34 Tex. Admin. Code § 3.590 - Margin: Combined Reporting

(a) Effective date. The provisions of this section apply to franchise tax reports originally due on or after January 1, 2008.

(b) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Affiliated group--Entities in which a controlling interest is owned by a common owner, either corporate or noncorporate, or by one or more of the member entities.

(2) Combined group--Taxable entities that are part of an affiliated group engaged in a unitary business and that are required to file a combined group report under Tax Code, § 171.1014.

(A) A combined group may not include a taxable entity that conducts business outside the United States if 80% or more of the taxable entity's property and payroll are assigned to locations outside the United States. If either the property factor or payroll factor is zero, the denominator is one. For example, if Corporation Z has no property, but does have payroll located entirely outside the United States, Corporation Z will not be included in the combined group. The combined group may not include a taxable entity that conducts business outside the United States and has no property or payroll if 80% or more of the taxable entity's gross receipts are assigned to locations outside the United States. See Tax Code, § 171.1014.

(B) A combined group may not include an exempt entity.

(C) A combined group must include eligible entities even if those entities do not have nexus as described in § 3.586 of this title (relating to Margin: Nexus).

(D) Eligible pass-through entities including partnerships, limited liability companies taxed as partnerships under federal law, limited liability companies that are disregarded under federal law and S corporations are included in a combined group.

(E) Passive entities are not included in the combined group; however, the pro rata share of net income from a passive entity shall be included in total revenue to the extent it was not generated by the margin of another taxable entity.

(3) Combined group report--A report that includes the business of all members of the combined group.

(4) Controlling interest.

(A) Controlling interest means:

(i) for a corporation, either more than 50%, owned directly or indirectly, of the total combined voting power of all classes of stock of the corporation, or more than 50% owned directly or indirectly, of the beneficial ownership interest in the voting stock of the corporation;

(ii) for a partnership, association, trust or other entity other than a limited liability company, more than 50%, owned directly or indirectly, of the capital, profits, or beneficial interest in the partnership, association, trust, or other entity;

(iii) for a limited liability company, either more than 50%, owned directly or indirectly, of the total membership interest of the limited liability company or more than 50%, owned directly or indirectly, of the beneficial ownership interest in the membership interest of the limited liability company.

(B) Examples are as follows:

(i) Corporation A owns 10% of Corporation C and 60% of Corporation B, which owns 41% of Corporation C. Corporation A has a controlling interest in Corporation B and a controlling interest in Corporation C of 51% of stock ownership because it has control of the stock owned by Corporation B.

(ii) Corporation A owns 10% of Limited Liability Company C and 15% of Corporation B, which owns 90% of Limited Liability Company C. Corporation A does not have controlling interest in Limited Liability Company C and does not have a controlling interest in Corporation B. Corporation B has a controlling interest in Limited Liability Company C.

(iii) Individual A owns 100% of 10 corporations, each of which owns 10% of Partnership B. Individual A has a controlling interest in each of the ten corporations and in Partnership B.

(iv) Corporation A holds a 70% interest in Partnership B that owns 60% of Limited Liability Company C. Corporation A owns the remaining 40% of Limited Liability Company C. Corporation A owns a controlling interest in Partnership B and, taking into account Company A's direct and indirect ownership of Limited Liability Company C, a 100% controlling interest in Limited Liability Company C.

(v) Corporation A owns 10% of Limited Liability Company C and 45% of Corporation B, which owns 90% of Limited Liability Company C. Corporation A would hold a 10% interest in Limited Liability Company C which would not constitute a controlling interest. Corporation B has a controlling interest in Limited Liability Company C.

(vi) Partnership P is owned equally by Limited Liability Company A, Limited Liability Company B and Limited Liability Company C. Three unrelated individuals each wholly owns one of the limited liability companies. None of the limited liability companies owns more than 50% of Partnership P. There is no controlling interest.

(vii) Individual A and Individual B each owns 50% of Partnership X. Individual A and Individual B each also owns 50% of Partnership Y. Individual A and Individual B are not husband and wife. Since neither individual owns more than 50% of each partnership, neither individual has a controlling interest in the partnerships.

(C) Other circumstances. In addition to the foregoing tests, the comptroller may consider any other circumstances that tend to demonstrate that the more than 50% direct or indirect common ownership test was met or was not met.

(D) Membership termination. Membership in an affiliated group shall be treated as terminated in any year, or fraction thereof, in which the conditions listed in this paragraph are not met, except as follows:

(i) when an affiliate is sold, exchanged, or otherwise disposed of, the membership in an affiliated group shall not be terminated if the requirements of this paragraph are again met immediately after the sale, exchange, or disposition.

