November 2020
The Comptroller's office publishes this newsletter to keep you informed about Texas taxes. Tax Policy News provides general information and is not a substitute for legal or other professional advice.
In This Issue . . .
COVID-19 News
Comptroller COVID-19 Response
The Comptroller's office understands the tremendous strain the pandemic and its related closures have placed on businesses throughout our state. We're grateful that virtually all of our taxpayers are doing their best to remain in compliance with Texas tax requirements, and we want to ease this burden whenever possible.
We will continue to extend the payment deadline for the motor vehicle tax due on purchases until the Governor's state disaster declaration expires. Any tax penalty will be automatically waived if the tax payment is received within 60 days of the expiration of the state disaster declaration.
For businesses struggling to pay the full amount of sales taxes they collect from customers, a short-term payment agreement may be available.
We continue to stand with and assist our Texas businesses during these difficult times.
For more information on these accommodations in addition to other COVID-19 related information, please see
Reminders
Certificate of Account Status — Webfile
Recent upgrades to the Webfile system make it easier to obtain a Certificate of Account Status online. Taxpayers who don't owe a report, payment or late fee can file their annual and final reports and then request a Certificate of Account Status the same day. The certificate will be available for immediate download. Using this self-service option is more convenient and avoids the delays of mailing and processing. If you do not owe any outstanding reports or payments, you may still conveniently obtain your certificate using Webfile.
The certificate will be available for immediate download. Using this self-service option is more convenient and avoids the delays of mailing and processing.
Tax Training Resources
Webinars
Our latest webinar, "Sales Tax Exemptions for Healthcare Items," was held in June and highlighted the sales tax exemptions available for a variety of healthcare items such as medicines, medical equipment and devices. A recording of this webinar is now available.
Our next webinar will be prerecorded and made available on our Tax Training Resources webpage in December. The webinar will discuss topics for Texas purchasers and sellers, focusing on changes after the U.S. Supreme Court decision in Wayfair v. South Dakota (PDF). For more information about the release of the webinar, please check the Tax Training Resources webpage. Information will also be emailed to GovDelivery recipients when the webinar is available.
We also offer video tutorials on filing and paying sales tax through Webfile. View them on our Video Tutorials webpage.
Visit our Tax Training Resources webpage to
find out more about our training resources
view the Podcast and Webinar Archive sections for previous recordings
Franchise Tax
Total Revenue vs. Cost of Goods Sold — Understanding the Difference
This article gives an overview of total revenue, cost of goods sold (COGS) and compensation; how franchise taxpayers should report them; and helpful information on where to find exclusions or deductions for each.
Total Revenue
What is total revenue for Texas franchise tax? A taxable entity's total revenue is tied closely to its Internal Revenue Service (IRS) federal tax return. To determine total revenue, the taxpayer totals the amounts entered on the federal tax return for the following:
gross receipts or sales
dividends
interest
[gross] rents
royalties
gains/losses
other income
Exclusions
Total revenue exclusions for franchise tax are amounts the law allows a taxable entity to subtract from its total revenue, usually to the extent the amounts are included in total revenue. Total revenue exclusions are entered on line 9 of the long form and EZ form, can be claimed by any qualifying entity, and include
exclusions any entity can claim, or "general" exclusions such as
bad debt expensed for federal income tax purposes
foreign royalties and foreign dividends
net distributive income from a taxable entity treated as a partnership or as an S corporation for federal income tax purposes
allowable deductions from IRS Form 1120, Schedule C relating to dividend income
income attributable to an entity that is a disregarded entity for federal income tax purposes
exclusions for flow-through funds mandated by law or fiduciary duty to be distributed to other entities
exclusions for flow-through funds mandated by contract or subcontract to be distributed to other entities, limited to the following flow-through funds
sales commissions to nonemployees
tax basis of securities underwritten
subcontracting payments made under a contract or subcontract to provide services, labor or materials in connection with the actual or proposed design, construction, remodeling, remediation, or repair of improvements on real property or within the boundaries of real property
exclusions for certain industries or industry activities, with some entities required to be primarily engaged in that specific activity can be found in Texas Tax Code Sections 171.1011 (g-1) — (x), Determination of Total Revenue from Entire Business
Any amount excluded from total revenue cannot be taken as a COGS or compensation deduction.
