Texas proposes qualifications for reduced retailer/wholesaler tax rate

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June 2019

Overview

On June 21, the Texas Comptroller of Public Accounts published in the Texas Register proposed amendments to Rule 3.584, concerning Margin: Reports and Payments. One change involves treating a taxpayer as producing a product it sells (and therefore subject to a higher tax rate) when the taxpayer asserts a copyright or patent right over such product. This change appears to be inconsistent with prior guidance included in a 2015 Comptroller policy letter.

The proposed change could result in certain taxpayers losing the classification of a retailer/wholesaler and thus becoming subject to double the Texas franchise tax rate.

Taxpayers impacted by the proposed change may consider submitting comments to the Comptroller during the 30-day review period.

The takeaway

The proposed amendments to Texas Admin Code 3.584 may prevent some taxpayers from qualifying for the reduced tax rate as they now will be considered ‘producers’ of the goods they sell.  Specifically, taxpayers that contract with an unaffiliated third-party manufacturer (i.e., contract manufacturer) for the production of goods that meet the taxpayer’s specifications previously may have qualified for the reduced tax rate based on previous guidance.  

Under the operation of the proposed rule, taxpayers that use an unaffiliated third-party manufacturer to produce and assemble all component parts but maintain a patent right or software copyright on the product or a component part of the product being produced possibly could be considered producers for purposes of qualifying for the retailer/wholesaler tax rate.

Examples of other impacted taxpayers include apparel designers, consumer electronics brands, computer hardware companies, furniture retailers, chemical companies, medical equipment designers, vehicle component distributors, and businesses dealing in goods typically imported from foreign entities for domestic consumption.   In the event that these taxpayers or their affiliates hold a patent or copyright on the good or a component part of the goods being sold, they might be considered producers and ineligible for the reduced tax rate should the proposed rule go into effect. 

Interested taxpayers should avail themselves of the opportunity to submit comments during the 30-day review period to the Comptroller for consideration.  Comments on the proposal may be submitted to Teresa G. Bostick, Director, Tax Policy Division, P.O. Box 13528, Austin, Texas 78711-3528.

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Peter Michalowski

Peter Michalowski

State and Local Tax Leader, PwC US

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