Texas Margin Tax

Originally published by George W. Rendziperis.

The Texas Comptroller has extended the filing deadline for the 2021 Texas Margin Report (the “Margin Report”) from May 15, 2021 until June 15, 2021. This extension aligns with the extension by the IRS which extended the federal tax deadline to June 15, 2021 for all Texas residents and businesses.

Texas imposes a tax based on taxable margin (the “Margin Tax”). The Margin Tax is imposed on the taxable margin of each taxable entity that does business in Texas or that is chartered or organized under Texas law.  Almost all legal entities with limited liability protection are considered taxable entities under the Margin Tax regime, including state law limited partnerships and business trusts.  However, certain legal entities are specifically excluded from the definition of a taxable entity and thus are not subject to the Margin Tax.

Margin Tax law references to types of entities (e.g., corporations, partnerships, etc.) generally refer to how the entity is legally organized under state law and not how the entity is treated for federal income tax purposes.  Accordingly, the Comptroller will focus on how that entity is legally organized under state law for purposes of determining whether the entity is subject to the Margin Tax.  As such, the federal entity classification of a legal entity under the “check-the-box” Regulations generally has no relevance for the Margin Tax only for purposes of calculating its taxable margin.

The Margin Tax is calculated on a water’s-edge unitary combined basis.  The Margin Tax base is calculated by taking revenue from the relevant federal income tax form (“Total Revenue”) and subtracting from that amount, at the annual election of the taxable entity on a timely filed report, the greater of: (i) cost of goods sold (“COGS Deduction”); (ii) compensation (“Compensation Deduction”); (iii) the 30% standard deduction; or (iv) the $1 million deduction.   The Margin Tax base is then apportioned to Texas using a single gross receipts factor (sales factor) and is then multiplied by a tax rate of 0.375% for retailers and wholesalers or .75% for all other taxpayers.  Special provisions apply in determining whether a taxpayer is primarily engaged in retail or wholesale trade for purposes of the 0.5% tax rate.

The Margin Tax is filed on a water’s-edge unitary combined bases.   To determine whether related entities should be combined, it must be determined if an individual or entity has a controlling interest, directly or indirectly, of a group of affiliated entities.

A combined group means taxable entities that are part of an affiliated group engaged in a unitary business and that are required to file a group report.  A controlling interest is generally more than 50% of ownership in an entity or entities.  If a person or entity has a controlling interest in a group of entities, then it is presumed that such entities would file a combined Margin Tax report.  A taxpayer may rebut the presumption by showing that such entities are not unitary in nature.

Unitary means a single economic enterprise that is made up of separate parts of a single entity or of a commonly controlled group that are sufficiently interdependent, integrated and interrelated through their activities to provide a synergy and mutual benefit that produces a sharing or exchange of value amount them and a significant flow of value to the separate parts.    In other words, are the group members in the same line of business, vertically integrated in which they are dependent upon each other, and whether such group members are functionally integrated through the exercise of strong centralized management.

Considerations when preparing you Margin Tax Report:

• Should my entity be part of a combined Margin Report or does it file a separate Margin Report?
• Is your business entitled to the COGS deduction or is it limited one of the other three Deductions, Compensation, 30% of gross revenue or the 1 million dollars?
• If your business is entitled to use the COGS deduction, what costs are direct, indirect, or not allowable costs?
• Is your business entitled to the reduced wholesaler/retailer tax rate?
• How does your business determine Texas sales for apportionment purposes? Does the business sell tangible personal property, provide services, or sell intangibles, such as loans or intellectual property?
• How does your business determine everywhere sales for apportioned purposes? Do you include net losses from the sale of assets?

The Texas Comptroller has recently updated its rules regarding determining Texas Sales for apportionment purposes, which may have an impact on your business. See article posted regarding these changes at Freeman Law SALT Alert.

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