided by Section 171.063 of this code must
be established as provided by that section, but a corporation may
apply for and receive other exemptions as provided by this
section.
(d) Neither this section nor Section 171.063 of this code
requires a corporation that was granted a franchise tax exemption
before September 1, 1975, that was entitled to the exemption on
September 1, 1975, and that has held the exemption since that
date, to file an additional application, report, letter of
exemption, or other evidence of qualification for that exemption.
Acts 1981, 67th Leg., p. 1693, ch. 389, Sec. 1, eff. Jan. 1,
1982.
Sec. 171.052. CERTAIN CORPORATIONS. (a) Except as provided by
Subsection (c), an insurance organization, title insurance
company, or title insurance agent authorized to engage in
insurance business in this state now required to pay an annual
tax under Chapter 4 or 9, Insurance Code, measured by its gross
premium receipts is exempted from the franchise tax. A
nonadmitted insurance organization that is required to pay a
gross premium receipts tax during a tax year is exempted from the
franchise tax for that same tax year.
(b) Farm mutuals, local mutual aid associations, and burial
associations are not subject to the franchise tax.
(c) An entity is subject to the franchise tax for a tax year in
any portion of which the entity is in violation of an order
issued by the Texas Department of Insurance under Section
2254.003(b), Insurance Code, that is final after appeal or that
is no longer subject to appeal.
Acts 1981, 67th Leg., p. 1693, ch. 389, Sec. 1, eff. Jan. 1,
1982. Amended by Acts 1985, 69th Leg., ch. 30, Sec. 1, eff. Aug.
26, 1985; Acts 1993, 73rd Leg., ch. 546, Sec. 2, eff. Jan. 1,
1994; Acts 2001, 77th Leg., ch. 1275, Sec. 1, eff. Sept. 1, 2001;
Acts 2003, 78th Leg., ch. 209, Sec. 33, eff. Oct. 1, 2003.
Amended by:
Acts 2006, 79th Leg., 3rd C.S., Ch.
1, Sec. 3, eff. January 1, 2008.
Sec. 171.0525. EXEMPTION--CERTAIN INSURANCE COMPANIES. A
corporation that is a farm mutual insurance company, local mutual
aid association, or burial association is exempted from the
franchise tax.
Added by Acts 2003, 78th Leg., ch. 1274, Sec. 23, eff. April 1,
2005.
Sec. 171.053. EXEMPTION--RAILWAY TERMINAL CORPORATION. A
corporation organized as a railway terminal corporation and
having no annual net income from its business is exempted from
the franchise tax.
Acts 1981, 67th Leg., p. 1693, ch. 389, Sec. 1, eff. Jan. 1,
1982.
Sec. 171.055. EXEMPTION--OPEN-END INVESTMENT COMPANY. An
open-end investment company, as defined by the Investment Company
Act of 1940 (Section 80a-1 et seq., 15 U.S.C.), that is subject
to that Act and that is registered under The Securities Act
(Article 581-1 et seq., Vernon's Texas Civil Statutes) is
exempted from the franchise tax.
Acts 1981, 67th Leg., p. 1693, ch. 389, Sec. 1, eff. Jan. 1,
1982.
Sec. 171.056. EXEMPTION--CORPORATION WITH BUSINESS INTEREST IN
SOLAR ENERGY DEVICES. A corporation engaged solely in the
business of manufacturing, selling, or installing solar energy
devices, as defined by Section 171.107 of this code, is exempted
from the franchise tax.
Acts 1981, 67th Leg., p. 1693, ch. 389, Sec. 1, eff. Jan. 1,
1982.
Sec. 171.057. EXEMPTION--NONPROFIT CORPORATION ORGANIZED TO
PROMOTE COUNTY, CITY, OR ANOTHER AREA. A nonprofit corporation
organized solely to promote the public interest of a county,
city, town, or another area in the state is exempted from the
franchise tax.
Acts 1981, 67th Leg., p. 1694, ch. 389, Sec. 1, eff. Jan. 1,
1982.
