Texas State Tax Rulings
Free plain-English summaries of state tax letter rulings and advisory opinions issued in Texas, with full citations and the original source on every page.
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If a corporation stops doing business in Texas and later resumes, does it lose its Texas franchise-tax business loss, and is that the same as a federal NOL?
No - stopping and later resuming Texas business does not by itself destroy a franchise-tax 'business loss,' but the loss can only be used while it is still within its carryforward period. The Texas fr…
Does a corporation building a pork-processing plant in a Texas Strategic Investment Area qualify for the franchise-tax capital investment credit, and possibly the jobs creation credit?
Yes. On the facts presented, the Comptroller concluded that the corporation could claim the pre-2008 Texas franchise-tax capital investment credit, and noted it might also qualify for the jobs creatio…
When the IRS audits a corporation and changes its income, must the corporation file an amended Texas franchise-tax report, and by when?
Yes. Under Tax Code Sec. 171.212(a)(1), a corporation must file an amended franchise-tax report when its net taxable earned surplus changes as a result of an IRS audit or other adjustment, and Sec. 17…
Can a corporation use push-down accounting to revalue its assets when computing taxable capital for the Texas franchise tax?
No. For the pre-2008 franchise tax, a corporation generally computes surplus, assets, and debts under generally accepted accounting principles (GAAP) (Tax Code Sec. 171.109(b)), but Sec. 171.109(m) an…
Is there a 50% limit on the base amount for the Texas franchise-tax research and development credit, and will penalties be waived where the form did not show it?
Yes - there is a base amount limit of 50% of current qualified research expenses for the franchise-tax research and development credit. A return preparer pointed out that the Texas Schedule F form and…
How broadly does the Tax Code Sec. 111.206 exception to the statute of limitations reach - only to a regulatory final determination, or to any refund from that period?
Narrowly. This internal Comptroller memo resolves a disagreement between the Audit Division and the Tax Policy Division over Tax Code Sec. 111.206, which creates an exception to the general statute of…
How are the payments an oil-and-gas producer receives under commodity swap agreements treated for Texas franchise-tax apportionment?
The full gross amount received counts as gross receipts, not the net. An oil-and-gas producer entering non-netted commodity swaps asked how the payments it receives are treated for franchise-tax appor…
How does a corporation obtain an exemption from the Texas franchise tax, and what does it have to submit?
Texas has no separate exemption application form. Under Tax Code Sec. 171.051, a corporation obtains a franchise-tax exemption by filing evidence of its qualification, and Franchise Tax Rule 3.541 giv…
For the Texas franchise tax, when are dividends and interest a corporation receives from a bank counted as Texas gross receipts?
It depends on where the bank is based. For the pre-2008 franchise tax, dividends and interest from a national bank are Texas gross receipts only if the bank's principal place of business is in Texas (…
How are insurers and HMOs taxed on the coverages they issue for the Children's Health Insurance Program (CHIP), and what stays taxable?
This internal Comptroller memo summarizes how insurers and HMOs are taxed on Children's Health Insurance Program (CHIP) coverages. Their CHIP coverages are exempt from general revenue premium taxes (T…
Can a partner in a licensed title agency claim the Texas franchise-tax exemption for title insurance agents subject to the premium receipts tax?
No. This internal Comptroller memo explains that a taxpayer who was one of several partners owning a licensed title agency was denied a franchise-tax exemption. The exemption for licensed insurance co…
Does an unincorporated nonprofit association have to file or pay Texas franchise tax, and must it send proof of its nonprofit status?
No. The Texas franchise tax is simply not imposed on unincorporated entities or associations, so an unincorporated nonprofit association does not file or pay it and does not need to send proof of nonp…
For Texas franchise-tax apportionment, what do 'location of payor' and 'legal domicile' mean, and are they the same for taxable capital and earned surplus?
The definitions are the same for both taxable capital and earned surplus apportionment. Under Franchise Tax Rule 3.549(b)(7), the 'location of payor' is the payor's legal domicile. Under Rule 3.549(b)…
Can a single-member LLC that is a federally disregarded entity get its own Texas franchise-tax exemption based on its tax-exempt sole member?
No. A single-member LLC treated as a federally disregarded entity cannot obtain its own Texas franchise-tax exemption. Tax Code Sec. 171.063(b) exempts a corporation that is exempt under IRC Sec. 501(…
After the Bandag decision, does a foreign corporation's Certificate of Authority to do business in Texas, by itself, create franchise-tax nexus?
No - not any more. The Comptroller had historically treated a foreign corporation's Certificate of Authority (COA) to transact business in Texas as sufficient nexus for the franchise tax under Tax Cod…
Can a nonprofit like a Friends of the Library group get a Texas franchise-tax exemption, and does that also exempt its purchases from sales tax?
