Section 3.587 - Margin: Total Revenue(a) Effective date. The provisions of this section apply to franchise tax reports originally due on or after January 1, 2008, except as otherwise noted.(b) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise. (1) Actual cost of uncompensated care--The amount determined by multiplying Operating Expenses by the Uncompensated Care Ratio where: (A) operating expenses are the amounts reported on line 2 and line 21, Internal Revenue Service Form 1065 or the amounts reported on line 2 and line 20, Internal Revenue Service Form 1120S or the corresponding line items from any other federal form filed, less any items that have already been subtracted from total revenue (e.g., bad debts);(B) uncompensated care ratio means uncompensated care charges less partial payments divided by total charges;(C) uncompensated care charges are the standard charges for health care services where the provider has not received any payment or where the provider has received partial payment that does not cover the cost of the health care provided to the patient. Uncompensated care charges do not include any portion of a charge that the health care provider has no right to collect under a private health care plan, under an agreement with an individual for a specific amount or under the charge limitations imposed by the programs described in subsection (e)(10)(A)(i) - (iii) of this section;(D) standard charges must be comparable to the charges applied to services provided to all patients of the health care provider;(E) partial payment is an amount that has been received toward uncompensated care charges that does not cover the cost of the services provided;(F) total charges are charges for all health care services, including uncompensated care;(G) records that clearly identify each patient, the procedure performed, and the standard charge for such a service, as well as payments received from each patient must be maintained by the health care provider for all uncompensated care;(H) a corresponding adjustment must be made to reduce the cost of goods sold deduction or the compensation deduction for the portion of the cost of goods sold or compensation that has been excluded from revenue: (i) the cost of goods sold deduction is reduced by subtracting the product of the cost of goods sold under § 3.588 of this title (relating to Margin: Cost of Goods Sold) multiplied by the uncompensated care ratio;(ii) the compensation deduction is reduced by subtracting the product of the compensation and benefits amounts under § 3.589 of this title (relating to Margin: Compensation) multiplied by the uncompensated care ratio.(2) Federal obligations-- (A) stocks and other direct obligations of, and obligations unconditionally guaranteed by, the United States government and United States government agencies; and(B) direct obligations of a United States government-sponsored agency.(3) Health care institution--An ambulatory surgical center; an assisted living facility licensed under Health and Safety Code, Chapter 247; an emergency medical services provider; a home and community support services agency; a hospice; a hospital; a hospital system; an intermediate care facility for the mentally retarded or a home and community-based services waiver program for persons with mental retardation adopted in accordance with the federal Social Security Act, §1915(c) (42 U.S.C. §1396n); a birthing center; a nursing home; an end stage renal disease facility licensed under Health and Safety Code, § 251.011; or a pharmacy.(4) Health care provider--Any taxable entity that participates in the Medicaid program, Medicare program, Children's Health Insurance Program (CHIP), state workers' compensation program, or TRICARE military health system as a provider of health care services.(5) Lending institution--An entity that makes loans; and (A) is regulated by the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, the Office of Thrift Supervision, the Texas Department of Banking, the Office of Consumer Credit Commissioner, the Credit Union Department, or any comparable regulatory body;(B) is licensed by, registered with, or otherwise regulated by the Department of Savings and Mortgage Lending;(C) is a "broker" or "dealer" as defined by the Securities Exchange Act of 1934 at 15 U.S.C. §78c; or(D) provides financing to unrelated parties solely for agricultural production.(6) Management company--A corporation, limited liability company, or other limited liability entity that conducts all or part of the active trade or business of another entity ("the managed entity") in exchange for a management fee and reimbursement of specified costs incurred in the conduct of the active trade or business of the managed entity, including wages and cash compensation as determined under Tax Code, § 171.1013(a) and (b). To qualify as a management company: (A) the entity must perform active and substantial management and operational functions, control and direct the daily operations and provide services such as accounting, general administration, legal, financial or similar services; or(B) if the entity does not conduct all of the active trade or business of an entity, the entity must conduct all operations, as provided in subparagraph (A) of this paragraph, for a distinct revenue-producing component of the entity.