Sec. 171.058. EXEMPTION--NONPROFIT CORPORATION ORGANIZED FOR
RELIGIOUS PURPOSES. A nonprofit corporation organized for the
purpose of religious worship is exempted from the franchise tax.
Acts 1981, 67th Leg., p. 1694, ch. 389, Sec. 1, eff. Jan. 1,
1982.
Sec. 171.059. EXEMPTION--NONPROFIT CORPORATION ORGANIZED TO
PROVIDE BURIAL PLACES. A nonprofit corporation organized to
provide places of burial is exempted from the franchise tax.
Acts 1981, 67th Leg., p. 1694, ch. 389, Sec. 1, eff. Jan. 1,
1982.
Sec. 171.060. EXEMPTION--NONPROFIT CORPORATION ORGANIZED FOR
AGRICULTURAL PURPOSES. A nonprofit corporation organized to hold
agricultural fairs and encourage agricultural pursuits is
exempted from the franchise tax.
Acts 1981, 67th Leg., p. 1694, ch. 389, Sec. 1, eff. Jan. 1,
1982.
Sec. 171.061. EXEMPTION--NONPROFIT CORPORATION ORGANIZED FOR
EDUCATIONAL PURPOSES. A nonprofit corporation organized solely
for educational purposes is exempted from the franchise tax.
Acts 1981, 67th Leg., p. 1694, ch. 389, Sec. 1, eff. Jan. 1,
1982. Amended by Acts 1995, 74th Leg., ch. 1002, Sec. 3, eff.
Jan. 1, 1996.
Sec. 171.062. EXEMPTION--NONPROFIT CORPORATION ORGANIZED FOR
PUBLIC CHARITY. A nonprofit corporation organized for purely
public charity is exempted from the franchise tax.
Acts 1981, 67th Leg., p. 1694, ch. 389, Sec. 1, eff. Jan. 1,
1982.
Sec. 171.063. EXEMPTION-NONPROFIT CORPORATION EXEMPT FROM
FEDERAL INCOME TAX. (a) The following corporations are exempt
from the franchise tax:
(1) a nonprofit corporation exempted from the federal income tax
under Section 501(c)(3), (4), (5), (6), (7), (8), (10), or (19),
Internal Revenue Code which in the case of a nonprofit hospital
means a hospital providing community benefits that include
charity care and government-sponsored indigent health care as set
forth in Subchapter D, Chapter 311, Health and Safety Code;
(2) a corporation exempted under Section 501(c)(2) or (25),
Internal Revenue Code, if the corporation or corporations for
which it holds title to property is either exempt from or not
subject to the franchise tax; and
(3) a corporation exempted from federal income tax under Section
501(c)(16), Internal Revenue Code.
(b) A corporation is entitled to an exemption under this section
based on the corporation's exemption from the federal income tax
if the corporation files with the comptroller evidence
establishing the corporation's exemption.
(c) A corporation's exemption under Subsection (b) of this
section is established by furnishing the comptroller with a copy
of the Internal Revenue Service's letter of exemption issued to
the corporation.
(d) If the Internal Revenue Service has not timely issued to a
corporation a letter of exemption, evidence establishing the
corporation's provisional exemption under this section is
sufficient if the corporation timely files with the comptroller
evidence that the corporation has applied in good faith for the
federal tax exemption. The evidence must be filed not later than
the 15th month after the day that is the last day of a calendar
month and that is nearest to the date of the corporation's
charter or certificate of authority.
(e) An exemption established under Subsection (c) or (d) of this
section is to be recognized, after it is finally established, as
of the date of the corporation's charter or certificate of
authority.
(f) If a corporation timely files evidence with the comptroller
under Subsection (d) of this section that it has applied for a
federal tax exemption and if the application is finally denied by
the Internal Revenue Service, this chapter does not impose a
penalty on the corporation from the date of its charter or
certificate of authority to the date of the final denial.
(g) If a corporation's federal tax exemption is withdrawn by the
Internal Revenue Service for failure of the corporation to
qualify or maintain its qualification for the exemption, the
corporation's exemption under this section ends on the effective
date of that withdrawal by the Internal Revenue Service. The
effective date of the withdrawal is considered the corporation's
beginning date for purposes of determining the corporation's
privilege periods and for all other purposes of this chapter.