The organization qualified for a franchise-tax exemption but not a sales-tax exemption. The Comptroller confirmed that the nonprofit (a library-support group that had requested exemption under Tax Cod…
Does the Boys and Girls Clubs of America qualify as a qualified after-school care program operator for the Texas franchise-tax after-school care credit?
Yes. For purposes of the Texas franchise-tax credit for after-school care, the Comptroller confirmed that a local Boys and Girls Club is a qualified after-school care program operator. Franchise Tax R…
When the IRS revokes a Texas nonprofit's federal 501(c)(3) status but the nonprofit appeals, what happens to its Texas sales-tax and franchise-tax exemptions, and from when?
The state exemptions continue during a bona fide federal appeal, and any loss is prospective from the IRS notice date. The Comptroller normally accepts the IRS's final determination and automatically …
How does a Texas S corporation and its chain of Qualified Subchapter S Subsidiaries (QSSSs) compute taxable earned surplus, and can a parent exclude cash distributions from its subsidiary?
Each corporation reports its own earned surplus, and intercompany distributions can be excluded if the rule's requirements are met. For a Texas S corporation and its chain of Qualified Subchapter S Su…
Is interest a bank earns on Federal Funds held at a Texas-domiciled correspondent bank a Texas gross receipt for franchise-tax apportionment?
Yes, under the law as it stood. For franchise-tax reports due on or after January 1, 2000, interest a bank earns on Federal Funds held in a Texas-domiciled correspondent bank is apportioned based on t…
Does a short-lived Delaware LLC that buys a Texas business's assets and liquidates the same day owe Texas franchise tax, and how is the seller's sale receipt sourced?
No franchise tax is due from the short-lived buyer. A Delaware LLC ('Buyer') was formed within two weeks of the deal solely to buy a Texas company's operating assets, then liquidate and distribute the…
Is a production credit association, a federal instrumentality under the Farm Credit System, immune from Texas franchise (state) tax?
No. The Comptroller denied the production credit association's request for a Texas state tax exemption. On February 20, 2001 the U.S. Supreme Court decided Director of Revenue of Missouri v. CoBank AC…
Does a Georgia LLC owe Texas franchise tax if it only monitors Texas residents' health by phone from Georgia, and does needing a certificate of authority decide the question?
Monitoring Texas residents solely by telephone from Georgia is not, by itself, doing business in Texas, and the certificate-of-authority question is separate. A Georgia LLC provided life-expectancy ev…
How did Texas apportion the pre-2008 franchise tax to the state, and does it follow the Multistate Tax Compact's formula?
Texas apportioned the pre-2008 franchise tax using a single gross-receipts factor — Texas gross receipts over total gross receipts — and did not adopt the Multistate Tax Compact's three-factor UDITPA …
How does an out-of-state company apportion service revenue to Texas for the franchise tax when it cannot break down receipts by state?
Service receipts are apportioned to where the services are performed, and a company that cannot trace revenue to each state may use another reasonable method. A Georgia-based corporation performed ser…
If a company keeps legal title but transfers the beneficial (equitable) ownership of its assets to limited partnerships, who owes Texas franchise tax on the income?
The income follows the beneficial owner, and only the corporate general partner owes the tax. A company kept legal title to its assets but transferred the equitable interest to two limited partnership…
How does the $150,000 franchise-tax gross-receipts threshold work, and how are 'gross receipts everywhere' computed for each component of the tax?
The $150,000 figure is an all-or-nothing threshold, not a deduction. For franchise-tax reports originally due on or after January 1, 2000, a corporation owes no franchise tax if its gross receipts fro…
Does an out-of-state touring band's corporation owe Texas franchise tax if it performs in Texas only a few days a year, even without corporate-income nexus?
Yes. A corporate touring band that performs in Texas - even about seven days out of the year - is 'doing business' in Texas and is subject to the franchise tax. Tax Code Sec. 171.001 imposes the tax o…
For the taxable-capital component of the Texas franchise tax, are accrued reserves like warranty reserves or accrued employee costs treated as debt or as part of surplus?
They are part of surplus, not debt. For the taxable-capital component of the franchise tax, Tax Code Sec. 171.109(a)(1) defines surplus as a corporation's net assets minus its stated capital and expre…
For a tour company that sells all-inclusive tour packages, how much of the package revenue is a Texas gross receipt for the franchise tax?
Only the part of the tour performed in Texas is a Texas gross receipt; total package revenue is receipts everywhere. A corporation assembled complete tour packages, sold them, and acted as tour guide;…
How does a Texas business-loss carryforward work for the franchise tax, and must a corporation use the loss in a year when it already owes no tax?