(ii) The comptroller may treat the affiliated group as remaining in place if the conditions of this paragraph are again met within a period not to exceed two years.

(E) Attribution. Except as otherwise provided, an entity is owned when a controlling interest is directly held or the interest is constructively owned. An individual constructively owns stock that is owned by his or her spouse.

(F) Membership in more than one group. If an entity is a member of more than one affiliated group, the entity is treated as a member of the affiliated group (or part thereof) with respect to which it has a unitary relationship. If the entity has a unitary relationship with more than one of those affiliated groups, it shall elect to be treated as a member of only one group. The election shall remain in effect until the unitary business relationship between the entity and the other members ceases, or unless revoked with approval of the comptroller.

(5) Reporting entity--The combined group's choice of an entity that is:

(A) the parent entity, if it is part of the combined group, or

(B) the entity that:

(i) is included within the combined group;

(ii) is subject to Texas' taxing jurisdiction; and

(iii) has the greatest Texas business activity during the first period upon which the first report is based, as measured by the Texas receipts after eliminations for that period.

(6) Unitary business--A single economic enterprise that is made up of separate parts of a single entity or of a commonly controlled group of entities that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts. In determining whether a unitary business exists, the comptroller shall consider any relevant factor, including:

(A) whether:

(i) activities of the group members are in the same general line, such as manufacturing, wholesaling, retailing of tangible personal property, transportation, or finance;

(ii) the activities of the group members are steps in a vertically structured enterprise or process, such as the steps involved in the production of natural resources, including exploration, mining, refining, and marketing; or

(iii) the members are functionally integrated through the exercise of strong centralized management, such as authority over purchasing, financing, product line, personnel, and marketing.

(B) Other factors. In addition, the comptroller may consider other factors that may be applicable, including guidelines in Supreme Court decisions that presume activities are unitary. All affiliated entities are presumed to be engaged in a unitary business.

(C) New entities. When a taxable entity acquires another entity, a presumption exists for finding a unitary relationship during the first reporting period. Any party may rebut such presumption by proving that the taxable entities were not unitary. If such presumption is rebutted, then the taxable entities shall not be considered unitary as of the date of acquisition. When a taxable entity forms another taxable entity, a unitary relationship exists as of the date of formation unless the business is not unitary on a longer term basis. An acquired entity is required to file a report for the period prior to acquisition.

(D) Non-arm's-length prices. Goods or services or both are supplied at non-arm's length prices between or among entities. Existence of arm's-length pricing between entities, however, does not indicate lack of unity.

(E) Existence of benefits from joint, shared or common activity. A discount, cost-saving or other benefit can be shown to result from joint purchases, leaseholds, or other forms of joint, shared or common activities between or among entities.

(F) Relationships of joint, shared or common activity to income-producing operations. In determining whether a joint, shared, or common activity is indicative of a unitary relationship, consideration shall be given to the nature and character of the basic operations of each entity. Such consideration shall include, but not be limited to, the entity's sources of supply, its goods or services produced or sold, its labor force, and market to determine whether the joint, shared, or common activity is directly beneficial to, related to, or reasonably necessary to the income-producing activities of the unitary business.

(G) Holding entities. The tests for a unitary business established by this section apply in determining whether a holding entity is included or excluded from a unitary business.

(7) United States--The 50 states and the District of Columbia. It also includes the territorial waters of the United States and the seabed and subsoil of those submarine areas that are adjacent to the territorial waters of the United States and over which the United States has exclusive rights, in accordance with international law, with respect to the exploration for or exploitation of natural resources. It also includes the possessions and territories of the United States and the Commonwealth of Puerto Rico.

(c) Mandatory combined reporting. A combined group shall file a combined group report. A taxable entity that is not included in a combined report must file a separate report if it is doing business in Texas or is chartered or organized in Texas.

(d) Determination of combined taxable margin and apportionment.

(1) Combined total revenue. A combined group shall determine its total revenue by:

(A) determining the total revenue of each of its members as provided by Tax Code, § 171.1011 (including §171.1011(h)) and § 3.587 of this title (relating to Margin: Total Revenue) as if the member were an individual taxable entity without regard to the no tax due limitation provided by Tax Code, § 171.002(d)(2);

(B) adding the total revenues of the members determined under subparagraph (A) of this paragraph, together; and

(C) subtracting, to the extent included under Tax Code, §§ 171.1011(c)(1)(A), (c)(2)(A), or (c)(3), items of total revenue received from a member of the combined group.