(h) A requirement that a nonprofit hospital provide charity care
and community benefits under Subsection (a)(1) may be satisfied
by a donation of money to the Texas Healthy Kids Corporation
established by Chapter 109, Health and Safety Code, if:
(1) the money is donated to be used for a purpose described by
Section 109.033(c), Health and Safety Code; and
(2) not more than 10 percent of the charity care required under
any provision of Section 311.045, Health and Safety Code, may be
satisfied by the donation.
Acts 1981, 67th Leg., p. 1694, ch. 389, Sec. 1, eff. Jan. 1,
1982. Amended by Acts 1987, 70th Leg., ch. 324, Sec. 3, eff. Aug.
31, 1987; Acts 1989, 71st Leg., ch. 239, Sec. 1, eff. June 2,
1989; Acts 1991, 72nd Leg., 1st C.S., ch. 5, Sec. 8.04, eff. Jan.
1, 1992; Acts 1995, 74th Leg., ch. 781, Sec. 6, eff. Sept. 1,
1995; Acts 1995, 74th Leg., ch. 1002, Sec. 4, eff. Jan. 1, 1996;
Acts 1997, 75th Leg., ch. 550, Sec. 3, eff. Jan. 1, 1998; Acts
1997, 75th Leg., ch. 1185, Sec. 3, eff. Jan. 1, 1998; Acts 1999,
76th Leg., ch. 1467, Sec. 2.50, 2.51, eff. Jan. 1, 2000.
Sec. 171.064. EXEMPTION--NONPROFIT CORPORATION ORGANIZED FOR
CONSERVATION PURPOSES. A nonprofit corporation organized solely
to educate the public about the protection and conservation of
fish, game, other wildlife, grasslands, or forests is exempted
from the franchise tax.
Acts 1981, 67th Leg., p. 1695, ch. 389, Sec. 1, eff. Jan. 1,
1982. Amended by Acts 1995, 74th Leg., ch. 1002, Sec. 5, eff.
Jan. 1, 1996.
Sec. 171.065. EXEMPTION--NONPROFIT CORPORATION ORGANIZED TO
PROVIDE WATER SUPPLY OR SEWER SERVICES. A nonprofit water supply
or sewer service corporation organized in behalf of a city or
town under Chapter 67, Water Code, is exempted from the franchise
tax.
Acts 1981, 67th Leg., p. 1695, ch. 389, Sec. 1, eff. Jan. 1,
1982. Amended by Acts 1999, 76th Leg., ch. 62, Sec. 18.47, eff.
Sept. 1, 1999.
Sec. 171.066. EXEMPTION--NONPROFIT CORPORATION INVOLVED WITH
CITY NATURAL GAS FACILITY. A nonprofit corporation organized to
construct, acquire, own, lease, or operate a natural gas facility
in behalf and for the benefit of a city or residents of a city is
exempted from the franchise tax.
Acts 1981, 67th Leg., p. 1695, ch. 389, Sec. 1, eff. Jan. 1,
1982.
Sec. 171.067. EXEMPTION--NONPROFIT CORPORATION ORGANIZED TO
PROVIDE CONVALESCENT HOMES FOR ELDERLY. A nonprofit corporation
organized to provide a convalescent home or other housing for
persons who are at least 62 years old or who are handicapped or
disabled is exempted from the franchise tax, whether or not the
corporation is organized for purely public charity.
Acts 1981, 67th Leg., p. 1695, ch. 389, Sec. 1, eff. Jan. 1,
1982.
Sec. 171.068. EXEMPTION--NONPROFIT CORPORATION ORGANIZED TO
PROVIDE COOPERATIVE HOUSING. A nonprofit corporation engaged
solely in the business of owning residential property for the
purpose of providing cooperative housing for persons is exempted
from the franchise tax.
Acts 1981, 67th Leg., p. 1695, ch. 389, Sec. 1, eff. Jan. 1,
1982.
Sec. 171.069. EXEMPTION--MARKETING ASSOCIATIONS. A marketing
association incorporated under Chapter 52, Agriculture Code, is
exempted from the franchise tax.