A business loss carries forward up to five years, but it must be applied to each succeeding year's earned surplus - even if no tax is otherwise due. Texas franchise tax gives no deduction against earn…
After emerging from Chapter 11, must a corporation using fresh start accounting for financial reporting also use it for the Texas franchise-tax taxable-capital report, and can it write down assets?
It must follow whatever method GAAP requires, but it still cannot write down assets in computing surplus. A company emerged from a Chapter 11 bankruptcy (finalized January 27, 2000) and used fresh sta…
When a Delaware corporation converts into a Delaware LLC (and then an LP), is it the same entity for Texas franchise tax, and can the LLC use the corporation's business losses?
It is treated as the same entity, and the LLC keeps the corporation's business losses. A Delaware C corporation converted under Delaware law to a Delaware LLC in April 2000, with the LLC set to conver…
How is 'surplus' defined for the taxable-capital component of the Texas franchise tax?
Surplus is a corporation's net assets minus its stated capital. For the taxable-capital component of the franchise tax, Tax Code Sec. 171.109(a)(1) defines surplus as the net assets of a corporation m…
Are the gross proceeds a company receives when debt securities held as inventory are called or mature counted as gross receipts for Texas franchise-tax apportionment?
Yes. The Comptroller decided that the gross proceeds received from the calls and maturities of debt securities held as inventory are gross receipts for franchise-tax apportionment purposes. The letter…
In a Section 338(h)(10) deemed asset sale of an S corporation holding QSSSs, which entities recognize gain for Texas franchise tax, and how is the goodwill gain sourced?
The QSSS subsidiaries recognize the deemed-asset-sale gain, the holding parent recognizes none, and goodwill is sourced to the payor's legal domicile. In a proposed sale of a Texas S corporation (ABC …
If a corporation files the No Tax Due Information Report, does it keep its business-loss carryover, and what is the difference between franchise-tax extension forms 05-141 and 05-110?
A no-tax-due filer keeps its remaining loss years but still must apply the loss against earned surplus, and the two extension forms are interchangeable. On the business-loss questions, Tax Code Sec. 1…
For the franchise-tax throwback rule on partnership sales, do you look at whether the corporation or the partnership is taxable in the destination state, and does general- versus limited-partner status matter?
You look at whether the corporation, not the partnership, is subject to tax in the destination state, and general- versus limited-partner status changes the answer. Addressing the throwback rule for g…
Must a non-licensed captive insurer that pays the Texas insurance premium tax also pay Texas franchise tax, or is it exempt?
The insurer is exempt from franchise tax, and its franchise-tax payments are credited against the premium-tax assessment. Following an audit, the Comptroller assessed a non-licensed Vermont captive in…
If a corporation has under $150,000 in gross receipts and owes no franchise tax, must it file the regular (long) form to keep using a business-loss carryover, and does a no-tax-due year still consume the loss?
A no-tax-due year still consumes the loss, and filing the long form is how you preserve or add to the carryover. A taxpayer with a business-loss carryover and under $150,000 in gross receipts everywhe…
Now that the long-form requirement is gone, must a short-form filer still reduce its business-loss carryover, and does using the short form extend the loss carryforward period?
A short-form filer still must use its loss each year, and the short form does not extend the carryforward period. After the instruction requiring the long form to preserve a business-loss carryover wa…
Does using a Texas-based stockbroker to trade for an out-of-state limited partnership create Texas franchise-tax nexus for the partnership's foreign corporate general partner?
No — so long as the broker does not represent the partnership in dealing with its customers. A foreign corporation was the general partner of a foreign limited partnership that does no business in Tex…
Is the 'assets minus debts minus stated capital' formula used to compute earned surplus, and do already-paid expenses count as debts?
That formula computes surplus for the taxable-capital component, not earned surplus, and expenses already paid are generally not debts. A taxpayer completing the short (no tax due) form was unsure how…
For the Texas franchise tax, can a leveraged ESOP's unpaid-shares contra account be netted against surplus, and is an ESOP counted as one shareholder for the officer/director compensation add-back?
The unpaid-ESOP account nets against surplus only if it is a statutory debt, and an ESOP is one shareholder if the shares are held in its name. A corporation with a leveraged ESOP asked how to report …
Does the Texas franchise tax allow the phased-in IRC Section 179 expense deduction in computing earned surplus, and which year's amount applies to a 2000 report?
Yes - Texas allows the IRC Section 179 phase-in for earned surplus, and the amount depends on the corporation's federal accounting period. Tax Code Sec. 171.001(b)(5) ties the Texas definition of the …
Could a corporation use the remainder of a 1996 Texas franchise-tax business loss on its 2000 final report after using part on its 2000 annual report?
