In a continuing effort to clarify certain Texas Margins Tax issues, the Texas Comptroller of Public Accounts (Comptroller) issued Tax Policy News in July 2010, which provides additional guidance on the Texas Margins Tax costs of goods sold computation; apportionment; and margin tax recovery fees. Texas statutes and regulations do not provide significant guidance on how these provisions should be applied.
Regarding the costs of goods sold deduction, the Comptroller clarified that this deduction may only be taken by taxpayers that produce “goods,” i.e., real property, tangible personal property, and specifically enumerated services related to video and radio programming. To the extent a taxpayer sells “mixed transactions”—transactions containing elements of both a “good” and a service—the taxpayer may only subtract as costs of goods sold those costs “in relation to” the good. However, a taxpayer may nonetheless deduct as costs of goods sold up to 4% of its back-office (“indirect or administrative overhead”) costs allocable to “the acquisition or production of goods.”
For apportionment purposes, the Comptroller also indicated that taxpayers must use the single-sales factor formula specified in Texas Tax Code § 171.105 when apportioning gross receipts for margin tax purposes. Although Texas has adopted the Multistate Tax Compact (see Texas Tax Code § 141.001), the Comptroller stated that Texas will not permit taxpayers to elect the Compact’s three-factor apportionment formula in lieu of the single-sales factor formula. Though the Tax Policy News letter states no basis for this conclusion, the statement is likely based on the Comptroller’s position that the Texas Margins Tax is not an income tax.
Lastly, the Comptroller stated that a taxpayer may choose to charge customers a separately stated fee as a way to recover its margins tax cost. Texas Comptroller of Public Accounts, STAR Doc. No. 201008847L (Aug. 6, 2010). The Comptroller determined that a “recovery fee” is permissible if the taxpayer:
- Explains to its customers that the charge is to recoup money paid by the company for margins tax imposed on the taxpayer;
- Does not represent the charge as a tax imposed directly on the customer;
- Ensures the line-item for the recovery charge does not appear in the “government fees and taxes” (or similar section) of the customer’s bill, invoice or contract; and
- Discloses that the recovery charge is not a tax the company is required to collect from its customers by law.
If these factors are not met, then the taxpayer must remit any charges it collects from the customer to the state. The taxpayer may not describe the fee charged as a “reimbursement,” “fee,” or “tax.” Finally, of note, any so-called “recovery fee” will be part of the total “sales price” of a taxable item sold by the company. As such, the recovery fee will be subject to sales tax in the same manner as the item sold.