Acts 1981, 67th Leg., p. 1695, ch. 389, Sec. 1, eff. Jan. 1,
1982. Amended by Acts 1995, 74th Leg., ch. 1002, Sec. 6, eff.
Jan. 1, 1996.
Sec. 171.070. EXEMPTION--LODGES. A lodge incorporated under
Article 1399 et seq., Revised Civil Statutes of Texas, 1925, is
exempted from the franchise tax.
Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,
1982.
Sec. 171.071. EXEMPTION--FARMERS' COOPERATIVE SOCIETY. A
farmers' cooperative society incorporated under Chapter 51,
Agriculture Code, is exempted from the franchise tax.
Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,
1982. Amended by Acts 1995, 74th Leg., ch. 1002, Sec. 7, eff.
Jan. 1, 1996.
Sec. 171.072. EXEMPTION--HOUSING FINANCE CORPORATION. A housing
finance corporation incorporated under the Texas Housing Finance
Corporations Act (Chapter 394, Local Government Code) is exempted
from the franchise tax.
Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,
1982. Amended by Acts 1987, 70th Leg., ch. 149, Sec. 44, eff.
Sept. 1, 1987.
Sec. 171.073. EXEMPTION--HOSPITAL LAUNDRY COOPERATIVE
ASSOCIATION. A hospital laundry cooperative association
incorporated under Subchapter A, Chapter 301, Health and Safety
Code, is exempted from the franchise tax.
Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,
1982. Amended by Acts 1991, 72nd Leg., ch. 14, Sec. 284(16), eff.
Sept. 1, 1991.
Sec. 171.074. EXEMPTION--DEVELOPMENT CORPORATION. A nonprofit
corporation organized under the Development Corporation Act
(Subtitle C1, Title 12, Local Government Code) is exempted from
the franchise tax.
Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,
1982. Amended by Acts 1983, 68th Leg., p. 1039, ch. 235, art. 7,
Sec. 2(a), eff. Sept. 1, 1983.
Amended by:
Acts 2007, 80th Leg., R.S., Ch.
885, Sec. 3.72, eff. April 1, 2009.
Sec. 171.075. EXEMPTION--COOPERATIVE ASSOCIATION. A cooperative
association incorporated under Subchapter B, Chapter 301, Health
and Safety Code, or under the Cooperative Association Act
(Article 1396--50.01, Vernon's Texas Civil Statutes) is exempted
from the franchise tax.
Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,
1982. Amended by Acts 1991, 72nd Leg., ch. 14, Sec. 284(29), eff.
Sept. 1, 1991.
Sec. 171.076. EXEMPTION--COOPERATIVE CREDIT ASSOCIATION. A
cooperative credit association incorporated under Chapter 55,
Agriculture Code, an organization organized under 12 U.S.C.
Section 2071, or an agricultural credit association regulated by
the Farm Credit Administration is exempted from the franchise
tax.
Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,
1982. Amended by Acts 1995, 74th Leg., ch. 1002, Sec. 8, eff.
Jan. 1, 1996; Acts 2001, 77th Leg., ch. 1263, Sec. 56, eff. Sept.
1, 2001.
Sec. 171.077. EXEMPTION--CREDIT UNION. A credit union
incorporated under Subtitle D, Title 3, Finance Code, is exempted
from the franchise tax.
Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,
1982. Amended by Acts 1999, 76th Leg., ch. 62, Sec. 7.93, eff.
Sept. 1, 1999.
Sec. 171.079. EXEMPTION--ELECTRIC COOPERATIVE CORPORATION. An
electric cooperative corporation incorporated under Chapter 161,
Utilities Code, that is not a participant in a joint powers
agency is exempted from the franchise tax.
Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,
1982. Amended by Acts 1995, 74th Leg., ch. 765, Sec. 2.27, eff.
Sept. 1, 1995; Acts 1999, 76th Leg., ch. 62, Sec. 18.48, eff.
Sept. 1, 1999.
Sec. 171.080. EXEMPTION--TELEPHONE COOPERATIVE CORPORATIONS. A
telephone cooperative corporation incorporated under Chapter 162,
Utilities Code, is exempted from the franchise tax.
Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,
1982. Amended by Acts 1999, 76th Leg., ch. 62, Sec. 18.49, eff.
Sept. 1, 1999.
Sec. 171.081. EXEMPTION--CORPORATION EXEMPT BY ANOTHER LAW.
Another statute that exempts a corporation from the franchise tax
is not affected by this chapter.
Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,
1982.
Sec. 171.082. EXEMPTION--CERTAIN HOMEOWNERS' ASSOCIATIONS. (a)
A nonprofit corporation is exempted from the franchise tax if:
(1) the corporation is organized and operated primarily to
obtain, manage, construct, and maintain the property in or of a
residential condominium or residential real estate development;
and
(2) the owners of individual lots, residences, or residential
units control at least 51 percent of the votes of the corporation
and that voting control, however acquired, is not held by:
(A) a single individual or family; or
(B) one or more developers, declarants, banks, investors, or
other similar parties.
(b) For purposes of this section, a condominium project is
considered residential if the project is legally restricted for
use as residences. A real estate development is considered
residential if the property is legally restricted for use as
residences.
Acts 1981, 67th Leg., p. 2758, ch. 752, Sec. 4, eff. May 1, 1982.
Amended by Acts 1995, 74th Leg., ch. 1002, Sec. 9, eff. Jan. 1,
1996.
Sec. 171.083. EXEMPTION--EMERGENCY MEDICAL SERVICE CORPORATION.
A nonprofit corporation that is organized for the sole purpose of
and engages exclusively in providing emergency medical services,
including rescue and ambulance services, is exempted from the
franchise tax.
Acts 1981, 67th Leg., p. 2785, ch. 752, Sec. 14, eff. May 1,
1982.
Sec. 171.084. EXEMPTION--CERTAIN TRADE SHOW PARTICIPANTS. (a)
A corporation is exempted from the franchise tax if:
(1) the only business activity conducted by or on behalf of the
corporation in this state is related to the solicitation of
orders conducted by representatives of the corporation who:
(A) solicit orders of personal property to be sent outside this
state for approval or rejection by the corporation and, if
approved, to be filled by shipment or delivery from a point
outside this state; or
(B) solicit orders in the name of or for the benefit of a
customer or prospective customer of the corporation, if the
orders are filled or intended to be filled by the customer or
prospective customer of the corporation by making orders to the
corporation described by Paragraph (A) of this subdivision; and
(2) the solicitation of orders is conducted on an occasional
basis at trade shows:
(A) promoted by wholesale centers;
(B) promoted by nonprofit trade or professional associations for
the purpose of facilitating the solicitation of orders from
members of the trade or profession; or
(C) held at municipally or county-owned convention centers or
meeting facilities.
(b) For purposes of this section, the solicitation of orders is
conducted on an occasional basis only if the solicitation is
conducted during not more than five periods during the business
period of the corporation to which a tax report applies and if no
single period during which solicitation is conducted is longer
than 120 hours.
(c) In this section, "wholesale center" means a permanent
wholesale facility that has permanent tenants and that promotes
at least four national or regional trade shows in a calendar
year. A tenant leasing space at a wholesale center for a period
longer than the period prescribed by Subsection (b) may qualify
for the exemption provided by this section only if the tenant
solicits orders on an occasional basis at the trade show as
prescribed by Subsection (b).
Added by Acts 1987, 70th Leg., ch. 778, Sec. 1, eff. May 1, 1988.
Amended by Acts 2003, 78th Leg., ch. 209, Sec. 34, eff. Oct. 1,
2003.
Sec. 171.085. EXEMPTION; RECYCLING OPERATION. A corporation
engaged solely in the business of recycling sludge, as defined by
Section 361.003, Solid Waste Disposal Act (Chapter 361, Health
and Safety Code), is exempted from the franchise tax.
Added by Acts 1989, 71st Leg., ch. 641, Sec. 3, eff. Sept. 1,
1991. Amended by Acts 1990, 71st Leg., 6th C.S., ch. 10, art. 2,
Sec. 33, eff. Sept. 6, 1990.