Yes. Section 171.110(d) allowed a business loss to offset net taxable earned surplus for up to five taxable years after the loss year. On the facts presented, a loss created on the corporation's 1996 …
When did a strategic-investment-area project qualify for Texas's former capital investment credit, and could pre-2000 costs enter the credit calculation?
Property first placed in service in a strategic investment area on or after January 1, 2000 could qualify, and eligible expenditures incurred before that date could be included in the credit computati…
When could a homeowners' or property owners' association qualify for the former Texas franchise-tax exemption, and was there a fixed percentage of lots that had to be sold?
An association could be considered only if it was a nonprofit corporation organized and operated primarily for residential property, the development was legally restricted to residential use, and indi…
Did an electric utility's securitization issuer owe pre-2008 franchise tax on transition charges or short-term earnings, and did the letter decide property tax?
The described issuer excluded transition-property transactions, transition charges, and short-term earnings on accumulated bond funds and the initial cash requirement from taxable capital and taxable …
For pre-2008 Texas franchise tax, could an LLC exclude contributed property with a $1,000 tax basis and $600,000 agreed value from taxable capital?
No. A corporation contributed property with a $1,000 tax basis and $600,000 fair market value to an LLC taxed federally as a partnership. The Comptroller said the LLC's pre-2008 taxable capital includ…
Did a utility-owned LLC include transition charges and interest earned while temporarily investing those receipts in taxable capital or taxable earned surplus?
No. TXU Electric's proposed wholly owned LLC would issue bonds secured by transition property, receive transition charges, and temporarily invest those receipts. Section 39.311 excluded the described …
How did the former Texas franchise tax treat an electric utility LLC's transition-property transactions and interest received by its bondholders?
The LLC excluded the transfer and ownership of transition property and receipt of transition charges from taxable capital and taxable earned surplus under Section 39.311. A bondholder subject to Texas…
Did federal tax deferral for an I.R.C. Section 1031 exchange also defer the exchange gain in the earned-surplus component of the former Texas franchise tax?
Yes, for the earned-surplus component described. Because that component began with federal net taxable income, a corporation's federal Section 1031 tax deferral was reflected in taxable earned surplus…
Did federal tax deferral for an I.R.C. Section 1031 exchange also defer the exchange gain in the earned-surplus component of the former Texas franchise tax?
Yes, for the earned-surplus component described. Because that component began with federal net taxable income, a corporation's federal Section 1031 tax deferral was reflected in taxable earned surplus…
Did a Virginia corporation create Texas franchise-tax nexus by selling merchandise from a trailer at one Texas NASCAR event?
Yes. Assuming the company was a corporation without a Texas certificate of authority, its merchandise sales from a trailer at one Texas NASCAR event in 1998 were sufficient to subject it to both the t…
Did a Delaware corporation create Texas franchise-tax nexus by keeping a Texas checking account and hiring a Texas resident as president?
No, not by themselves. A Delaware corporation's Texas checking account and employment of a Texas resident as president did not subject it to franchise tax. If the president conducted the corporation's…
How were a bank's interest and dividend receipts sourced for Texas franchise-tax reports due on or after January 1, 2000?
They were apportioned to the payor's legal domicile. House Bill 2067 repealed Section 171.1031, which had sourced a bank's or savings and loan association's interest and dividends to Texas when the re…
When did a bank exclude interest from the former earned-surplus receipts factor, and how did Texas source other bank interest before and after January 1, 2000?
Interest excluded from the earned-surplus tax base was also excluded from both Texas and everywhere receipts for that component. Rule 3.555(k), for example, excluded federal-obligation interest from e…
When two corporations form a Texas limited partnership, who owes Texas franchise tax — the partnership, the general partner, or the limited partner?
The general partner owes the tax; the limited partner generally does not. Under the pre-2008 Texas franchise tax, a limited partnership itself is not subject to the tax, even if it elects to be taxed …
After an audit assessment was paid and later reversed, did Texas pay interest for the period between the taxpayer's payment and refund?
No. The taxpayer was entitled to recover the interest it had paid on the reversed audit assessment, but Texas would not pay additional interest for the time between payment and refund. Senate Bill 132…
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These are official tax letter rulings and advisory opinions issued by Texas's revenue authority in response to questions from specific taxpayers about how the tax law applies to their facts. A ruling is binding on the department only for the taxpayer who requested it and cannot be relied on by anyone else, but it is strong evidence of how the state reads the law. Every ruling above has a plain-English question and short answer, plus a link to the full original source.