Does the federal FSC Repeal and Extraterritorial Income Exclusion Act of 2000 affect the Texas franchise tax, and how is a Foreign Sales Corporation treated?

Plain-English summary

A taxpayer asked how the federal Extraterritorial Income Exclusion - enacted by the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 - affects the Texas franchise tax.

• No effect on Texas franchise tax. Texas franchise tax is calculated under the Internal Revenue Code of 1986 in effect for the tax year beginning January 1, 1996 and before January 1, 1997 (Tax Code Sec. 171.001(b)(5)), together with the regulations for that period. Because that conformity date is frozen, the new federal extraterritorial-income provisions do not carry over; changing the date would take new Texas legislation (which the Comptroller noted the Legislature might or might not consider in its 2003 session).
• How an FSC is treated. A Foreign Sales Corporation is generally treated the same as any other corporation doing business in Texas. For apportioning its receipts, the letter points to Rule 3.549(e)(12) (Taxable Capital: Apportionment) and Rule 3.557(e)(12) (Earned Surplus: Apportionment).
• Caveat. The response is based on the facts presented and current law; different or additional facts could change it.

Currency note: This letter describes the pre-2008 franchise tax, replaced by the current margin tax effective January 1, 2008 (House Bills 3 and 3928), which conforms to a later Internal Revenue Code. Treat this letter as historical. (The same frozen-conformity reasoning appears in the Comptroller's letters on other federal changes, such as the Job Creation and Worker Assistance Act of 2002.)

What this means for you

Exporters that used a Foreign Sales Corporation or claimed the ETI exclusion

For the old Texas franchise tax, a federal export tax benefit like the extraterritorial-income exclusion did not reduce your Texas base, because Texas was locked to the 1996 Internal Revenue Code. The FSC itself was taxed like any other Texas corporation, with receipts apportioned under the specific franchise-tax apportionment rules.

Tax professionals reconciling federal and Texas figures

Expect a mismatch: a new federal export or income-exclusion provision generally did not flow into the pre-2008 franchise tax without a Texas conformity change. Apply Rules 3.549(e)(12) and 3.557(e)(12) for FSC receipt apportionment.

Common questions

Q: Did the Extraterritorial Income Exclusion reduce Texas franchise tax?
A: No. Texas franchise tax followed the 1996 Internal Revenue Code (Sec. 171.001(b)(5)), and only new Texas legislation could change that.

Q: Is a Foreign Sales Corporation taxed differently in Texas?
A: No. It is generally treated the same as any other corporation doing business in Texas, with receipts apportioned under Rules 3.549(e)(12) and 3.557(e)(12).

Citations and references

Statutes and rules:

• Texas Tax Code Sec. 171.001(b)(5) - franchise tax calculated under the Internal Revenue Code of 1986 in effect for the tax year beginning January 1, 1996 and before January 1, 1997
• Franchise Tax Rule 3.549(e)(12), 34 Tex. Admin. Code - Taxable Capital apportionment for a Foreign Sales Corporation
• Franchise Tax Rule 3.557(e)(12), 34 Tex. Admin. Code - Earned Surplus apportionment for a Foreign Sales Corporation

Federal law referenced:

• FSC Repeal and Extraterritorial Income Exclusion Act of 2000

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200204959L

Original ruling text

April 1, 2002

To: **

Dear **:

Thank you for your Tax Help inquiry concerning Extraterritorial Income and
Extraterritorial Income Exclusion and how it relates to the Texas franchise
tax.

Texas franchise tax is calculated based upon the Internal Revenue Code of 1986
in effect for the tax year beginning January 1, 1996 and before January 1,
1997, and any regulations adopted under that code applicable to that period.
Texas Tax Code (TTC) 171.001(b)(5). Whether the Texas legislature will
consider amending the foregoing section in the 2003 legislative session is
presently unknown.

Consequently, the new provisions of the FSC Repeal and Extraterritorial Income
Exclusion Act of 2000 will have no effect for Texas franchise tax purposes.

A Foreign Sales Corporation is generally treated the same as any other
corporation doing business in Texas for Texas franchise tax. See Rule
3.549(e)(12) Taxable Capital: Apportionment, and Rule 3.557(e)(12) Earned
Surplus: Apportionment, for guidance on the apportionment of receipts for a
Foreign Sales Corporation.

The statute and rules mentioned, as well as other related materials, are
accessible online at http://www.window.state.tx.us/taxinfo/frantax.html.

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

If you have questions about this, my internet address is
, or you may call toll-free at 1-800-531-5441,
extension 59952.

Sincerely,

Teresa Bostick
Tax Policy Division