Sec. 171.087. EXEMPTION--NONPROFIT CORPORATION ORGANIZED FOR
STUDENT LOAN FUNDS OR STUDENT SCHOLARSHIP PURPOSES. A nonprofit
corporation organized solely to provide a student loan fund or
student scholarships is exempted from the franchise tax.
Added by Acts 1995, 74th Leg., ch. 1002, Sec. 10, eff. Jan. 1,
1996.
Sec. 171.088. EXEMPTION--NONCORPORATE ENTITY ELIGIBLE FOR
CERTAIN EXEMPTIONS. An entity that is not a corporation but
that, because of its activities, would qualify for a specific
exemption under this subchapter if it were a corporation,
qualifies for the exemption and is exempt from the tax in the
same manner and under the same conditions as a corporation.
Added by Acts 2006, 79th Leg., 3rd C.S., Ch.
1, Sec. 4, eff. January 1, 2008.
SUBCHAPTER C. DETERMINATION OF TAXABLE MARGIN; ALLOCATION AND
APPORTIONMENT
Sec. 171.101. DETERMINATION OF TAXABLE MARGIN. (a) The taxable
margin of a taxable entity is computed by:
(1) determining the taxable entity's margin, which is the lesser
of:
(A) 70 percent of the taxable entity's total revenue from its
entire business, as determined under Section 171.1011; or
(B) an amount computed by:
(i) determining the taxable entity's total revenue from its
entire business, under Section 171.1011;
(ii) subtracting, at the election of the taxable entity, either:
(a) cost of goods sold, as determined under Section 171.1012; or
(b) compensation, as determined under Section 171.1013; and
(iii) subtracting, in addition to any subtractions made under
Subparagraph (ii)(a) or (b), compensation, as determined under
Section 171.1013, paid to an individual during the period the
individual is serving on active duty as a member of the armed
forces of the United States if the individual is a resident of
this state at the time the individual is ordered to active duty
and the cost of training a replacement for the individual;
(2) apportioning the taxable entity's margin to this state as
provided by Section 171.106 to determine the taxable entity's
apportioned margin; and
(3) subtracting from the amount computed under Subdivision (2)
any other allowable deductions to determine the taxable entity's
taxable margin.
(b) Notwithstanding Subsection (a)(1)(B)(ii), a staff leasing
services company may subtract only compensation as determined
under Section 171.1013.
(c) In making a computation under this section, an amount that
is zero or less is computed as a zero.
(d) An election under Subsection (a)(1)(B)(ii) shall be made by
the taxable entity on its annual report and is effective only for
that annual report. A taxable entity shall notify the
comptroller of its election not later than the due date of the
annual report.
Acts 1981, 67th Leg., p. 1697, ch. 389, Sec. 1, eff. Jan. 1,
1982. Amended by Acts 1991, 72nd Leg., ch. 901, Sec. 53(b), eff.
Aug. 26, 1991; Acts 1991, 72nd Leg., 1st C.S., ch. 5, Sec. 8.05,
eff. Jan. 1, 1992.
Amended by:
Acts 2006, 79th Leg., 3rd C.S., Ch.
1, Sec. 5, eff. January 1, 2008.
Acts 2007, 80th Leg., R.S., Ch.
1282, Sec. 11, eff. January 1, 2008.
Sec. 171.1011. DETERMINATION OF TOTAL REVENUE FROM ENTIRE
BUSINESS. (a) In this section, a reference to an Internal
Revenue Service form includes a variant of the form. For
example, a reference to Form 1120 includes Forms 1120-A, 1120-S,
and other variants of Form 1120. A reference to an Internal
Revenue Service form also includes any subsequent form with a
different number or designation that substantially provides the
same information as the original form.
(b) In this section, a reference to an amount reportable as
income on a line number on an Internal Revenue Service form is
the amount entered to the extent the amount entered complies with
federal income tax law and includes the corresponding amount
entered on a variant of the form, or a subsequent form, with a
different line number to the extent the amount entered complies
with federal income tax law.
