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Texas adopts significant changes to margin tax sourcing rule

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January 2021

Overview

The Comptroller adopted amendments to Texas Admin Code 3.591 — Margin: Apportionment, which will be republished in the Texas Register on January 15. 

The amendments include both new provisions and significant changes to existing provisions for the sourcing of revenue relating to the sale of general services, internet hosting, advertising, digital property, single-member LLC interests, capital assets and investments, financial derivatives, and broadcasting.

Most amendments do not provide a general applicable date. The current rule applies to “franchise tax reports originally due on or after January 1, 2008, except as otherwise noted.” Accordingly, unless a specific applicable date is provided as noted below, the Comptroller may apply changes retroactively. 

These amendments previously were published in proposed form on November 13, 2020. Please read our Insight for discussion of the proposed amendments. The final amendments include the following changes:

  • provides an optional effective date for the change to sourcing of TV and radio advertising receipts
  • clarifies the calculation and inclusion of net gains and losses
  • retains the 7.9% sourcing rate for sale of securities for reports due prior to January 1, 2021
  • retains the mileage ratio for transportation companies but switches to ‘compensated miles.’

The takeaway

The amendments to Texas Admin Code 3.591 may have a significant impact on service providers, especially out-of-state taxpayers in the technology industry, as Texas appears to be shifting from cost-of-performance to market sourcing, and may place a significant burden on service providers to determine and document the location of their customers.

All taxpayers should be aware of the potential retroactive application of most of the amendments based on the unchanged general application date, the lack of a new application date for the majority of the amendments, and the Comptroller’s acknowledgment that certain amendments will supersede prior inconsistent rulings.

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Peter Michalowski

Partner, State and Local Tax Consulting Leader, PwC US

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