(7) Net distributive income--The net amount of income, gain, deduction, or loss relating to a pass-through entity or disregarded entity reportable to the owners for the tax year of the entity.(8) Obligation--Any bond, debenture, security, mortgage-backed security, pass-through certificate, or other evidence of indebtedness of the issuing entity. The term does not include a deposit, a repurchase agreement, a loan, a lease, a participation in a loan or pool of loans, a loan collateralized by an obligation of a United States government agency, or a loan guaranteed by a United States government agency.(9) Pro bono services--The direct provision of legal services to the poor, without an expectation of compensation.(10) Product--Services, tangible personal property, and intangible property.(11) Sales commission-- (A) any form of compensation paid to a person for engaging in an act for which a license is required by Occupations Code, Chapter 1101; or(B) compensation paid to a sales representative by a principal in an amount that is based on the amount or level of certain orders for or sales of the principal's product and that the principal is required to report on Internal Revenue Service Form 1099-MISC (or would have been reported if the amount had met the Internal Revenue Service minimum reporting requirement).(C) for purposes of defining sales commission, a principal is a person who: (i) manufactures, produces, imports, distributes, or acts as an independent agent for the distribution of a product for sale;(ii) uses a sales representative to solicit orders for the product; and(iii) compensates the sales representative wholly or partly by sales commission.(12) Security--The meaning assigned by Internal Revenue Code, §475(c)(2), and includes instruments described by Internal Revenue Code, §475(e)(2)(B), (C), and (D).(13) Staff leasing services company--A business entity that offers staff leasing services, as that term is defined by Labor Code, § 91.001, or a temporary employment service, as that term is defined by Labor Code, § 93.001.(14) Tiered partnership arrangement--An ownership structure in which any of the interests in one taxable entity treated as a partnership or an S corporation for federal income tax purposes (a "lower tier entity") are owned by one or more other taxable entities (an "upper tier entity").(15) United States government--Any department or ministry of the federal government, including a federal reserve bank. The term does not include a state or local government, a commercial enterprise owned wholly or partly by the United States government, or a local governmental entity or commercial enterprise whose obligations are guaranteed by the United States government.(16) United States government agency--An instrumentality of the United States government whose obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the United States government. The term includes the Government National Mortgage Association, the Department of Veterans Affairs, the Federal Housing Administration, the Farmers Home Administration, the Export-Import Bank, the Overseas Private Investment Corporation, the Commodity Credit Corporation, the Small Business Administration, and any successor agency.(17) United States government-sponsored agency--An agency originally established or chartered by the United States government to serve public purposes specified by the United States Congress but whose obligations are not explicitly guaranteed by the full faith and credit of the United States government. The term includes the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, the Farm Credit System, the Federal Home Loan Bank System, the Student Loan Marketing Association, and any successor agency.(c) General rules for reporting total revenue. (1) Variant of form. Any reference to an Internal Revenue Service form includes a variant of the form. For example, a reference to Form 1120 includes Forms 1120-A, 1120-S, and other variants of Form 1120. A reference to an Internal Revenue Service form also includes any subsequent form with a different number or designation that substantially provides the same information as the original form.(2) Amount reportable. Any reference to an amount reportable as income on a line number on an Internal Revenue Service form is the amount entered to the extent the amount entered complies with federal income tax law and includes the corresponding amount entered on a variant of the form, or a subsequent form, with a different line number to the extent the amount entered complies with federal income tax law.(3) Federal consolidated group. A taxable entity that is part of a federal consolidated group or is a disregarded entity shall compute its total revenue as if it had filed a separate return for federal income tax purposes; provided, however, that a disregarded entity may combine its revenue, cost of goods sold, compensation and gross revenue with its parent as provided by § 3.590(d)(6) of this title (relating to Margin: Combined Reporting). Further information on combined entities can be found in § 3.590 of this title.