Bill Text: TX SB756 | 2015-2016 | 84th Legislature | Introduced


Bill Title: Relating to the determination of cost of goods sold for purposes of computing the franchise tax.

Spectrum: Partisan Bill (Republican 1-0)

Status: (Introduced - Dead) 2015-03-04 - Left pending in committee [SB756 Detail]

Download: Texas-2015-SB756-Introduced.html
  84R2401 ADM-D
 
  By: Taylor of Collin S.B. No. 756
 
 
 
A BILL TO BE ENTITLED
 
AN ACT
  relating to the determination of cost of goods sold for purposes of
  computing the franchise tax.
         BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
         SECTION 1.  Section 171.1012, Tax Code, is amended to read as
  follows:
         Sec. 171.1012.  DETERMINATION OF COST OF GOODS SOLD. [(a)
  In this section:
               [(1)     "Goods" means real or tangible personal property
  sold in the ordinary course of business of a taxable entity.
               [(2)     "Production" includes construction,
  installation, manufacture, development, mining, extraction,
  improvement, creation, raising, or growth.
               [(3)(A)  "Tangible personal property" means:
                           [(i)     personal property that can be seen,
  weighed, measured, felt, or touched or that is perceptible to the
  senses in any other manner;
                           [(ii)     films, sound recordings, videotapes,
  live and prerecorded television and radio programs, books, and
  other similar property embodying words, ideas, concepts, images, or
  sound, without regard to the means or methods of distribution or the
  medium in which the property is embodied, for which, as costs are
  incurred in producing the property, it is intended or is reasonably
  likely that any medium in which the property is embodied will be
  mass-distributed by the creator or any one or more third parties in
  a form that is not substantially altered; and
                           [(iii)     a computer program, as defined by
  Section 151.0031.
                     [(B)     "Tangible personal property" does not
  include:
                           [(i)  intangible property; or
                           [(ii)  services.
         [(b)]  Subject to Section 171.1014, a taxable entity that
  elects to subtract cost of goods sold for the purpose of computing
  its taxable margin shall determine the amount of that cost of goods
  sold as follows:
               (1)  for a taxable entity treated for federal income
  tax purposes as a corporation, the cost of goods sold is the amount
  reportable as cost of goods sold on line 2, Internal Revenue Service
  Form 1120;
               (2)  for a taxable entity treated for federal income
  tax purposes as a partnership, the cost of goods sold is the amount
  reportable as cost of goods sold on line 2, Internal Revenue Service
  Form 1065;
               (3)  for a taxable entity treated for federal income
  tax purposes as an S corporation, the cost of goods sold is the
  amount reportable as cost of goods sold on line 2, Internal Revenue
  Service Form 1120S; or
               (4)  for any other taxable entity, the cost of goods
  sold is an amount determined in a manner substantially equivalent
  to the amount for Subdivision (1), (2), or (3) determined by rules
  the comptroller shall adopt [provided by this section].
         [(c)     The cost of goods sold includes all direct costs of
  acquiring or producing the goods, including:
               [(1)  labor costs;
               [(2)     cost of materials that are an integral part of
  specific property produced;
               [(3)     cost of materials that are consumed in the
  ordinary course of performing production activities;
               [(4)     handling costs, including costs attributable to
  processing, assembling, repackaging, and inbound transportation
  costs;
               [(5)     storage costs, including the costs of carrying,
  storing, or warehousing property, subject to Subsection (e);
               [(6)     depreciation, depletion, and amortization,
  reported on the federal income tax return on which the report under
  this chapter is based, to the extent associated with and necessary
  for the production of goods, including recovery described by
  Section 197, Internal Revenue Code;
               [(7)     the cost of renting or leasing equipment,
  facilities, or real property directly used for the production of
  the goods, including pollution control equipment and intangible
  drilling and dry hole costs;
               [(8)     the cost of repairing and maintaining equipment,
  facilities, or real property directly used for the production of
  the goods, including pollution control devices;
               [(9)     costs attributable to research, experimental,
  engineering, and design activities directly related to the
  production of the goods, including all research or experimental
  expenditures described by Section 174, Internal Revenue Code;
               [(10)     geological and geophysical costs incurred to
  identify and locate property that has the potential to produce
  minerals;
               [(11)     taxes paid in relation to acquiring or producing
  any material, or taxes paid in relation to services that are a
  direct cost of production;
               [(12)     the cost of producing or acquiring electricity
  sold; and
               [(13)     a contribution to a partnership in which the
  taxable entity owns an interest that is used to fund activities, the
  costs of which would otherwise be treated as cost of goods sold of
  the partnership, but only to the extent that those costs are related
  to goods distributed to the taxable entity as goods-in-kind in the
  ordinary course of production activities rather than being sold.
         [(d)     In addition to the amounts includable under Subsection
  (c), the cost of goods sold includes the following costs in relation
  to the taxable entity's goods:
               [(1)  deterioration of the goods;
               [(2)  obsolescence of the goods;
               [(3)     spoilage and abandonment, including the costs of
  rework labor, reclamation, and scrap;
               [(4)     if the property is held for future production,
  preproduction direct costs allocable to the property, including
  costs of purchasing the goods and of storage and handling the goods,
