CHAPTER 171. FRANCHISE TAX

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TAX CODE

TITLE 2. STATE TAXATION

SUBTITLE F. FRANCHISE TAX

CHAPTER 171. FRANCHISE TAX

SUBCHAPTER A. DEFINITIONS; TAX IMPOSED

Sec. 171.0001. GENERAL DEFINITIONS. In this chapter:

(1) "Affiliated group" means a group of one or more entities in

which a controlling interest is owned by a common owner or

owners, either corporate or noncorporate, or by one or more of

the member entities.

(2) "Assigned employee" has the meaning assigned by Section

91.001, Labor Code.

(3) "Banking corporation" means each state, national, domestic,

or foreign bank, whether organized under the laws of this state,

another state, or another country, or under federal law,

including a limited banking association organized under Subtitle

A, Title 3, Finance Code, and each bank organized under Section

25(a), Federal Reserve Act (12 U.S.C. Sections 611-631) (edge

corporations), but does not include a bank holding company as

that term is defined by Section 2, Bank Holding Company Act of

1956 (12 U.S.C. Section 1841).

(4) "Beginning date" means:

(A) for a taxable entity chartered or organized in this state,

the date on which the taxable entity's charter or organization

takes effect; and

(B) for any other taxable entity, the date on which the taxable

entity begins doing business in this state.

(5) "Charter" includes a limited liability company's certificate

of organization, a limited partnership's certificate of limited

partnership, and the registration of a limited liability

partnership.

(6) "Client company" means:

(A) a person that contracts with a license holder under Chapter

91, Labor Code, and is assigned employees by the license holder

under that contract; or

(B) a client of a temporary employment service, as that term is

defined by Section 93.001(2), Labor Code, to whom individuals are

assigned for a purpose described by that subdivision.

(7) "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 under Section 171.1014.

(8) "Controlling interest" means:

(A) for a corporation, either more than 50 percent, owned

directly or indirectly, of the total combined voting power of all

classes of stock of the corporation, or more than 50 percent,

owned directly or indirectly, of the beneficial ownership

interest in the voting stock of the corporation;

(B) for a partnership, association, trust, or other entity other

than a limited liability company, more than 50 percent, owned

directly or indirectly, of the capital, profits, or beneficial

interest in the partnership, association, trust, or other entity;

and

percent, owned directly or indirectly, of the total membership

interest of the limited liability company or more than 50

percent, owned directly or indirectly, of the beneficial

ownership interest in the membership interest of the limited

liability company.

(9) "Internal Revenue Code" means the Internal Revenue Code of

1986 in effect for the federal tax year beginning on January 1,

2007, not including any changes made by federal law after that

date, and any regulations adopted under that code applicable to

that period.

(10) "Lending institution" means 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;

Exchange Act of 1934 at 15 U.S.C. Section 78c; or

(D) provides financing to unrelated parties solely for

agricultural production.

(11) "Management company" means 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) a management fee; and

(B) 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 Sections

171.1013(a) and (b).

(11-a) "Natural person" means a human being or the estate of a

human being. The term does not include a purely legal entity

given recognition as the possessor of rights, privileges, or

responsibilities, such as a corporation, limited liability

company, partnership, or trust.

(12) "Retail trade" means the activities described in Division G

of the 1987 Standard Industrial Classification Manual published

by the federal Office of Management and Budget.

(13) "Savings and loan association" means a savings and loan

association or savings bank, whether organized under the laws of

this state, another state, or another country, or under federal

law.

(13-a) "Security," for purposes of Sections 171.1011(g),

171.1011(g-2), and 171.106(f) only, has the meaning assigned by

Section 475(c)(2), Internal Revenue Code, and includes

instruments described by Sections 475(e)(2)(B), (C), and (D) of

that code.

(14) "Shareholder" includes a limited liability company's member

and a limited banking association's participant.