(4) Passive entity. A taxable entity will include its share of net distributive income from a passive entity, but only to the extent the net income of the passive entity was not generated by any other taxable entity.(5) Exclusions from total revenue. (A) Any expense excluded from total revenue (e.g. flow-through funds or the cost of uncompensated care allowed under subsection (e) of this section) may not be included in the determination of cost of goods sold (see § 3.588 of this title) or the determination of compensation (see § 3.589 of this title).(B) Net distributive income that is subtracted from total revenue may not be included in the determination of compensation.(6) Contract services. Except as provided by subsection (e)(2) of this section, a payment received under an ordinary contract for the provision of services in the ordinary course of business may not be excluded from the calculation of total revenue.(7) Payment to affiliated group members. If the taxable entity belongs to an affiliated group, the taxable entity may not exclude from the calculation of total revenue any payments described by subsection (e)(1) - (6) of this section that are made to entities that are members of the affiliated group.(8) Tiered partnership provision. This provision is not mandatory. Subject to the following subparagraphs, a lower tier entity in a tiered partnership arrangement may exclude from total revenue the amount of total revenue reported to an upper tier entity. If a lower tier entity chooses to file under the tiered partnership provision, the lower tier entity may report total revenue to any or all of its upper tier entities. The total revenue reported to an upper tier entity must equal the upper tier entity's ownership percentage of the lower tier entity's entire total revenue. (A) Reporting requirements. The lower tier entity must submit a report to the comptroller showing the amount of total revenue that each upper tier entity must include with the upper tier entity's own total revenue. Each upper tier entity must submit a report to the comptroller showing the amount of the lower tier entity's total revenue that was passed to the upper tier entity and is included in the total revenue of the upper tier entity.(B) Nontaxable upper tier entity. This paragraph does not apply to that percentage of the total revenue attributable to an upper tier entity by a lower tier entity if the upper tier entity is not subject to the tax under this chapter. In this case, the lower tier entity cannot report total revenue to the nontaxable upper tier entity and the lower tier entity cannot exclude this total revenue from its franchise tax report.(C) Eligibility for no tax due, discounts and the E-Z Computation. The no tax due thresholds, discounts and the E-Z Computation do not apply to an upper or lower tier entity if, before the attribution of any total revenue by a lower tier entity to upper tier entities under this section, the lower tier entity does not meet the criteria. See § 3.584(d)(8) of this title (relating to Margin: Reports and Payments).(D) Not a partnership distribution. Total revenue reported from a lower tier entity to an upper tier entity under the provisions of Tax Code, § 171.1015(b) is not a distribution from a partnership.(E) Combined reporting. The tiered partnership provision is not an alternative to combined reporting. Combined reporting is mandatory for taxable entities that meet the ownership and unitary criteria. See § 3.590 of this title. Therefore, the tiered partnership provision is not allowed if the lower tier entity is included in a combined group.(F) Accounting period. If the lower tier entity and an upper tier entity have different accounting periods, the upper tier entity must allocate the revenue reported from the lower tier entity to the accounting period that the upper tier entity's report is based on.(G) Lower tier entity no tax due. For reports originally due on or after January 1, 2010, if the lower tier entity owes no tax before the attribution of total revenue to the upper tier entities, filing under the tiered partnership provision is not allowed.(9) Allocated revenue. Revenue that Texas cannot tax because the activities generating that item of revenue do not have sufficient unitary connection with the entity's other activities conducted in Texas under the United States Constitution is not included in total revenue.(d) Reporting total revenue. The line items in this subsection refer to line items on the 2006 Internal Revenue Service forms. In computing total revenue for a subsequent report year, total revenue should be based on the equivalent line numbers from the corresponding federal report and computed based on the Internal Revenue Code of 1986 in effect for the federal tax year beginning on January 1, 2007. (1) Corporations. For the purpose of computing its taxable margin, the total revenue of a taxable entity treated as a corporation for federal income tax purposes is computed by: (A) adding: (i) the amount reportable as income on line 1c, Internal Revenue Service Form 1120;(ii) the amounts reportable as income on lines 4 through 10, Internal Revenue Service Form 1120; and(iii) any total revenue reported by a lower