  as provided by Subsections (c)(4) and (c)(5);
               [(5)     postproduction direct costs allocable to the
  property, including storage and handling costs, as provided by
  Subsections (c)(4) and (c)(5);
               [(6)     the cost of insurance on a plant or a facility,
  machinery, equipment, or materials directly used in the production
  of the goods;
               [(7)  the cost of insurance on the produced goods;
               [(8)     the cost of utilities, including electricity,
  gas, and water, directly used in the production of the goods;
               [(9)     the costs of quality control, including
  replacement of defective components pursuant to standard warranty
  policies, inspection directly allocable to the production of the
  goods, and repairs and maintenance of goods; and
               [(10)     licensing or franchise costs, including fees
  incurred in securing the contractual right to use a trademark,
  corporate plan, manufacturing procedure, special recipe, or other
  similar right directly associated with the goods produced.
         [(e)     The cost of goods sold does not include the following
  costs in relation to the taxable entity's goods:
               [(1)     the cost of renting or leasing equipment,
  facilities, or real property that is not used for the production of
  the goods;
               [(2)     selling costs, including employee expenses
  related to sales;
               [(3)     distribution costs, including outbound
  transportation costs;
               [(4)  advertising costs;
               [(5)  idle facility expense;
               [(6)  rehandling costs;
               [(7)     bidding costs, which are the costs incurred in
  the solicitation of contracts ultimately awarded to the taxable
  entity;
               [(8)     unsuccessful bidding costs, which are the costs
  incurred in the solicitation of contracts not awarded to the
  taxable entity;
               [(9)     interest, including interest on debt incurred or
  continued during the production period to finance the production of
  the goods;
               [(10)     income taxes, including local, state, federal,
  and foreign income taxes, and franchise taxes that are assessed on
  the taxable entity based on income;
               [(11)     strike expenses, including costs associated
  with hiring employees to replace striking personnel, but not
  including the wages of the replacement personnel, costs of
  security, and legal fees associated with settling strikes;
               [(12)  officers' compensation;
               [(13)  costs of operation of a facility that is:
                     [(A)     located on property owned or leased by the
  federal government; and
                     [(B)     managed or operated primarily to house
  members of the armed forces of the United States; and
               [(14)     any compensation paid to an undocumented worker
  used for the production of goods.   As used in this subdivision:
                     [(A)     "undocumented worker" means a person who is
  not lawfully entitled to be present and employed in the United
  States; and
                     [(B)     "goods" includes the husbandry of animals,
  the growing and harvesting of crops, and the severance of timber
  from realty.
         [(f)     A taxable entity may subtract as a cost of goods sold
  indirect or administrative overhead costs, including all mixed
  service costs, such as security services, legal services, data
  processing services, accounting services, personnel operations,
  and general financial planning and financial management costs, that
  it can demonstrate are allocable to the acquisition or production
  of goods, except that the amount subtracted may not exceed four
  percent of the taxable entity's total indirect or administrative
  overhead costs, including all mixed service costs.   Any costs
  excluded under Subsection (e) may not be subtracted under this
  subsection.
         [(g)     A taxable entity that is allowed a subtraction by this
  section for a cost of goods sold and that is subject to Section
  263A, 460, or 471, Internal Revenue Code, may capitalize that cost
  in the same manner and to the same extent that the taxable entity
  capitalized that cost on its federal income tax return or may
  expense those costs, except for costs excluded under Subsection
  (e), or in accordance with Subsections (c), (d), and (f). If the
  taxable entity elects to capitalize costs, it must capitalize each
  cost allowed under this section that it capitalized on its federal
  income tax return.   If the taxable entity later elects to begin
  expensing a cost that may be allowed under this section as a cost of
  goods sold, the entity may not deduct any cost in ending inventory
  from a previous report.   If the taxable entity elects to expense a
  cost of goods sold that may be allowed under this section, a cost
  incurred before the first day of the period on which the report is
  based may not be subtracted as a cost of goods sold.   If the taxable
  entity elects to expense a cost of goods sold and later elects to
  capitalize that cost of goods sold, a cost expensed on a previous
  report may not be capitalized.
         [(h)     A taxable entity shall determine its cost of goods
  sold, except as otherwise provided by this section, in accordance
  with the methods used on the federal income tax return on which the
  report under this chapter is based.   This subsection does not affect
  the type or category of cost of goods sold that may be subtracted
  under this section.
         [(i)     A taxable entity may make a subtraction under this
  section in relation to the cost of goods sold only if that entity
  owns the goods.     The determination of whether a taxable entity is
  an owner is based on all of the facts and circumstances, including
  the various benefits and burdens of ownership vested with the
  taxable entity.   A taxable entity furnishing labor or materials to a
  project for the construction, improvement, remodeling, repair, or
  industrial maintenance (as the term "maintenance" is defined in 34
  T.A.C. Section 3.357) of real property is considered to be an owner
  of that labor or materials and may include the costs, as allowed by
