Texas Margin Tax Receives Revisions

The revised Texas franchise tax (also known as the “margin tax”) now applies to all forms of entities with liability protection.  Previously, it applied only to corporations and limited liability companies.  Partnerships are now specifically included as a taxable entity.  A general partnership that is composed entirely of natural persons, however, is a nontaxable entity.  The revised tax is generally a tax on gross revenue less one of three specific deductions.

One of the deductions is for cost of goods sold. To be able to utilize this deduction, the taxable entity must own the goods. A contractor entity will be able to use the cost of goods sold deduction, even though the entity may not technically own the goods. Under the Texas Tax Code, a taxable entity furnishing labor or materials to a project for the construction, improvement, remodeling, repair, or industrial maintenance of real property is considered to be an owner of that labor or materials and may include the costs in the computation of cost of goods sold.

The calculation of cost of goods sold is based on statutory definitions and not federal rules. Cost of goods sold includes all direct costs of acquiring or producing the goods. The relevant statute specifically includes 23 items in cost of goods sold. It also lists 13 items that are not included in cost of goods sold, such as advertising costs, interest, officers’ compensation and distribution costs. Finally, up to 4% of the indirect or administrative overhead costs, including all mixed service costs, which are allocable to the acquisition or production of goods, may be deducted in cost of goods sold deduction.