(c) Except as provided by this section, and subject to Section
171.1014, for the purpose of computing its taxable margin under
Section 171.101, the total revenue of a taxable entity is:
(1) for a taxable entity treated for federal income tax purposes
as a corporation, an amount computed by:
(A) adding:
(i) the amount reportable as income on line 1c, Internal Revenue
Service Form 1120;
(ii) the amounts reportable as income on lines 4 through 10,
Internal Revenue Service Form 1120; and
(iii) any total revenue reported by a lower tier entity as
includable in the taxable entity's total revenue under Section
171.1015(b); and
(B) subtracting:
(i) bad debt expensed for federal income tax purposes that
corresponds to items of gross receipts included in Subsection
(c)(1)(A) for the current reporting period or a past reporting
period;
(ii) to the extent included in Subsection (c)(1)(A), foreign
royalties and foreign dividends, including amounts determined
under Section 78 or Sections 951-964, Internal Revenue Code;
(iii) to the extent included in Subsection (c)(1)(A), net
distributive income from a taxable entity treated as a
partnership or as an S corporation for federal income tax
purposes;
(iv) allowable deductions from Internal Revenue Service Form
1120, Schedule C, to the extent the relating dividend income is
included in total revenue;
(v) to the extent included in Subsection (c)(1)(A), items of
income attributable to an entity that is a disregarded entity for
federal income tax purposes; and
(vi) to the extent included in Subsection (c)(1)(A), other
amounts authorized by this section;
(2) for a taxable entity treated for federal income tax purposes
as a partnership, an amount computed by:
(A) adding:
(i) the amount reportable as income on line 1c, Internal Revenue
Service Form 1065;
(ii) the amounts reportable as income on lines 4, 6, and 7,
Internal Revenue Service Form 1065;
(iii) the amounts reportable as income on lines 3a and 5 through
11, Internal Revenue Service Form 1065, Schedule K;
(iv) the amounts reportable as income on line 17, Internal
Revenue Service Form 8825;
(v) the amounts reportable as income on line 11, plus line 2 or
line 45, Internal Revenue Service Form 1040, Schedule F; and
(vi) any total revenue reported by a lower tier entity as
includable in the taxable entity's total revenue under Section
171.1015(b); and
(B) subtracting:
(i) bad debt expensed for federal income tax purposes that
corresponds to items of gross receipts included in Subsection
(c)(2)(A) for the current reporting period or a past reporting
period;
(ii) to the extent included in Subsection (c)(2)(A), foreign
royalties and foreign dividends, including amounts determined
under Section 78 or Sections 951-964, Internal Revenue Code;
(iii) to the extent included in Subsection (c)(2)(A), net
distributive income from a taxable entity treated as a
partnership or as an S corporation for federal income tax
purposes;
(iv) to the extent included in Subsection (c)(2)(A), items of
income attributable to an entity that is a disregarded entity for
federal income tax purposes; and
(v) to the extent included in Subsection (c)(2)(A), other
amounts authorized by this section; or
(3) for a taxable entity other than a taxable entity treated for
federal income tax purposes as a corporation or partnership, an
amount determined in a manner substantially equivalent to the
amount for Subdivision (1) or (2) determined by rules that the
comptroller shall adopt.
(d) Subject to Section 171.1014, a taxable entity that is part
of a federal consolidated group shall compute its total revenue
under Subsection (c) as if it had filed a separate return for
federal income tax purposes.
(e) A taxable entity that owns an interest in a passive entity
shall exclude from the taxable entity's total revenue the taxable
entity's share of the net income of the passive entity, but only
to the extent the net income of the passive entity was generated
by the margin of any other taxable entity.
(f) A taxable entity shall exclude from its total revenue, to
the extent included under Subsection (c)(1)(A), (c)(2)(A), or
(c)(3), flow-through funds that are mandated by law or fiduciary
duty to be distributed to other entities, including taxes
collected from a third party by the taxable entity and remitted
by the taxable entity to a taxing authority.
