How does an out-of-state company apportion service revenue to Texas for the franchise tax when it cannot break down receipts by state?

Plain-English summary

A Georgia-based corporation performed service merchandising on customers' products in Texas and other states. It was paid based on total shipments to all locations, with no breakdown of how much went to each state, and asked how to apportion that revenue to Texas.

• Service receipts follow where the work is done. Franchise Tax Rules 3.549(e)(38) (taxable capital) and 3.557(e)(33) (earned surplus) provide that receipts from performing services are apportioned to the location where the services are performed.
• If you can't trace it, use a reasonable method. Because the company could not determine how much revenue was directly attributable to services performed in Texas, the Comptroller said it may use another reasonable method. The example given: divide the hours employees spent performing services in Texas by the total hours spent in all states to get a Texas percentage, then multiply total revenue by that percentage to get Texas gross receipts. Everywhere gross receipts would include total revenues.
• Fact-based. The answer rests on the facts presented and current law, and could change with different facts.

Currency note: This 2001 letter applies the pre-2008 franchise tax's taxable-capital and earned-surplus apportionment rules (replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928). The margin tax apportions service receipts under its own rules; confirm current law.

What this means for you

Multistate service businesses that bill without a state breakdown

The sourcing rule was clear - services are sourced where performed - but the letter is useful for its practical fallback: when your billing does not tell you the Texas share, a reasonable proxy (here, an employee-hours ratio) is acceptable to split service revenue. Total revenue still goes in the everywhere denominator.

Tax professionals

The Comptroller endorsed a reasonable-method apportionment for service receipts that cannot be directly traced, using a Texas-hours-over-total-hours fraction as an example rather than a mandate. Document whatever method you choose. Re-verify under the margin tax, which has its own service-receipt sourcing rules.

Common questions

Q: How are service receipts sourced for the Texas franchise tax?
A: To the location where the services are performed (Rules 3.549(e)(38) and 3.557(e)(33)).

Q: What if I can't tell how much revenue came from Texas services?
A: You may use another reasonable method - for example, an employee-hours ratio (Texas service hours over total service hours) applied to total revenue.

Q: What goes in the "everywhere" gross receipts?
A: Your total revenues.

Citations and references

Rules:

• 34 Tex. Admin. Code Sec. 3.549(e)(38) (Franchise Tax Rule 3.549, Taxable Capital: Apportionment) - service receipts sourced where performed
• 34 Tex. Admin. Code Sec. 3.557(e)(33) (Franchise Tax Rule 3.557, Earned Surplus: Apportionment) - service receipts sourced where performed

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200101079L

Original ruling text

January 30, 2001

To: **

Dear **:

Thank you for your e-mail regarding the apportionment of taxable capital and
earned surplus.

You stated in your message that your corporate office is located in Georgia and
that your corporation performs service merchandising on customers products in
Texas and other states. You are paid for your services based on total
shipments made to all locations by your customers and are not given a breakdown
as to how much is shipped into each individual state.

Franchise tax rules 3.549(e)(38), Taxable Capital: Apportionment, and
3.557(e)(33), Earned Surplus: Apportionment, discuss the apportionment of
revenues from the performance of services. The rules state that the receipts
from the performance of services are apportioned to the location where the
services are performed.

Since you cannot determine how much of the revenue you receive is directly
attributable to the services your representatives perform in Texas, you may use
another reasonable method to apportion the revenue. For example, you could use
the number of hours spent by your employees performing services in Texas as the
numerator and the total number of hours spent by your employees performing
services in all states as the denominator and get a percentage of service hours
spent in Texas. Then multiply the total revenue bye the percentage to get
Texas gross receipts. Everywhere gross receipts would include your total
revenues.

The rules mentioned above may be viewed via the Comptroller's Window on State
Government at . Click on the heading "Texas Taxes" and
you'll find a heading for "the Franchise Tax." Once you are on "the Franchise
Tax" page, you'll find a link to "Franchise Tax Rules."

This response is based on current law and the facts presented. If there are
different or additional facts, the response may change.

If you have any questions about this or any other franchise tax matter, you may
call me at 1-800-531-5441, extension 3-4612, or e-mail me at the address below.

Sincerely,

Janet Spies
[email protected]
Comptroller of Public Accounts