(15) "Staff leasing services company" means:

(A) a business entity that offers staff leasing services, as

that term is defined by Section 91.001, Labor Code; or

(B) a temporary employment service, as that term is defined by

Section 93.001, Labor Code.

(16) "Total revenue" means the total revenue of a taxable entity

as determined under Section 171.1011.

(17) "Unitary business" means a single economic enterprise that

is made up of separate parts of a single entity or of a commonly

controlled group of entities that are sufficiently

interdependent, integrated, and interrelated through their

activities so as to provide a synergy and mutual benefit that

produces a sharing or exchange of value among them and a

significant flow of value to the separate parts. In determining

whether a unitary business exists, the comptroller shall consider

any relevant factor, including whether:

(A) the activities of the group members are in the same general

line, such as manufacturing, wholesaling, retailing of tangible

personal property, insurance, transportation, or finance;

(B) the activities of the group members are steps in a

vertically structured enterprise or process, such as the steps

involved in the production of natural resources, including

exploration, mining, refining, and marketing; or

of strong centralized management, such as authority over

purchasing, financing, product line, personnel, and marketing.

(18) "Wholesale trade" means the activities described in

Division F of the 1987 Standard Industrial Classification Manual

published by the federal Office of Management and Budget.

Amended by:

Acts 2006, 79th Leg., 3rd C.S., Ch.

1, Sec. 2, eff. January 1, 2008.

Acts 2007, 80th Leg., R.S., Ch.

1282, Sec. 1, eff. January 1, 2008.

Sec. 171.0002. DEFINITION OF TAXABLE ENTITY. (a) Except as

otherwise provided by this section, "taxable entity" means a

partnership, limited liability partnership, corporation, banking

corporation, savings and loan association, limited liability

company, business trust, professional association, business

association, joint venture, joint stock company, holding company,

or other legal entity. The term includes a combined group. A

joint venture does not include joint operating or co-ownership

arrangements meeting the requirements of Treasury Regulation

Section 1.761-2(a)(3) that elect out of federal partnership

treatment as provided by Section 761(a), Internal Revenue Code.

(b) "Taxable entity" does not include:

(1) a sole proprietorship;

(2) a general partnership:

(A) the direct ownership of which is entirely composed of

natural persons; and

(B) the liability of which is not limited under a statute of

this state or another state, including by registration as a

limited liability partnership;

(3) a passive entity as defined by Section 171.0003; or

(4) an entity that is exempt from taxation under Subchapter B.

(1) a grantor trust as defined by Sections 671 and

7701(a)(30)(E), Internal Revenue Code, all of the grantors and

beneficiaries of which are natural persons or charitable entities

as described in Section 501(c)(3), Internal Revenue Code,

excluding a trust taxable as a business entity pursuant to

Treasury Regulation Section 301.7701-4(b);

(2) an estate of a natural person as defined by Section

7701(a)(30)(D), Internal Revenue Code, excluding an estate

taxable as a business entity pursuant to Treasury Regulation

Section 301.7701-4(b);

(3) an escrow;

(4) a real estate investment trust (REIT) as defined by Section

856, Internal Revenue Code, and its "qualified REIT subsidiary"

entities as defined by Section 856(i)(2), Internal Revenue Code,

provided that:

(A) a REIT with any amount of its assets in direct holdings of

real estate, other than real estate it occupies for business

purposes, as opposed to holding interests in limited partnerships

or other entities that directly hold the real estate, is a

taxable entity; and

(B) a limited partnership or other entity that directly holds

the real estate as described in Paragraph (A) is not exempt under

this subdivision, without regard to whether a REIT holds an

interest in it;

(5) a real estate mortgage investment conduit (REMIC), as

defined by Section 860D, Internal Revenue Code;

(6) a nonprofit self-insurance trust created under Chapter 2212,

Insurance Code, or a predecessor statute;

(7) a trust qualified under Section 401(a), Internal Revenue

Code; or

(8) a trust or other entity that is exempt under Section

501(c)(9), Internal Revenue Code.