Cost of Goods Sold (COGS)
An entity incurs COGS when acquiring or producing goods the taxable entity sells in the ordinary course of business. For franchise tax purposes, goods include real or tangible personal property (TPP) and do not include services or intangible property.
The COGS reported for franchise tax differs somewhat from the COGS that is reported for federal income tax purposes.
The three types of costs that a taxable entity can include when calculating its COGS deduction are
direct costs of acquiring or producing the goods
additional costs related to the goods
indirect or administrative overhead costs that are allocable to the acquisition or production of the goods, capped at 4 percent of total indirect or administrative overhead costs
For more information, see Rule 3.588 — Margin: Cost of Goods Sold.
Certain other costs are not allowed, such as
advertising
selling and distribution costs
interest expense
officers' compensation
A taxable entity must produce or acquire goods for sale and own the goods it is selling, with several exceptions for certain industries that can be found in Texas Tax Code Sections 171.1012(i)–(t).
Compensation
A taxable entity can take a compensation deduction when it pays its employees wages and cash compensation, and/or provides benefits.
Keep in mind that the actual amount of wages and cash compensation paid by a taxable entity to each officer, director, owner, partner and employee may not include more than $390,000, for reports years 2020 and 2021.
Wages and cash compensation include
Internal Revenue Service Form W-2 wages or an equivalent foreign wage
stock awards and stock options
net distributive income reported to a natural person
Wages and cash compensation do not include
payments made that are reportable on Internal Revenue Form 1099
the taxpayer's share of payroll taxes
wages paid to undocumented workers
Benefits include any benefits allowed by the IRS that the taxable entity pays on behalf of its employees, such as
employees' health savings accounts
health care (for example, this would include contributions to the cost of health insurance)
retirement
workers' compensation
Benefits do not include
amounts included in the definition of wages and cash compensation.
payroll taxes. For example, "payroll taxes" would include payments to state and federal unemployment compensation funds and payments under the
Federal Insurance Contributions Act, Chapter 21 of Subtitle C of the Internal Revenue Code, §§3101 — 3128; and
Railroad Retirement Tax Act, Chapter 22 of Subtitle C of the Internal Revenue Code, §§3201 — 3233.
amounts paid by an employee.
Forms
A taxable entity's total revenue determines which franchise tax report form it may file. If a taxable entity's total revenue is
$1,180,000 or less for report years 2020 and 2021, it can file Form 05-163, No Tax Due Report (PDF)
$20 million or less, it can file Form 05-169, EZ Computation Report (PDF)
A taxable entity must file Form 05-158-A and 05-158-B, Franchise Tax Report (PDF) Pages 1 and 2 (Long Form), when it is
taking either a COGS or compensation deduction;
taking any allowable deductions for solar/wind energy system costs, clean coal project costs or relocation costs; or
claiming any credits such as a historic structure rehabilitation credit, qualified research and development credit, etc.
Franchise tax rates, thresholds and deduction limits vary by report year. Below are the rates for reports years 2020 and 2021.
Item | Amount |
|---|---|
No Tax Due Threshold | $1,180,000 |
Tax Rate (retail or wholesale) | 0.375 percent |
Tax Rate (other than retail or wholesale) | 0.75 percent |
Compensation Deduction Limit | $390,000 |
EZ Computation Total Revenue Threshold | $20 million |
EZ Computation Rate | 0.331 percent |
The law requires an entity that qualifies to file Form 05-163, No Tax Due Franchise Tax Report (PDF), to file this report electronically. A taxable entity can use our Webfile system or an approved third-party software to do so.
More Information
Sales and Use Tax
Decking Your Halls
When buying holiday decorations, you owe tax unless you buy them from a tax-exempt organization (PDF) during one of its tax-free fundraisers.
Examples of holiday decorations include
holiday lights (interior and exterior)
candles
holiday trees and garlands
mistletoe and holly
poinsettias and wreaths
ornaments
Hiring a Holiday Decorator
People often hire a holiday decorator to help "deck the halls" of their home or business.
You do not owe tax when your decorator
uses your decorations; and
charges only for their time to decorate your tree, hang your lights and otherwise decorate your home or business. Any charges for removing the decorations are also not taxable.
This is because your decorator is only selling their time or labor, which is not taxable when not in conjunction with the sale of a taxable item.
