For a healthcare-savings (PPO access) program, how are membership fees and marketing-representative enrollment fees sourced for Texas franchise tax?

Plain-English summary

A representative asked how to source two revenue streams of a Texas-based corporation that sells a healthcare-savings program — access to the same preferred provider organizations (PPOs) used by insurers — to uninsured or underinsured individuals, mainly through a network-marketing model using independent marketing representatives (IMRs). The Comptroller advised:

• Membership fees. A person who enrolls is purchasing an intangible right to receive a benefit (whether or not they ever use it). These fees are sourced based on the location of the payor — the legal domicile of the member.
• IMR enrollment fees. An IMR pays an enrollment fee for the right to sell memberships, which is also an intangible right. These fees are likewise sourced based on the location of the payor — the legal domicile of the IMR.

The Comptroller cautioned that the response rested on current law and the facts presented.

Important currency note: This letter applies the pre-2008 franchise tax. The 2007 legislation (House Bills 3 and 3928) replaced it with the current margin tax, which has its own receipts-sourcing rules (substantially revised for reports due on or after January 1, 2021). Treat the sourcing conclusions as historical and confirm current law.

What this means for you

Membership, subscription, and network-marketing businesses

Revenue characterized as an intangible right — a membership or a right to sell — followed the payor's legal domicile for Texas apportionment, not where any service was performed. How you characterize the receipt drives where it is sourced.

Accountants and tax professionals

Note that both the member's fee and the reseller's enrollment fee were treated as intangibles keyed to the payor's domicile. This is pre-2008 apportionment; re-verify under the margin tax's sourcing rules.

Common questions

Q: How were the healthcare-savings membership fees sourced?
A: As an intangible right, sourced to Texas based on the member's legal domicile (the payor's location).

Q: How were the marketing representatives' enrollment fees sourced?
A: The same way — as an intangible right to sell memberships, sourced to the representative's legal domicile.

Citations and references

The letter relied on the character of each fee as an intangible right, sourced to the payor's location, rather than citing specific numbered Tax Code sections. See the verbatim text below.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200605665L

Original ruling text

May 18, 2006

RE: COMPANY (Taxpayer No. **)

Dear **:

Thank you for your letter regarding the sourcing of membership and independent
marketing representative fees for your client.

You stated in your letter that your client is a Texas based corporation that is
a wholly-owned subsidiary of a publicly traded corporation. Your client offers
savings on healthcare services throughout the United States to persons who are
uninsured, underinsured, or who have elected to purchase only high deductible
or limited benefit medical insurance policies. These savings are achieved
through a program which allows access to the same preferred provider
organizations (PPOs) that are utilized by many insurance companies. Your
client offers that program to individuals primarily through a network marketing
strategy. Memberships in the program have been sold to residents in numerous
states, including Texas, mainly through independent marketing representatives
(IMRs). Each IMR typically resides and operates in the same state as his or
her customer, the individual member.

In addition to the membership fee revenue, your client receives an enrollment
fee from the IMRs in return for their right to sell memberships in the program.

Membership Fees
A person who enrolls in the healthcare savings program pays a membership fee.
The person may or may not ever take advantage of the benefits provided by the
healthcare savings program. It is this agency’s opinion that the person paying
the membership fee is purchasing an intangible right to receive a benefit. As
a result, these fees should be sourced based on the location of the payor – the
legal domicile of the person purchasing the membership.

IMR Enrollment Fees
Memberships in the healthcare program are sold by independent marketing
representatives (IMRs). IMRs pay an enrollment fee for the right to sell the
memberships. It is our opinion that the enrollment fee is an intangible right
to sell the memberships. These fees should be sourced based on the location of
the payor – the legal domicile of the person paying the enrollment fee.

This response is based on current law and the facts and information 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, please
call me at 1-800-531-5441, extension 34612. My direct number is (512) 463-4612.
You may write me at Tax Policy Division, Comptroller of Public Accounts,
Austin, Texas 78774.

Sincerely,

Janet Spies
Tax Policy Division

cc: **
Hermie Nanez, Business Activity Research Team, Audit Division