(d) An entity that can file as a sole proprietorship for federal

tax purposes is not a sole proprietorship for purposes of

Subsection (b)(1) and is not exempt under that subsection if the

entity is formed in a manner under the statutes of this state,

another state, or a foreign country that limit the liability of

the entity.

Amended by:

Acts 2007, 80th Leg., R.S., Ch.

1282, Sec. 2, eff. January 1, 2008.

Sec. 171.0003. DEFINITION OF PASSIVE ENTITY. (a) An entity is

a passive entity only if:

(1) the entity is a general or limited partnership or a trust,

other than a business trust;

(2) during the period on which margin is based, the entity's

federal gross income consists of at least 90 percent of the

following income:

(A) dividends, interest, foreign currency exchange gain,

periodic and nonperiodic payments with respect to notional

principal contracts, option premiums, cash settlement or

termination payments with respect to a financial instrument, and

income from a limited liability company;

(B) distributive shares of partnership income to the extent that

those distributive shares of income are greater than zero;

sale of commodities traded on a commodities exchange, and gains

from the sale of securities; and

(D) royalties, bonuses, or delay rental income from mineral

properties and income from other nonoperating mineral interests;

and

(3) the entity does not receive more than 10 percent of its

federal gross income from conducting an active trade or business.

(a-1) In making the computation under Subsection (a)(3), income

described by Subsection (a)(2) may not be treated as income from

conducting an active trade or business.

(b) The income described by Subsection (a)(2) does not include:

(1) rent; or

(2) income received by a nonoperator from mineral properties

under a joint operating agreement if the nonoperator is a member

of an affiliated group and another member of that group is the

operator under the same joint operating agreement.

Amended by:

Acts 2006, 79th Leg., 3rd C.S., Ch.

1, Sec. 2, eff. January 1, 2008.

Acts 2007, 80th Leg., R.S., Ch.

1282, Sec. 3, eff. January 1, 2008.

Sec. 171.0004. DEFINITION OF CONDUCTING ACTIVE TRADE OR

BUSINESS. (a) The definition in this section applies only to

Section 171.0003.

(b) An entity conducts an active trade or business if:

(1) the activities being carried on by the entity include one or

more active operations that form a part of the process of earning

income or profit; and

(2) the entity performs active management and operational

functions.

performed by persons outside the entity, including independent

contractors, to the extent the persons perform services on behalf

of the entity and those services constitute all or part of the

entity's trade or business.

(d) An entity conducts an active trade or business if assets,

including royalties, patents, trademarks, and other intangible

assets, held by the entity are used in the active trade or

business of one or more related entities.

(e) For purposes of this section:

(1) the ownership of a royalty interest or a nonoperating

working interest in mineral rights does not constitute conduct of

an active trade or business;

(2) payment of compensation to employees or independent

contractors for financial or legal services reasonably necessary

for the operation of the entity does not constitute conduct of an

active trade or business; and

(3) holding a seat on the board of directors of an entity does

not by itself constitute conduct of an active trade or business.

Amended by:

Acts 2006, 79th Leg., 3rd C.S., Ch.

1, Sec. 2, eff. January 1, 2008.

Acts 2007, 80th Leg., R.S., Ch.

1282, Sec. 4, eff. January 1, 2008.

Sec. 171.001. TAX IMPOSED. (a) A franchise tax is imposed on

each taxable entity that does business in this state or that is

chartered or organized in this state.

(b) The tax imposed under this chapter extends to the limits of

the United States Constitution and the federal law adopted under

the United States Constitution.

not imposed on an entity if, during the period on which the

report is based, the entity qualifies as a passive entity as

defined by Section 171.0003.

Acts 1981, 67th Leg., p. 1691, ch. 389, Sec. 1, eff. Jan. 1,

1982. Amended by Acts 1991, 72nd Leg., ch. 901, Sec. 53(a), eff.

Aug. 26, 1991; Acts 1991, 72nd Leg., 1st C.S., ch. 5, Sec. 8.01,

eff. Jan. 1, 1992; Acts 1993, 73rd Leg., ch. 765, Sec. 7, eff.