tier entity as includable in the taxable entity's total revenue under Tax Code, § 171.1015(b); and(B) subtracting, to the extent included in the calculation under subparagraph (A) of this paragraph: (i) bad debt expensed for federal income tax purposes that corresponds to items of gross receipts included for the current reporting period or a past reporting period;(ii) foreign royalties and foreign dividends, including amounts determined under Internal Revenue Code, §78 or §§951 - 964;(iii) net distributive income from a taxable entity treated as a partnership or as an S corporation for federal income tax purposes, except as provided by subsection (c)(4) of this section;(iv) allowable deductions from Internal Revenue Service Form 1120, Schedule C, to the extent the relating dividend income is included in total revenue;(v) items of income attributable to an entity that is a disregarded entity for federal income tax purposes; and(vi) other amounts authorized by subsection (e) of this section.(2) S corporations. For the purpose of computing its taxable margin, the total revenue of a taxable entity treated as an S corporation for federal income tax purposes is computed by: (A) adding: (i) the amount reportable as income on line 1c, Internal Revenue Service Form 1120S;(ii) the amounts reportable as income on lines 4 and 5, Internal Revenue Service Form 1120S;(iii) the amounts reportable as income on lines 3a and 4 through 10, Internal Revenue Service Form 1120S, Schedule K;(iv) the amounts reportable as income on lines 17 and 19, Internal Revenue Service Form 8825; and(v) any total revenue reported by a lower tier entity as includable in the taxable entity's total revenue under Tax Code, § 171.1015(b); and(B) subtracting, to the extent included in the calculation under subparagraph (A) of this paragraph: (i) bad debt expensed for federal income tax purposes that corresponds to items of gross receipts included for the current reporting period or a past reporting period;(ii) foreign royalties and foreign dividends, including amounts determined under Internal Revenue Code, §78 or §§951 - 964;(iii) net distributive income from a taxable entity treated as a partnership or as an S corporation for federal income tax purposes, except as provided by subsection (c)(4) of this section;(iv) items of income attributable to an entity that is a disregarded entity for federal income tax purposes; and(v) other amounts authorized by subsection (e) of this section.(3) Partnerships. For the purpose of computing its taxable margin, the total revenue of a taxable entity treated as a partnership for federal income tax purposes is computed by: (A) adding: (i) the amount reportable as income on line 1c, Internal Revenue Service Form 1065;(ii) the amounts reportable as income on lines 4, 6, and 7, Internal Revenue Service Form 1065;(iii) the amounts reportable as income on lines 3a and 5 through 11, Internal Revenue Service Form 1065, Schedule K;(iv) the amounts reportable as income on line 17, Internal Revenue Service Form 8825;(v) the amounts reportable as income on line 11, plus line 2 or line 45, Internal Revenue Service Form 1040, Schedule F; and(vi) any total revenue reported by a lower tier entity as includable in the taxable entity's total revenue under Tax Code, § 171.1015(b); and(B) subtracting, to the extent included in the calculation under subparagraph (A) of this paragraph: (i) bad debt expensed for federal income tax purposes that corresponds to items of gross receipts included for the current reporting period or a past reporting period;(ii) foreign royalties and foreign dividends, including amounts determined under Internal Revenue Code, §78 or §§951 - 964;(iii) net distributive income from a taxable entity treated as a partnership or as an S corporation for federal income tax purposes, except as provided by subsection (c)(4) of this section;(iv) items of income attributable to an entity that is a disregarded entity for federal income tax purposes; and(v) other amounts authorized by subsection (e) of this section.(4) Trusts. For the purpose of computing its taxable margin, the total revenue of a taxable entity treated as a trust for federal income tax purposes is computed by: (A) adding: (i) the amount reportable as income on lines 1, 2a, 3, 4, 7, and 8 of Internal Revenue Service Form 1041;(ii) the amount reportable as income on lines 3, 4, 32, and 37 of Internal Revenue Service Form 1040, Schedule E;(iii) the amounts reportable as income on line 11, plus line 2 or line 45, Internal Revenue Service Form 1040, Schedule F; and(iv) any total revenue reported by a lower tier entity as includable in the taxable entity's total revenue under Tax Code, § 171.1015(b); and(B) subtracting, to the extent included in the calculation under subparagraph (A) of this paragraph: (i) bad debt expensed for federal income tax purposes that corresponds to items of gross receipts included for the current reporting period or a past reporting period;(ii) foreign royalties and foreign dividends, including amounts determined under Internal Revenue Code, §78 or §§951 - 964;(iii) net distributive income from a taxable entity treated as a partnership or as an S corporation for federal income tax purposes, except as provided by subsection (c)(4) of this section;(iv) items of income attributable to an entity that is a disregarded entity for federal income tax purposes; and(v) other amounts authorized by subsection (e) of this section.