(2) Combined cost of goods sold.

(A) A combined group that elects to subtract costs of goods sold shall determine that amount by:

(i) determining the cost of goods sold for each of its members as provided by Tax Code, § 171.1012 and § 3.588 of this title (relating to Margin: Cost of Goods Sold) as if the member were an individual taxable entity;

(ii) adding the amounts of cost of goods sold determined under clause (i) of this subparagraph, together; and

(iii) subtracting from the amount determined under clause (ii) of this subparagraph, any cost of goods sold amounts paid from one member of the combined group to another member of the combined group, but only to the extent the corresponding item of total revenue was subtracted under paragraph (1)(C) of this subsection.

(B) A member of a combined group may claim as cost of goods sold those costs that qualify under Tax Code, § 171.1012, if the goods for which the costs are incurred are owned by another member of the combined group.

(3) Combined compensation. The combined group may not subtract in relation to a person, more than the wages and cash compensation limitation provided in § 3.589(c)(1) of this title (relating to Margin: Compensation), per 12-month period on which margin is based. A combined group that elects to subtract compensation shall determine that amount by:

(A) determining the compensation for each of its members as provided by Tax Code, § 171.1013 and § 3.589 of this title, as if each member were an individual taxable entity;

(B) adding the amounts of compensation determined under subparagraph (A) of this paragraph, together; and

(C) subtracting from the amount determined under subparagraph (B) of this paragraph, any compensation amounts paid from one member of the combined group to another member of the combined group, but only to the extent the corresponding item of total revenue was subtracted under paragraph (1)(C) of this subsection.

(4) Combined groups are eligible to use the 70% of revenue calculation pursuant to Tax Code, § 171.101 or, if qualified, the E-Z Computation pursuant to Tax Code, § 171.1016. See § 3.584 of this title (relating to Margin: Reports and Payments).

(5) Combined apportionment.

(A) The combined margin is generally apportioned in accordance with § 3.591 of this title (relating to Margin: Apportionment).

(B) Except as provided in subparagraph (D) of this paragraph, gross receipts from business done in this state of taxable entities without nexus individually in Texas are excluded from the numerator. For example, sales of tangible personal property shipped into Texas by a member that does not have nexus individually are excluded from the numerator but are included in the denominator.

(C) For each member of the combined group that does not have nexus individually with this state for purpose of taxation, a combined group must, for information purposes only, include in a report filed under Tax Code, § 171.201 or § 171.202:

(i) the member's gross receipts from business done in this state; and

(ii) the member's gross receipts from business done in this state that are subject to taxation in another state under a throwback law or regulation.

(D) Receipts derived from transactions between members of a combined group that are excluded under Tax Code, § 171.1014(c)(3), may not be included in the numerator or denominator of the apportionment factor. However, the numerator of the apportionment factor will include certain sales of tangible personal property made to third party purchasers if the tangible personal property is ultimately delivered to a purchaser in Texas without substantial modification. See Tax Code, § 171.1055(b). For example, drop shipments made from a Texas location to a Texas purchaser would be included in Texas receipts based on the amount billed to the third party purchaser if the seller is a member of the combined group and the seller does not have nexus.

(6) Disregarded entities. When reporting revenue, cost of goods sold, compensation and gross receipts for a disregarded entity, that information may be included with the parent; in that event, both entities are presumed to have nexus.

(e) Reporting entity.

(1) Responsibilities of the reporting entity.

(A) Access to records. In addition to the information required to be included in the combined group report, upon request of the comptroller, the reporting entity shall provide access to the tax, financial, and nonfinancial records of entities that do and do not have Texas nexus.

(B) Filing. The reporting entity shall file a combined group report on behalf of the combined group together with all reports and schedules required by the comptroller. Any elections required by the combined group are binding on all members of the group.

(C) Payment. The reporting entity shall timely remit to the comptroller the Texas franchise tax imposed on the combined group.

(D) Authority. The reporting entity may file refund claims, give waivers and execute agreements on behalf of the combined group. Any refund claim, waiver given, agreement or any document executed, shall be considered as having also been given or executed by each combined group member.

(2) Notices. Notices mailed to the reporting entity shall be deemed to have been mailed to each of the taxable entities in the combined group.

(3) Change in the reporting entity. The reporting entity shall change only when the entity (other than the parent) is no longer subject to Texas' jurisdiction to tax or the reporting entity is no longer a member of the combined group, at which time the combined group shall designate another entity that qualifies as its reporting entity and notify the comptroller of the designation.

(f) Accounting period of the combined group.