  this section, in the computation of cost of goods sold.   Solely for
  purposes of this section, a taxable entity shall be treated as the
  owner of goods being manufactured or produced by the entity under a
  contract with the federal government, including any subcontracts
  that support a contract with the federal government,
  notwithstanding that the Federal Acquisition Regulation may
  require that title or risk of loss with respect to those goods be
  transferred to the federal government before the manufacture or
  production of those goods is complete.
         [(j)     A taxable entity may not make a subtraction under this
  section for cost of goods sold to the extent the cost of goods sold
  was funded by partner contributions and deducted under Subsection
  (c)(13).
         [(k)     Notwithstanding any other provision of this section,
  if the taxable entity is a lending institution that offers loans to
  the public and elects to subtract cost of goods sold, the entity,
  other than an entity primarily engaged in an activity described by
  category 5932 of the 1987 Standard Industrial Classification Manual
  published by the federal Office of Management and Budget, may
  subtract as a cost of goods sold an amount equal to interest
  expense.   For purposes of this subsection, an entity engaged in
  lending to unrelated parties solely for agricultural production
  offers loans to the public.
         [(k-1)     Notwithstanding any other provision of this section,
  the following taxable entities may subtract as a cost of goods sold
  the costs otherwise allowed by this section in relation to tangible
  personal property that the entity rents or leases in the ordinary
  course of business of the entity:
               [(1)     a motor vehicle rental or leasing company that
  remits a tax on gross receipts imposed under Section 152.026;
               [(2)     a heavy construction equipment rental or leasing
  company; and
               [(3)     a railcar rolling stock rental or leasing
  company.
         [(k-2)     This subsection applies only to a pipeline entity:
  (1) that owns or leases and operates the pipeline by which the
  product is transported for others and only to that portion of the
  product to which the entity does not own title; and (2) that is
  primarily engaged in gathering, storing, transporting, or
  processing crude oil, including finished petroleum products,
  natural gas, condensate, and natural gas liquids, except for a
  refinery installation that manufactures finished petroleum
  products from crude oil. Notwithstanding Subsection (e)(3) or (i),
  a pipeline entity providing services for others related to the
  product that the pipeline does not own and to which this subsection
  applies may subtract as a cost of goods sold its depreciation,
  operations, and maintenance costs allowed by this section related
  to the services provided.
         [(k-3)     For purposes of Subsection (k-2), "processing" means
  the physical or mechanical removal, separation, or treatment of
  crude oil, including finished petroleum products, natural gas,
  condensate, and natural gas liquids after those materials are
  produced from the earth.   The term does not include the chemical or
  biological transformation of those materials.
         [(l)     Notwithstanding any other provision of this section, a
  payment made by one member of an affiliated group to another member
  of that affiliated group not included in the combined group may be
  subtracted as a cost of goods sold only if it is a transaction made
  at arm's length.
         [(m)     In this section, "arm's length" means the standard of
  conduct under which entities that are not related parties and that
  have substantially equal bargaining power, each acting in its own
  interest, would negotiate or carry out a particular transaction.
         [(n)     In this section, "related party" means a person,
  corporation, or other entity, including an entity that is treated
  as a pass-through or disregarded entity for purposes of federal
  taxation, whether the person, corporation, or entity is subject to
  the tax under this chapter or not, in which one person, corporation,
  or entity, or set of related persons, corporations, or entities,
  directly or indirectly owns or controls a controlling interest in
  another entity.
         [(o)     If a taxable entity, including a taxable entity with
  respect to which cost of goods sold is determined pursuant to
  Section 171.1014(e)(1), whose principal business activity is film
  or television production or broadcasting or the distribution of
  tangible personal property described by Subsection (a)(3)(A)(ii),
  or any combination of these activities, elects to subtract cost of
  goods sold, the cost of goods sold for the taxable entity shall be
  the costs described in this section in relation to the property and
  include depreciation, amortization, and other expenses directly
  related to the acquisition, production, or use of the property,
  including expenses for the right to broadcast or use the property.
         [(t)     If a taxable entity that is a movie theater elects to
  subtract cost of goods sold, the cost of goods sold for the taxable
  entity shall be the costs described by this section in relation to
  the acquisition, production, exhibition, or use of a film or motion
  picture, including expenses for the right to use the film or motion
  picture.]
         SECTION 2.  Section 171.1011(v), Tax Code, is amended to
  read as follows:
         (v)  A taxable entity primarily engaged in the business of
  transporting goods by waterways that does not subtract cost of
  goods sold in computing its taxable margin shall exclude from its
  total revenue direct costs of providing transportation services by
  intrastate or interstate waterways to the same extent that a
  taxable entity that sells in the ordinary course of business real or
  tangible personal property would be authorized by Section 171.1012
  to subtract those costs as costs of goods sold in computing its
  taxable margin[, notwithstanding Section 171.1012(e)(3)].
         SECTION 3.  This Act applies only to a report originally due
  on or after the effective date of this Act.
         SECTION 4.  This Act takes effect January 1, 2016.
feedback