Aug. 30, 1993; Acts 1995, 74th Leg., ch. 914, Sec. 12, eff. Sept.

1, 1995; Acts 1995, 74th Leg., ch. 1002, Sec. 1, eff. Jan. 1,

1996; Acts 1997, 75th Leg., ch. 1185, Sec. 1, eff. Jan. 1, 1998;

Acts 1999, 76th Leg., ch. 184, Sec. 1, eff. Jan. 1, 2000; Acts

2003, 78th Leg., ch. 209, Sec. 31, 32, eff. Oct. 1, 2003.

Amended by:

Acts 2006, 79th Leg., 3rd C.S., Ch.

1, Sec. 2, eff. January 1, 2008.

Acts 2007, 80th Leg., R.S., Ch.

1282, Sec. 5, eff. January 1, 2008.

Sec. 171.0011. ADDITIONAL TAX. (a) Except as provided by

Section 171.001(c), an additional tax is imposed on a taxable

entity that for any reason becomes no longer subject to the tax

imposed under this chapter.

(b) The additional tax is equal to the appropriate rate under

Section 171.002 of the taxable entity's taxable margin computed

on the period beginning on the day after the last day for which

the tax imposed on taxable margin or net taxable earned surplus

was computed and ending on the date the taxable entity is no

longer subject to the tax imposed under this chapter.

comptroller are due on the 60th day after the date the taxable

entity becomes no longer subject to the tax imposed under this

chapter.

(d) Except as otherwise provided by this section, the provisions

of this chapter apply to the tax imposed under this section.

(e) Repealed by Acts 2007, 80th Leg., R.S., Ch. 1282, Sec.

37(1), eff. January 1, 2008.

Added by Acts 1991, 72nd Leg., 1st C.S., ch. 5, Sec. 8.02, eff.

Jan. 1, 1992. Amended by Acts 1993, 73rd Leg., ch. 546, Sec. 1,

eff. Jan. 1, 1994.

Amended by:

Acts 2006, 79th Leg., 3rd C.S., Ch.

1, Sec. 2, eff. January 1, 2008.

Acts 2007, 80th Leg., R.S., Ch.

1282, Sec. 6, eff. January 1, 2008.

Acts 2007, 80th Leg., R.S., Ch.

1282, Sec. 37(1), eff. January 1, 2008.

Sec. 171.002. RATES; COMPUTATION OF TAX. (a) Subject to

Sections 171.003 and 171.1016 and except as provided by

Subsection (b), the rate of the franchise tax is one percent of

taxable margin.

(b) Subject to Sections 171.003 and 171.1016, the rate of the

franchise tax is 0.5 percent of taxable margin for those taxable

entities primarily engaged in retail or wholesale trade.

trade only if:

(1) the total revenue from its activities in retail or wholesale

trade is greater than the total revenue from its activities in

trades other than the retail and wholesale trades;

(2) except as provided by Subsection (c-1), less than 50 percent

of the total revenue from activities in retail or wholesale trade

comes from the sale of products it produces or products produced

by an entity that is part of an affiliated group to which the

taxable entity also belongs; and

(3) the taxable entity does not provide retail or wholesale

utilities, including telecommunications services, electricity, or

gas.

(c-1) Subsection (c)(2) does not apply to total revenue from

activities in a retail trade described by Major Group 58 of the

Standard Industrial Classification Manual published by the

federal Office of Management and Budget.

Text of subsection as amended by Acts 2009, 81st Leg., R.S., Ch.

286, Sec. 1

Text of subsection effective until December 31, 2011

(d) A taxable entity is not required to pay any tax and is not

considered to owe any tax for a period if:

(1) the amount of tax computed for the taxable entity is less

than $1,000; or

(2) the amount of the taxable entity's total revenue from its

entire business is less than or equal to $1 million or the amount

determined under Section 171.006 per 12-month period on which

margin is based.