(1) The combined group's accounting period is determined as follows:

(A) if two or more members of a combined group file a federal consolidated return, the group's accounting period is the federal taxable period of the federal consolidated group;

(B) in all other instances, the accounting period is the federal taxable period of the reporting entity.

(2) Members with different accounting periods. If the federal taxable period of a member differs from the federal taxable period of the combined group, the reporting entity will determine the portion of that member's revenue, cost of goods sold, compensation, etc. to be included by preparing a separate income statement based on federal income tax reporting methods for the period included in the group's accounting period.

(g) Liability for the combined tax, penalty, and interest. The members of a combined group shall be jointly and severally liable for the combined tax reported on the combined report and any interest and penalty.

(h) Credits. Unless otherwise provided by law, credits generally may be applied against the combined tax liability of the combined group. See § 3.594 of this title (relating to Margin: Temporary Credit for Business Loss Carryforwards), and § 3.593 of this title (relating to Margin: Credits).

(i) Standard Industrial Classification Code. For a combined group, the revenue from each retail and wholesale trade activity of each of the members of the combined group shall be aggregated for purposes of determining whether the combined group is engaged in retail or wholesale trade. The determination of whether a combined group is engaged in a retail or wholesale trade activity shall be made after eliminations.

(j) Tax rate, discounts, and E-Z Computation. The determination of whether a combined group is eligible for the 0.5% tax rate, discounts from tax liability, and the E-Z Computation under Tax Code, §§ 171.002, 171.0021, and 171.1016, shall be made based on the total revenue of the combined group as a whole after eliminations. See § 3.584 of this title.

(k) Combined report filing. A taxable entity will only be included in a combined group report for the accounting period in which it belongs to the combined group.

(1) Initial reports.

(A) Combined groups. A combined group will not file an initial report. For the period that a combined group exists, the combined group will file only annual reports regardless of whether the reporting entity or any or all of the members of the combined group would have been required to file an initial report if filing as a separate entity.

(B) Members of a combined group. This subparagraph applies to members of a combined group that became subject to the franchise tax prior to October 4, 2009. Members of a combined group that become subject to the tax on October 4, 2009 or later will file only annual reports (see paragraph (2)(B) of this subsection).

(i) A newly-formed member of a combined group will not report its data on a separate initial report but will include its data with the combined group's report for the corresponding accounting period. If a member of a combined group receives a franchise tax initial report filing notice, the entity must return the notice to the comptroller identifying the reporting entity of the combined group unless the entity is required to file a separate initial report under clause (ii) or (iii) of this subparagraph.

(ii) A newly formed member of a combined group that leaves the combined group during the accounting period that would be covered by its initial report is required to file a separate initial report for the period beginning on the date it leaves the group through the date of its last federal accounting year end that is at least 60 days prior to the original due date of its initial report. Example: Corporation A is formed on April 3, 2009 as a member of Combined Group Z. It is spun off as a separate non-unitary entity effective August 15, 2009. The federal accounting year end for all parties is December 31. Corporation A will file a 2010 initial report due July 1, 2010 for August 15, 2009 - December 31, 2009, the period after the spin-off of the corporation. Combined Group Z will file a 2010 annual report including Corporation A for April 3, 2009 - August 14, 2009, the period before the spin-off of the corporation.

(iii) A newly-formed entity that is subsequently acquired by a combined group is required to file a separate initial report for the period that is prior to the acquisition date. Example: Corporation A is a separate entity that was formed on November 15, 2008 and has a June 30 federal accounting year end. Corporation A was acquired by Combined Group Z effective February 1, 2009. Combined Group Z has a December 31 federal accounting year end. Corporation A will file a 2010 initial report due February 12, 2010. Because Corporation A was acquired by Combined Group Z effective February 1, 2009, Corporation A will include only the period from November 15, 2008 - January 31, 2009 on its initial report. Combined Group Z will file a 2010 annual report including Corporation A for the period February 1, 2009 - December 31, 2009.

(2) Annual reports.

(A) Combined groups. For the period that a combined group exists, the combined group will file only annual reports.

(B) Members of a combined group.

(i) For any accounting period that an entity is not part of a combined group, the entity must file a separate report. Example: Corporation B is a separate entity that began filing franchise tax reports in 2000 and has a December 31 federal accounting year end. Corporation B was acquired by Combined Group X effective July 1, 2009. Combined Group X has a March 31 federal accounting year end. Corporation B is sold by Combined Group X to Combined Group Y effective October 1, 2009. Combined Group Y has a December 31 federal accounting year end. Corporation B will file a 2010 annual report for the period January 1, 2009 - June 30, 2009. Combined Group X will file a 2010 annual report for the period April 1, 2008 - March 31, 2009. Combined Group X will not include Corporation B in its 2010 annual report because Corporation B was not part of the combined group during the accounting period on which the report is based. Combined Group X will include Corporation B in its 2011 annual report for the period July 1, 2009 - September 30, 2009. Combined Group Y will file a 2010 annual report for the period January 1, 2009 - December 31, 2009 and will include Corporation B for the period October 1, 2009 - December 31, 2009.

