How did the pre-2008 Texas franchise tax apply to a transmission and distribution utility (TDU) and a retail electric provider (REP) after electricity deregulation?

Plain-English summary

When Texas deregulated its electricity market, a corporation asked how the change affected its pre-2008 franchise tax. The Comptroller explained that the main effect is on gross receipts, which drive the apportionment factor used for both parts of the old franchise tax (taxable capital and earned surplus).

• Transmission and distribution utility (TDU). A TDU that only moves electricity (rather than buying it) is providing a transportation service. Its receipts are service receipts, sourced to where the service is performed (Tax Code Sec. 171.103(2), 171.1032(a)(2); Rule 3.549(e)(38)).
• Retail electric provider (REP). A REP sells electricity - tangible personal property - to the end-use customer at the meter. A sale of tangible personal property delivered to a Texas purchaser is a Texas gross receipt, so the REP's entire sale to an in-Texas customer counts as Texas receipts (Rule 3.549(e)(41); Rule 3.557(e)(37)(A)).
• Apportionment. Each company divides its Texas gross receipts by its receipts everywhere to get an apportionment factor (Rule 3.549(c); Rule 3.557(c)), and applies that factor to both taxable capital and earned surplus.

Currency note: This letter describes the pre-2008 franchise tax (taxable capital and earned surplus), replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928. The margin tax computes receipts and apportionment differently; confirm present law.

What this means for you

Utilities and retail electric providers (pre-2008)

Whether you were a TDU or a REP changed the character of your receipts - service versus sale of property - and therefore how they were sourced to Texas. A wires company moving power booked service receipts where the service happened; a retail seller booked the whole in-state sale as a Texas receipt.

Tax professionals

The letter is an apportionment-sourcing analysis, not a special deregulation regime: it applies the ordinary franchise-tax service-sourcing and tangible-property-delivery rules to the new industry structure. Note that the answer presumes the TDU is merely transporting (not purchasing) the electricity - a different fact could change the result.

Common questions

Q: Did electricity deregulation create a new franchise tax?
A: No. The Comptroller analyzed how the existing franchise tax - through gross receipts and apportionment - applied to the deregulated roles.

Q: How are a transmission utility's receipts sourced?
A: As a transportation service, sourced to where the service is performed.

Q: How much of a retail provider's sale is a Texas receipt?
A: The entire sale of electricity to an end-use customer located in Texas, because it is a sale of tangible personal property delivered in Texas.

Citations and references

Statutes and rules:

• Texas Tax Code Sec. 171.103(2) and 171.1032(a)(2) - cited for treating the transmission of electricity as a service producing gross receipts
• Franchise Tax Rule 3.549(e)(38), 34 Tex. Admin. Code - service receipts sourced to where the service is performed
• Franchise Tax Rules 3.549(e)(41) and 3.557(e)(37)(A), 34 Tex. Admin. Code - a sale of tangible personal property delivered to a Texas purchaser is a Texas gross receipt
• Franchise Tax Rules 3.549(c) and 3.557(c), 34 Tex. Admin. Code - apportionment factor = Texas gross receipts divided by gross receipts everywhere

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200202819L

Original ruling text

February 25, 2002

FROM: Lowell Olsen Dunn, Tax Policy Division

RE: Electricity Deregulation-Franchise Tax Consequences

This analysis of Texas franchise tax consequences is based on the following
understanding of the progression of events: The Transmission and Distribution
Utility ("TDU") will transmit electricity through TDU lines to be delivered for
the Retail Electric Provider ("REP") to their end-use customer.

The main impact from a franchise tax point of view for the corporation's
involvement in electricity deregulation will be the calculation of gross
receipts in determining franchise tax liability. Gross receipts are used in
apportioning both components of the franchise tax, taxable capital and earned
surplus. The gross receipts apportionment factor is based on the amount of
gross receipts from business in Texas in relation to the corporation's business
everywhere.

TDU

We presume that the TDU is not purchasing but merely transporting the
electricity. Accordingly, the TDU is providing a service in the form of
transportation of the electricity to the REP, thus the TDU will have gross
receipts from this service. Texas Tax Code (TTC) 171.103(2); TTC
171.1032(a)(2). The gross receipts of the TDU will be apportioned to the
location where the service is performed for franchise tax purposes.
Comptroller's Rule 3.549(e)(38).

Presuming the TDU has Texas gross receipts from the performance of their
transmission service, the Texas gross receipts are then divided by gross
receipts from everywhere to determine the apportionment factor for the
corporation. Rule 3.549(c); Rule 3.557(c). This apportionment factor will
apply to the TDU's calculation for both taxable capital and earned surplus.

REP

The REP is selling the end-use consumer electricity, tangible personal property
("TPP"), at the meter. The REP paid the TDU a fee for the transportation
service to deliver the electricity to the end-use consumer at the meter. Sale
of TPP that is delivered in Texas to a purchaser is considered a Texas gross
receipt. Rule 3.549(e)(41); Rule 3.557(e)(37)(A). Consequently, the REP
will have Texas gross receipts for the entire amount of the sale of TPP to the
end-use consumer, presuming the consumer is in Texas.

The Texas gross receipts are then divided by gross receipts from everywhere to
determine the apportionment factor for the corporation. Rule 3.549(c); Rule
3.557(c). The REP then calculates their Texas franchise tax liability in the
same way as the TDU for both taxable capital and earned surplus purposes.

Calculation of Franchise Tax

For taxable capital, a corporation calculates their franchise tax liability by
multiplying their apportionment factor, derived from gross receipts as set out
above, by the total taxable capital of the corporation. Total taxable capital
is the equity of a corporation (Assets - Debts). Gross receipts as well as
surplus must be reported according to Generally Accepted Accounting Principles
("GAAP") for taxable capital purposes.

For earned surplus, the corporation calculates their franchise tax liability by
multiplying their apportionment factor, derived from gross receipts, by their
reportable federal taxable income with certain adjustments. A corporation must
use the same accounting methods in reporting gross receipts as used in
reporting federal taxable income for earned surplus purposes.