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Texas proposes significant changes to margin tax sourcing rule

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November 2020


The Comptroller has submitted significant proposed amendments to Texas Admin Code 3.591 — Margin: Apportionment for publication in the Texas Register. The proposed amendments were filed with the Office of Secretary of State on November 2; it is anticipated that they will be published in the Texas Register on November 13.

The proposed 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 of the 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. 

Once published, the proposed amendments are subject to a 30-day period of public commentary. As noted in the proposed amendments, the earliest possible date of adoption is December 13, 2020. However, that date may be extended to the extent the Comptroller modifies the proposed amendments during or after the comment period. 

The takeaway

The proposed 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.

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

Publishing of the proposed amendments in the Texas Register, expected to be November 13, will trigger the formal rule adoption process and starts the 30-day period for public comment on the proposed amendments.

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Peter Michalowski

Partner, State and Local Tax Consulting Leader, PwC US

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