(ii) A taxable entity formed on October 4, 2009, or later, that is a member of a combined group and that leaves the combined group during the accounting period that would be covered by its first annual report, is required to file a separate annual report for the period beginning on the date it leaves the group through the date of its last federal accounting year end in the calendar year prior to the year its first annual report is originally due. Example: Corporation A is formed on April 3, 2010 as a member of Combined Group Z. It is spun off as a separate non-unitary entity effective August 15, 2010. The federal accounting year end for all parties is December 31. Corporation A will file a 2011 annual report due May 15, 2011 for August 15, 2010 - December 31, 2010, the period after the spin-off of the corporation. Combined Group Z will file a 2010 annual report including Corporation A for April 3, 2010 - August 14, 2010, the period before the spin-off of the corporation.

(iii) A taxable entity formed on October 4, 2009, or later, and is subsequently acquired by a combined group is required to file a first annual report for the period that is prior to the acquisition date. Example: Corporation A is a separate entity that was formed on June 15, 2010 and has a December 31 federal accounting year end. Corporation A was acquired by Combined Group Z effective December 1, 2010. Combined Group Z has a December 31 accounting year end. Corporation A will file a 2011 annual report due May 15, 2011. Because Corporation A was acquired by Combined Group Z effective December 1, 2010, Corporation A will include only the period from June 15, 2010 - November 30, 2010 on its annual report. Combined Group Z will file a 2010 annual report including Corporation A for the period December 1, 2010 - December 31, 2010.

(3) Final reports.

(A) Combined groups. If every member of a combined group ceases doing business in Texas, a final report will need to be filed and paid before a taxable entity will receive clearance from the comptroller for termination, cancellation, withdrawal or merger. In all other cases, for the period a combined group exists, the combined group will file only annual reports.

(B) Members of a combined group.

(i) A member of a combined group that ceases doing business in Texas will not file a final report. The data that would have been reported on the final report will be included in the combined group's annual report for the corresponding accounting period. If a member of a combined group receives a franchise tax final report filing notice, the entity must return the notice to the comptroller identifying the reporting entity of the combined group unless the entity is required to file a separate final report under clause (ii) or (iii) of this subparagraph.

(ii) A separate entity that joins a combined group and then ceases doing business in Texas in the accounting period that would be covered by a final report is required to file a final report for the period that is prior to the acquisition date. The period from the acquisition date through the date the entity ceased doing business in Texas will be reported on the combined group's annual report for the corresponding period. Example: Corporation C is a separate entity that has a December 31 accounting year end. Corporation C was acquired by Combined Group W effective July 1, 2008. Combined Group W also has a December 31 accounting year end. On October 31, 2008 Corporation C is dissolved. Corporation C will file a final report due December 30, 2008 for the period January 1, 2008 - June 30, 2008, which is the period before Corporation C was purchased by Combined Group W. Combined Group W will file a 2009 annual report and include Corporation C for the period July 1, 2008 - October 31, 2008.

(iii) A member of a combined group that leaves the combined group and then ceases doing business in Texas during the accounting period that would be covered by a final report is required to file a final report for the period from the date the entity left the combined group through the date that the entity ceased doing business in Texas. Example: Corporation C is a member of Combined Group W. Both Corporation C and Combined Group W have a September 30 accounting year end. Corporation C leaves the combined group effective May 1, 2008. On August 15, 2008, Corporation C is dissolved. Corporation C will file a final report due October 14, 2008 for the period May 1, 2008 - August 15, 2008, which is the period after Corporation C left Combined Group W. Combined Group W will file a 2009 annual report and will include Corporation C for the period October 1, 2007 - April 30, 2008.

(4) Electronic funds transfer. If any one member of a combined group receives notice that it is required to electronically transfer franchise tax payments, then the combined group is required to electronically transfer payments.

Notes

34 Tex. Admin. Code § 3.590

The provisions of this §3.590 adopted to be effective January 1, 2008, 32 TexReg 10040; amended to be effective January 1, 2009, 33 TexReg 10504; amended to be effective December 31, 2009, 34 TexReg 9471