How were intercompany receivable sales, collection gains, and servicing fees sourced under the former Texas franchise tax?

Plain-English summary

The intercompany receivable sale created no gross receipts; later gain and servicing fees followed different sourcing rules.

The parent sold short-term customer receivables to its wholly owned subsidiary at a small discount, continued collecting them, and charged the subsidiary an administrative fee.

Texas confirmed three results:

• The receivable sale itself created no gross receipts for either corporation.
• Any subsidiary gain from collecting more than it paid was sourced to the payor's location, defined as the customer-debtor's legal domicile.
• The parent's collection-service fee was sourced where the services were performed.

What this means for you

Corporate groups factoring receivables

The receivable transfer, the factor's collection gain, and the servicer's fee were separate receipt categories.

Tax professionals

Identify the debtor's legal domicile and document where collection services are performed.

Common questions

Q: Did the receivable sale create gross receipts?
A: No.

Q: Where was the subsidiary's collection gain sourced?
A: To the customer-debtor's legal domicile.

Q: Where was the servicing fee sourced?
A: Where the collection services were performed.

Citations and references

• The letter confirms the requested sourcing rules without citing specific provisions.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9611856L

Original ruling text

November 14, 1996

Dear ***:

In your FAX of November 12, you requested confirmation of the franchise tax
treatment of sales of receivables between a parent corporation, Corporation A,
and its wholly owned subsidiary, Corporation B.

You state that both corporations are Delaware corporations with their principal
place of business in Texas. Corporation A sells tangible personal property to
its customers on credit. Payment is due on the receivables within 30 to 90
days of shipment to the customer. No interest is charged on the receivables
unless payment is made after the due date. After the sale is made, Corporation
A sells the receivable to Corporation B at a small discount off the face
amount. Corporation A continues to collect payments on the receivables on
behalf of Corporation B. Corporation A charges an administrative fee to
Corporation B for collecting the payments.

Corporation A is an accrual basis taxpayer for federal income tax purposes. On
the federal income tax return, Corporation A reports the full sales price as
income and recognizes a loss on the sale of the receivable. If Corporation B
receives more than the amount paid for a particular receivable, the corporation
recognizes gain on the transaction.

I have restated the rulings you requested followed by a response:

1. Sale of the receivables by Corporation A to Corporation B does not result
   in any gross receipts to Corporation A or Corporation B.

Response

Correct.

2. Any gain recognized by Corporation B on collection of the receivables is
   sourced to the location of the payor, i.e., the location of the
   customer/debtor.

Response

Correct. The location of payor is the legal domicile of the customers.

3. The administrative service fee paid to Corporation A for collection of the
   receivables sold to Corporation B is sourced to the location where the services
   are provided.

Response

Correct.

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 any questions, contact Tax Policy Division. You may call toll free
1-800-531-5441, or our regular number is 512/463-4600. My extension is 3-4662.
You may write me at Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Bob Jeffcoat
Tax Policy Division