(5) Single member limited liability company (LLC) filing as a sole proprietorship. For the purpose of computing its taxable margin, the total revenue of a taxable entity registered as a single member limited liability company and filing as a sole proprietorship for federal income tax purposes is computed by: (A) adding: (i) the amount reportable as income on line 3 of Internal Revenue Service, Form 1040, Schedule C;(ii) the amount reportable as income on line 17, Internal Revenue Service Form 4797, to the extent that it relates to the LLC;(iii) ordinary income or loss from partnerships, S corporations, estates and trusts, Internal Revenue Service Form 1040, Schedule E, to the extent that it relates to the LLC;(iv) the amount reportable as income on line 16 of Internal Revenue Service Form 1040, Schedule D, to the extent that it relates to the LLC;(v) the amounts reportable as income on lines 3 and 4, Internal Revenue Service Form 1040, Schedule E, to the extent that it relates to the LLC;(vi) the amounts reportable as income on line 11, plus line 2 or line 45, Internal Revenue Service Form 1040, Schedule F, to the extent that it relates to the LLC;(vii) the amount reportable as income on line 6 of Internal Revenue Service Form 1040, Schedule C, that has not already been included in this subparagraph; and(viii) any total revenue reported by a lower tier entity as includable in the taxable entity's total revenue under Tax Code, § 171.1015(b); and(B) subtracting, to the extent included in the calculation under subparagraph (A) of this paragraph: (i) bad debt expensed for federal income tax purposes that corresponds to items of gross receipts included for the current reporting period or a past reporting period;(ii) foreign royalties and foreign dividends, including amounts determined under Internal Revenue Code, §78 or §§951 - 964;(iii) net distributive income from a taxable entity treated as a partnership or as an S corporation for federal income tax purposes, except as provided by subsection (c)(4) of this section;(iv) items of income attributable to an entity that is a disregarded entity for federal income tax purposes; and(v) other amounts authorized by subsection (e) of this section.(6) Other taxable entities. For a taxable entity other than a taxable entity treated for federal income tax purposes as a corporation, S corporation, partnership, trust, or single member limited liability company filing as a sole proprietorship, the total revenue will be an amount determined in a manner substantially equivalent to the amount calculated for the entities listed in this subsection.(e) Exclusions from total revenue. Except as otherwise provided in this section and only to the extent included in the calculation of total revenue under subsection (d)(1) - (6) of this section, the following items shall be excluded from total revenue: (1) Flow-through funds mandated by law or fiduciary duty. Flow-through funds that are mandated by law or fiduciary duty to be distributed to other entities or persons, including taxes collected from a third party by the taxable entity and remitted by the taxable entity to a taxing authority; (A) Allowed exclusions include, but are not limited to, taxes imposed by law on a third party but collected by the taxable entity and remitted by it to a taxing authority. Examples include, but are not limited to, state sales tax and the Texas hotel occupancy tax.(B) For excise taxes, only those entities that collect and remit the tax to the taxing authority may exclude the tax from total revenue. Excise taxes include, but are not limited to, motor fuels taxes and tobacco taxes.(C) Taxes imposed by law on the taxable entity itself are not allowed as flow-through funds and cannot be excluded from total revenue. Examples include, but are not limited to, the Texas mixed beverage tax and the Texas franchise tax.(2) Flow-through funds mandated by contract. Flow-through funds that are mandated by contract to be distributed to other entities or persons, limited to: (A) sales commissions, as that term is defined by subsection (b)(11) of this section, to non-employees, including split-fee real estate commissions;(B) the tax basis as determined under the Internal Revenue Code of securities underwritten; and(C) subcontracting payments handled by the taxable entity to provide services, labor, or materials in connection with the actual or proposed design, construction, remodeling, or repair of improvements on real property or the location of the boundaries of real property;(3) Principal repayments. A taxable entity that is a lending institution shall exclude the principal repayment of loans;(4) Tax basis of securities and loans. A taxable entity shall exclude the tax basis, as determined under the Internal Revenue Code, of securities and loans sold;(5) Legal services. A taxable entity that provides legal services shall exclude: (A) the following flow-through funds that are mandated by law, contract, or