How were receipts from long-haul telecommunications circuits sourced when the provider supplied facilities but did not originate or terminate calls?

Plain-English summary

The long-haul circuit provider sourced receipts according to the location of the facilities it supplied, not under the rules for companies originating or terminating telephone calls.

The company provided wholesale voice-and-data circuits through its Texas microwave network and lines leased from other carriers. Related corporations supplied the out-of-state portions. The company did not originate or terminate calls.

The Comptroller therefore distinguished Rules 3.549(e)(43) and 3.557(e)(39), which addressed the activity of originating and terminating interstate calls. The provider's relevant service was furnishing facilities to long-distance carriers.

For both tax components, charges attributed to Texas facilities were Texas receipts and charges attributed to out-of-state facilities were not. Total receipts everywhere included related-company circuit charges to the extent included in GAAP revenue for taxable capital or federal-return revenue for earned surplus.

The letter's example treated a $10,000 monthly charge as receipts everywhere. If $7,000 related to Texas facilities and $3,000 to out-of-state facilities, Texas receipts were $7,000.

What this means for you

Telecommunications providers

The substance of the revenue-producing activity controlled. Supplying network capacity was treated differently from originating or terminating calls.

Tax professionals

First determine total recognized revenue for each tax component, then attribute the charge between Texas and out-of-state facilities.

Common questions

Q: Was the taxpayer treated as a telephone company under the cited rules?
A: No, because it did not originate or terminate calls.

Q: Were access charges automatically telephone-call receipts?
A: No. The letter said access charges for a local network or facilities were not receipts from telephone calls.

Q: Did the same facility-location sourcing apply to both components?
A: Yes.

Citations and references

• Texas Tax Code Secs. 171.112 and 171.1121
• 34 Tex. Admin. Code Secs. 3.549(e)(43) and 3.557(e)(39)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9803494L

Original ruling text

March 6, 1998

Dear Mr. *****:

Thank you for the information contained in your letter concerning the
activities of a taxpayer providing long-haul, voice-and-data circuits. This
response addresses the franchise tax apportionment guidelines applicable to the
situation described in the ruling request.

You have indicated that the company provides wholesale telecommunications
services through its microwave radio-based communications network and through
telecommunications lines leased from other carriers. The company's microwave
network is located entirely in Texas.

Most of the company's customers are long-distance telecommunications carriers.
For example, it will provide one of these carriers a long-haul circuit from
Dallas to Los Angeles. The out-of-state portion of the circuit is provided by
a related corporation.

The company typically bills its customers a fixed monthly rate for use of the
long-haul circuits (which may also be called a "private line", "dedicated
line", or "trunk").

The company does not provide the service of originating or terminating calls
(we presume the long-distance service is provided by its customer carriers).

You have asked whether the taxpayer would be considered a telephone company
under Franchise Tax Rules 3.549(e)(43) and 3.557(e)(39). Neither of these
rules nor the statute provide a definition of "telephone company". As a
general rule, the Comptroller has focused on the substance of the activity
generating the receipt in determining the appropriate apportionment guidelines.

With respect to the above-cited rule provisions, the relevant activity is that
of originating and terminating the interstate phone call. The ruling request
indicates that the taxpayer does not provide the service of originating or
terminating phone calls. We would, therefore, distinguish the taxpayer's
activities from what is covered in these rule provisions.

Similarly, access charges paid by long-distance telephone carriers to a
telephone company for access to a local network or use of local facilities are
not considered receipts from telephone calls.

The following guidelines are applicable to the determination of the taxpayer's
gross receipts from the services you have described and the apportionment of
these receipts.

Sec. 171.112 of the Tax Code defines "gross receipts" for taxable capital as
all revenues that would be recognized annually under a generally accepted
accounting principles (GAAP) method of accounting, without deduction for
certain costs, unless the statute provides otherwise. To the extent that the
revenue recognized by the taxpayer under GAAP includes the charges for the
circuits provided by the related corporation, such amounts would be included in
its gross receipts for taxable capital.

For earned surplus purposes, "gross receipts" means all revenues reportable by
a corporation on its federal tax return, without deduction for certain costs,
unless the statute provides otherwise. Sec. 171.1121, Texas Tax Code. To the
extent that the revenue reportable by the taxpayer on its federal tax return
includes the charges for the circuits provided by the related corporation, such
amounts would be included in its gross receipts for earned surplus.

Based on the information contained in the ruling request, we would characterize
the taxpayer's service as that of providing the facilities used by the
long-distance carriers. Therefore, the receipts attributed to the facilities
located in Texas would be apportioned as Texas receipts. The charges attributed
to the out-of-state facilities would not be included in the Texas receipts
factor. This treatment is applicable to both tax base components.

For example, the company bills a customer $10,000 for its monthly services.
The company recognizes the $10,000 as revenue for federal income tax purposes
and revenue under GAAP. The $10,000 would be reported as gross receipts from
everywhere for both taxable capital and earned surplus.

In this example, $7,000 of the charges are attributed to the Texas facilities
and $3,000 are attributed to the out-of-state facilities. The company would
report the $7,000 as gross receipts from Texas. If the entire $10,000 was
attributed to the Texas facility, the company would report $10,000 as Texas
receipts.

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

If you have any questions, please call toll-free 1-800-531-5441, extension
3-4496 or (512)463-4496.

Sincerely,

Jerry Bobbitt
Tax Policy Division