Text of subsection as amended by Acts 2009, 81st Leg., R.S., Ch.

286, Sec. 2

Text of subsection effective on January 01, 2012

(d) A taxable entity is not required to pay any tax and is not

considered to owe any tax for a period if:

(1) the amount of tax computed for the taxable entity is less

than $1,000; or

(2) the amount of the taxable entity's total revenue from its

entire business is less than or equal to $600,000 or the amount

determined under Section 171.006 per 12-month period on which

margin is based.

Acts 1981, 67th Leg., p. 1691, ch. 389, Sec. 1, eff. Jan. 1,

1982. Amended by Acts 1984, 68th Leg., 2nd C.S., ch. 31, art. 3,

part D, Sec. 1, eff. May 1, 1985; Acts 1987, 70th Leg., 2nd C.S.,

ch. 5, art. 2, pt. 1, Sec. 1, eff. Jan. 1, 1988; Acts 1987, 70th

Leg., 2nd C.S., ch. 5, art. 2, pt. 2, Sec. 1, eff. Jan. 1, 1990;

Acts 1991, 72nd Leg., 1st C.S., ch. 5, Sec. 8.031(a), eff. Jan.

1, 1992; Acts 1997, 75th Leg., ch. 1185, Sec. 2, eff. Jan. 1,

1998; Acts 1999, 76th Leg., ch. 394, Sec. 10, eff. Jan. 1, 2000.

Amended by:

Acts 2006, 79th Leg., 3rd C.S., Ch.

1, Sec. 2, eff. January 1, 2008.

Acts 2007, 80th Leg., R.S., Ch.

1282, Sec. 7, eff. January 1, 2008.

Acts 2009, 81st Leg., R.S., Ch.

286, Sec. 1(a), eff. January 1, 2010.

Acts 2009, 81st Leg., R.S., Ch.

286, Sec. 2(a), eff. January 1, 2012.

Sec. 171.0021. DISCOUNTS FROM TAX LIABILITY FOR SMALL

BUSINESSES.

Text of subsection effective until January 01, 2012

(a) A taxable entity is entitled to a discount of the tax

imposed under this chapter that the taxable entity is required to

pay after determining its taxable margin under Section 171.101,

applying the appropriate rate of the tax under Section 171.002(a)

or (b), and subtracting any other allowable credits, as follows:

(1) for a taxable entity for which the total revenue from its

entire business is greater than $300,000 but less than $400,000,

the taxable entity is entitled to a discount of 80 percent;

(2) for a taxable entity for which the total revenue from its

entire business is equal to or greater than $400,000 but less

than $500,000, the taxable entity is entitled to a discount of 60

percent;

(3) for a taxable entity for which the total revenue from its

entire business is equal to or greater than $500,000 but less

than $700,000, the taxable entity is entitled to a discount of 40

percent; and

(4) for a taxable entity for which the total revenue from its

entire business is equal to or greater than $700,000 but less

than $900,000, the taxable entity is entitled to a discount of 20

percent.

Text of subsection effective on January 01, 2012

(a) A taxable entity is entitled to a discount of the tax

imposed under this chapter that the taxable entity is required to

pay after determining its taxable margin under Section 171.101,

applying the appropriate rate of the tax under Section 171.002(a)

or (b), and subtracting any other allowable credits, as follows:

(1) for a taxable entity for which the total revenue from its

entire business is greater than $600,000 but less than $700,000,

the taxable entity is entitled to a discount of 40 percent; and

(2) for a taxable entity for which the total revenue from its

entire business is equal to or greater than $700,000 but less

than $900,000, the taxable entity is entitled to a discount of 20

percent.

(b) The amounts under Subsection (a) are subject to adjustment

as provided by Section 171.006.

Added by Acts 2007, 80th Leg., R.S., Ch.

1282, Sec. 8, eff. January 1, 2008.

Amended by:

Acts 2009, 81st Leg., R.S., Ch.