You do owe tax on the full charge for the decorations and time when your decorator
sells or rents decorations to you; and
charges for their time to decorate your tree, hang the lights and otherwise decorate your home or business. Any charges for removing the decorations are also taxable.
This is because your decorator is selling both their time and taxable items, making the total price charged taxable.
Decorating Windows
Business windows — If you hire someone to paint holiday images on the windows at your business, you owe tax on the total amount charged. Any charges for removing the images are also taxable. These services are considered taxable nonresidential repair and remodeling services.
Home windows — If you hire someone to paint holiday images on the windows at your home and you provide the paint, you do not owe tax on the charge for the time to paint the windows. This is because residential repair and remodeling labor or services are not taxable.
If the painter provides the paint, and charges you
one charge for the job, you do not owe tax; the painter pays tax on the paint when they buy it.
separately for time and paint, then you owe tax on the charge for the paint. This is the sale of taxable items under a separated contract for residential repair and remodeling.
If the decorator removes the painted images for you, and separately charges for that service, then you owe tax on the charge for removing the images as a real property cleaning service. If the decorator charges one amount for painting the image and later removing it, the charge is not taxable as long as the amount charged for removing the image is not more than 5 percent of the total charge.
More Information
Rule 3.357 — Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance
Publication 96-122 — Exempt Organization Purchases and Sales (PDF)
Marketplace Sellers' Tax Responsibilities
A marketplace is a physical or electronic store, internet website, software application, or catalog that marketplace sellers use to make sales. A marketplace provider is an entity that owns or operates a marketplace and processes sales or payments for marketplace sellers. Examples include Amazon, Walmart Marketplace, StubHub and Etsy. Antique malls or other markets with centralized cash registers are also examples of marketplaces. A marketplace seller is an individual who sells through a marketplace provider.
Marketplace providers engaged in business in Texas must collect, report and remit state and local sales and use tax on all sales made through a marketplace. Marketplace providers are required to certify to marketplace sellers that they will collect sales and use tax on their behalf. Marketplace sellers who have been given this certification are not responsible for collecting tax on sales made through the marketplace. No special form or language is required to notify marketplace sellers that the provider is collecting and remitting tax for Texas. The notification can be part of the terms of use or any other agreement between the marketplace provider and seller and does not need to be a separate document that the provider issues to all sellers.
Texas Sellers
If you are a marketplace seller located in Texas, you are not responsible for collecting and remitting sales and use tax on your sales made through a marketplace that has certified they are collecting tax on your behalf. You must, however, retain records of your marketplace sales for at least four years.
When completing the Texas Sales and Use Tax Return, you will include sales made through a marketplace provider in "Total Texas Sales" (Item 1), but exclude them from "Taxable Sales" (Item 2). As a Texas seller, you must file sales and use tax returns timely even if you do not have any taxable sales to report.
You should collect, report and remit tax on sales made outside a marketplace (through a business website, in person, etc.) as usual.
Remote Sellers
If you are a remote seller that only sells into Texas through a marketplace provider that has certified they will collect sales and use tax on your behalf, you are not required to hold a Texas tax permit. You must, however, keep required records of your marketplace sales for at least four years.
If you are a remote seller and you sell through a marketplace and your own website, you must have a use tax permit if you cross the $500,000 safe harbor threshold. You must include all sales when making the safe harbor calculation, including marketplace sales, even if the marketplace provider is collecting and remitting the sales tax. When completing the Texas Sales and Use Tax Return, you will include sales made through a marketplace provider in "Total Texas Sales" (Item 1), but exclude them from "Taxable Sales" (Item 2).
More Information
Rules
Proposed
The Comptroller's office proposed the following rules for public comment through the Texas Register:
Franchise
Rule 3.586 — Margin: Nexus
Publication date — Dec. 4, 2020
Comment period end date — Jan. 3, 2021
Rule 3.591 — Margin: Apportionment
Publication date — Nov. 13, 2020
Comment period end date — Dec. 13, 2020
State Tax Automated Research System
STAR Watch
To see the latest items added to our State Tax Automated Research (STAR) system, use the New Documents link on the STAR home page.
The Monthly Updates Search Form defaults to the current month and "All Taxes." Use the pull-down menu to choose a different month or a particular tax. Selecting "All Taxes" brings up the documents organized by tax type.