(g) A taxable entity shall exclude from its total revenue, to
the extent included under Subsection (c)(1)(A), (c)(2)(A), or
(c)(3), only the following flow-through funds that are mandated
by contract to be distributed to other entities:
(1) sales commissions to nonemployees, including split-fee real
estate commissions;
(2) the tax basis as determined under the Internal Revenue Code
of securities underwritten; and
(3) subcontracting payments handled by the taxable entity to
provide services, labor, or materials in connection with the
actual or proposed design, construction, remodeling, or repair of
improvements on real property or the location of the boundaries
of real property.
(g-1) A taxable entity that is a lending institution shall
exclude from its total revenue, to the extent included under
Subsection (c)(1)(A), (c)(2)(A), or (c)(3), proceeds from the
principal repayment of loans.
(g-2) A taxable entity shall exclude from its total revenue, to
the extent included under Subsection (c)(1)(A), (c)(2)(A), or
(c)(3), the tax basis as determined under the Internal Revenue
Code of securities and loans sold.
(g-3) A taxable entity that provides legal services shall
exclude from its total revenue:
(1) to the extent included under Subsection (c)(1)(A),
(c)(2)(A), or (c)(3), the following flow-through funds that are
mandated by law, contract, or fiduciary duty to be distributed to
the claimant by the claimant's attorney or to other entities on
behalf of a claimant by the claimant's attorney:
(A) damages due the claimant;
(B) funds subject to a lien or other contractual obligation
arising out of the representation, other than fees owed to the
attorney;
(C) funds subject to a subrogation interest or other third-party
contractual claim; and
(D) fees paid an attorney in the matter who is not a member,
partner, shareholder, or employee of the taxable entity;
(2) to the extent included under Subsection (c)(1)(A),
(c)(2)(A), or (c)(3), reimbursement of the taxable entity's
expenses incurred in prosecuting a claimant's matter that are
specific to the matter and that are not general operating
expenses; and
(3) $500 per pro bono services case handled by the attorney, but
only if the attorney maintains records of the pro bono services
for auditing purposes in accordance with the manner in which
those services are reported to the State Bar of Texas.
(g-4) A taxable entity that is a pharmacy cooperative shall
exclude from its total revenue, to the extent included under
Subsection (c)(1)(A), (c)(2)(A), or (c)(3), flow-through funds
from rebates from pharmacy wholesalers that are distributed to
the pharmacy cooperative's shareholders.
(g-6) A taxable entity that is a qualified destination
management company as defined by Section 151.0565 shall exclude
from its total revenue, to the extent included under Subsection
(c)(1)(A), (c)(2)(A), or (c)(3), payments made to other persons
to provide services, labor, or materials in connection with the
provision of destination management services as defined by
Section 151.0565.
(h) If the taxable entity belongs to an affiliated group, the
taxable entity may not exclude payments described by Subsection
(f), (g), (g-1), (g-2), (g-3), or (g-4) that are made to entities
that are members of the affiliated group.
(i) Except as provided by Subsection (g), a payment made under
an ordinary contract for the provision of services in the regular
course of business may not be excluded.
(j) Any amount excluded under this section may not be included
in the determination of cost of goods sold under Section 171.1012
or the determination of compensation under Section 171.1013.
(k) A taxable entity that is a staff leasing services company
shall exclude from its total revenue payments received from a
client company for wages, payroll taxes on those wages, employee
benefits, and workers' compensation benefits for the assigned
employees of the client company.
(l) For purposes of Subsection (g)(1):
(1) "Sales commission" means:
(A) any form of compensation paid to a person for engaging in an
act for which a license is required by Chapter 1101, Occupations
Code; or
(B) compensation paid to a sales representative by a principal
in an amount that is based on the amount or level of certain
orders for or sales of the principal's product and that the
principal is required to report on Internal Revenue Service Form
1099-MISC.
(2) "Principal" means a person who:
(A) manufactures, produces, imports, distributes, or acts as an
independent agent for the distribution of a product for sale;
(B) uses a sales representative to solicit orders for the
product; and
(C) compensates the sales representative wholly or partly by
sales commission.
(m) A taxable entity shall exclude from its total revenue, to
the extent included under Subsection (c)(1)(A), (c)(2)(A), or
(c)(3), dividends and interest received from federal obligations.
(m-1) A taxable entity that is a management company shall
exclude from its total revenue reimbursements of