Texas: Comptroller Published Proposed Apportionment Rule Changes in Texas Register

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Detailed Texas Development

On Friday November 13, 2020, the Texas Comptroller published proposed changes to Texas Administrative Rule § 3.591 Margin; Apportionment in the Texas Register. Many of the changes to the regulation focus on the sourcing of service receipts. Under Texas law, receipts from providing a service are apportioned to the location where the service is performed. If services are performed both inside and outside Texas, then the receipts are attributed to Texas in proportion to the fair value of the services that are rendered in Texas. The proposed regulation adds guidance on interpreting the location where a service is considered performed. Generally, a service will be performed at the location of the receipts-producing, end-product act or acts. This new test, so to speak, aligns with language adopted by the appeals court in the Sirius XM case. Recall, in that case the court held that the receipts-producing end-product act associated with the provision of satellite ratio service was when the taxpayer activated a customer’s chip set in his or her satellite-enabled radio. This occurred where the customer’s radio was located, which was likely the customer’s residence where their car was located.

The regulation further provides that if there is a receipts-producing, end-product act, the location of other acts will not be considered even if they are essential to the performance of the receipts-producing act. This is also consistent with Sirius XM, as the court held that producing the satellite radio programming content was a non-receipt producing act, albeit an essential one. If there is not a receipts-producing end-product act, then the locations of all essential acts may be considered in determining where a service is performed.  If services are performed in Texas and another state for a single charge, a fair value analysis is required, and the proposed regulation provides guidance on determining fair value, as well as a few examples.

The proposed regulation also revises the rules around capital assets and investments and clarifies that only the net gain from the sale of a capital asset is included in gross receipts. A net loss from the sale of a capital asset or investment is not included in gross receipts. Net gain or loss would be determined separately for each sale of a capital asset or investment.  This is a substantive change, as for reports originally due prior to January 1, 2021, a taxable entity adds the net gains and losses to determine total gross receipts from such transactions.

The proposed regulation revises numerous definitions and creates new rules for sourcing certain types of receipts from services, including advertising services, internet hosting services, and loan servicing activities.  “Internet hosting service” is defined to include real time or on-demand access to several products, including but not limited to, video gaming, entertainment streaming, marketplace provider services, and data processing.  The current rule that addresses “computer software services and programs” has been revised to provide guidance on sourcing receipts from “computer hardware and digital property.”  Ostensibly to aid in applying these rules, the proposed regulation includes several new examples. Please contact Jeff Benson at 214-840-6911 or Doug Maziur at 713-319-3866 with questions. 

This Week's Developments

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Sarah McGahan

Sarah McGahan

Managing Director, State & Local Tax, KPMG US