When were a subsidiary's billings to reimburse parent-company expenses excluded from former franchise-tax gross receipts?

Plain-English summary

At-cost reimbursements of parent-company expenses could be excluded from the subsidiary's gross receipts, but the billing method and agency relationship mattered.

With a written agency agreement, reimbursed expenses were excluded when they did not exceed the subsidiary's cost. If the billing exceeded cost, the excess entered gross receipts everywhere.

Without a written agency agreement, an exact dollar-for-dollar billing was excluded. If the subsidiary did not bill dollar for dollar, the entire charge entered gross receipts. Any included charge was apportioned according to the nature of the item.

The subsidiary could not act as an agent for services it performed itself. The answer was the same whether the parent paid cash or the companies reduced an intercompany receivable.

What this means for you

Related corporations

Document the agency relationship and whether each reimbursement exactly matches cost. A markup can cause some or all of the billing to enter gross receipts.

Tax professionals

Separate third-party expenses paid for an affiliate from services the subsidiary performs itself, then source included charges based on their nature.

Common questions

Q: Did a written agency agreement exclude every billing?
A: No. Amounts above cost entered gross receipts.

Q: What if there was no written agreement?
A: Only dollar-for-dollar expense billings were excluded under the letter.

Q: Did paying through intercompany accounts change the result?
A: No.

Citations and references

• The ruling identifies no statute or rule by section number

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9803280L

Original ruling text

March 31, 1998

Dear Ms. **:

In your letter of March 16, you requested a determination regarding the
computation of gross receipts for billings by a subsidiary corporation to its
parent corporation.

You indicate that the parent corporation (Parent) and subsidiary corporation
(Subsidiary) are foreign corporations which are domiciled in Texas. Subsidiary
is indebted to Parent. Parent is essentially a holding company. On occasion,
Parent incurs expenses which are paid for by Subsidiary. The payment is booked
as a reduction to the intercompany debt on Subsidiary's books and a reduction
to the intercompany receivable on Parent's books. Parent records the related
expense.

If Subsidiary incurs expenses on behalf of Parent, the reimbursements are
treated as follows:

1. If Parent has a written agency agreement with Subsidiary, the reimbursed
   expenses are not included in Subsidiary's gross receipts if they don't exceed
   Subsidiary's cost.

If Subsidiary's billing exceeds the cost, the excess is included in gross
receipts everywhere. The charges are apportioned based on the nature of the
item.

2. If Subsidiary does not have a written agency agreement with Parent, the
   billings are not included in gross receipts if Subsidiary bills Parent the same
   amount for the expense as the actual cost to Subsidiary (i.e., on a
   dollar-for-dollar basis).

However, if Subsidiary does not bill on a dollar-for-dollar basis, the total
charge is included in gross receipts. The charge would be apportioned based on
the nature of the item.

In any case, Subsidiary may not act as an agent for services performed by
Subsidiary.

You should note that the method of payment for the expenses does not affect the
determination of gross receipts. That is, my response is the same whether
Parent reimburses Subsidiary by reducing the intercompany receivable or by
paying cash.

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