fiduciary duty to be distributed to the claimant by the claimant's attorney or to other entities on behalf of a claimant by the claimant's attorney: (i) damages due the claimant;(ii) funds subject to a lien or other contractual obligation arising out of the representation, other than fees owed to the attorney;(iii) funds subject to a subrogation interest or other third-party contractual claim; and(iv) fees paid an attorney in the matter who is not a member, partner, shareholder, or employee of the taxable entity;(B) reimbursement of the taxable entity's expenses incurred in prosecuting a claimant's matter that are specific to the matter and that are not general operating expenses; and(C) regardless of whether it was included in the calculation of total revenue under subsection (d) of this section, $500 per pro bono services case handled by the attorney, but only if the attorney maintains records of the pro bono services for auditing purposes in accordance with the manner in which those services are reported to the State Bar of Texas;(6) Pharmacy cooperative. A taxable entity that is a pharmacy cooperative shall exclude flow-through funds from rebates from pharmacy wholesalers that are distributed to the pharmacy cooperative's shareholders;(7) Staff leasing services company. A taxable entity that is a staff leasing services company shall exclude payments received from a client company for wages, payroll taxes on those wages, employee benefits, and workers' compensation benefits for the employees assigned to the client company. A staff leasing services company cannot exclude payments received from a client company for payments made to independent contractors assigned to the client company and reportable on Internal Revenue Service Form 1099;(8) Dividends and interest from federal obligations. A taxable entity shall exclude dividends and interest received from federal obligations;(9) Management company. A taxable entity that is a management company shall exclude reimbursements of specified costs incurred in its conduct of the active trade or business of a managed entity, including wages and cash compensation as determined under Tax Code, § 171.1013(a) and (b);(10) Health care provider. A taxable entity that is a health care provider shall exclude: (A) the total amount of payments, including co-payments and deductibles from the patient or supplemental insurance, received: (i) under the Medicaid program, Medicare program, Indigent Health Care and Treatment Act (Health and Safety Code, Chapter 61), and Children's Health Insurance Program (CHIP), including any plans under these programs;(ii) for professional services provided in relation to a workers' compensation claim under Labor Code, Title 5;(iii) for professional services provided to a beneficiary rendered under the TRICARE military health system, including any plans under this program;(iv) from a third-party agent or administrator for revenue earned under clauses (i) - (iii) of this subparagraph; and(B) the actual costs, regardless of whether it was included in the calculation of total revenue under subsection (d)(1) - (6) of this section, of uncompensated care provided, but only if the provider maintains records of the uncompensated care for auditing purposes and, if the provider later receives payment for all or part of that care, the provider adjusts the amount excluded for the tax year in which the payment is received.(11) Health care institution. A health care provider that is a health care institution shall exclude 50% of the exclusion described in paragraph (10) of this subsection.(12) Federal government and armed forces. A taxable entity shall exclude all revenue received that is directly derived from the 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.(13) Oil and gas. During the dates, certified by the comptroller, in which the monthly average closing price of West Texas Intermediate crude oil is below $40 per barrel and the average closing price of gas is below $5 per MMBtu, as recorded on the New York Mercantile Exchange (NYMEX), a taxable entity shall exclude total revenue received from oil or gas produced from: (A) an oil well designated by the Railroad Commission of Texas or similar authority of another state whose production averages less than 10 barrels a day over a 90-day period; and(B) a gas well designated by the Railroad Commission of Texas or similar authority of another state whose production averages less than 250 mcf a day over a 90-day period.(14) Qualified destination management company. Effective for reports originally due on or after January 1, 2010, a taxable entity that is a qualified destination management company as defined by Tax Code, § 151.0565 shall exclude from its total revenue payments made to other entities or persons to provide services, labor, or materials in connection with the provision of destination management services as defined in Tax Code, § 151.0565.34 Tex. Admin. Code § 3.587
The provisions of this §3.587 adopted to be effective January 1, 2008, 32 TexReg 10028; amended to be effective January 1, 2009, 33 TexReg 10503; amended to be effective December 31, 2009, 34 TexReg 9470; amended to be effective September 30, 2012, 37 TexReg 7487