286, Sec. 3(a), eff. January 1, 2012.

Sec. 171.003. INCREASE IN RATE REQUIRES VOTER APPROVAL. (a) An

increase in a rate provided by Section 171.002(a) or (b) takes

effect only if approved by a majority of the registered voters

voting in a statewide referendum held on the question of

increasing the rate. The referendum must specify the increased

rate or rates.

(b) This section does not apply to a decrease in a rate provided

by Section 171.002(a) or (b). If a rate is decreased, this

section applies to any subsequent increase in that rate.

by this chapter in relation to:

(1) the manner in which the tax is computed, including the

determination of margin and taxable margin and any allowable

deductions or credits;

(2) the manner in which the tax is administered or enforced; or

(3) the applicability of the tax to certain entities.

Amended by:

Acts 2006, 79th Leg., 3rd C.S., Ch.

1, Sec. 2, eff. January 1, 2008.

Sec. 171.006. ADJUSTMENT OF ELIGIBILITY FOR NO TAX DUE,

DISCOUNTS, AND COMPENSATION DEDUCTION. (a) In this section,

"consumer price index" means the average over a state fiscal

biennium of the Consumer Price Index for All Urban Consumers

(CPI-U), U.S. City Average, published monthly by the United

States Bureau of Labor Statistics, or its successor in function.

(b) Beginning in 2010, on January 1 of each even-numbered year,

the amounts prescribed by Sections 171.002(d)(2), 171.0021, and

171.1013(c) are increased or decreased by an amount equal to the

amount prescribed by those sections on December 31 of the

preceding year multiplied by the percentage increase or decrease

during the preceding state fiscal biennium in the consumer price

index and rounded to the nearest $10,000.

report originally due on or after the date the determination is

made.

(d) The comptroller shall make the determination required by

this section and may adopt rules related to making that

determination.

(e) A determination by the comptroller under this section is

final and may not be appealed.

Amended by:

Acts 2006, 79th Leg., 3rd C.S., Ch.

1, Sec. 2, eff. January 1, 2008.

Acts 2007, 80th Leg., R.S., Ch.

1282, Sec. 9, eff. January 1, 2008.

Acts 2007, 80th Leg., R.S., Ch.

1282, Sec. 10, eff. January 1, 2008.

Sec. 171.1016. E-Z COMPUTATION AND RATE. (a) Notwithstanding

any other provision of this chapter, a taxable entity whose total

revenue from its entire business is not more than $10 million may

elect to pay the tax imposed under this chapter in the amount

computed and at the rate provided by this section rather than in

the amount computed and at the tax rate provided by Section

171.002.

(b) The amount of the tax for which a taxable entity that elects

to pay the tax as provided by this section is liable is computed

by:

(1) determining the taxable entity's total revenue from its

entire business, as determined under Section 171.1011;

(2) apportioning the amount computed under Subdivision (1) to

this state, as provided by Section 171.106, to determine the

taxable entity's apportioned total revenue; and

(3) multiplying the amount computed under Subdivision (2) by the

rate of 0.575 percent.

this section may not take a credit, deduction, or other

adjustment that is not specifically authorized by this section.

(d) Section 171.0021 applies to a taxable entity that elects to

pay the tax as provided by this section.

(e) A reference in this chapter or other law to the rate of the

franchise tax means, as appropriate, the rate under Section

171.002 or, for a taxable entity that elects to pay the tax as

provided by this section, the rate under this section.

Added by Acts 2007, 80th Leg., R.S., Ch.

1282, Sec. 19, eff. January 1, 2008.

SUBCHAPTER B. EXEMPTIONS

Sec. 171.051. APPLICATION FOR EXEMPTION; EFFECTIVE DATE. (a)

Except as provided by Subsection (c) of this section, a

corporation may apply for an exemption under this subchapter by

filing with the comptroller, as provided by the rules of the

comptroller, evidence of the corporation's qualifications for the

exemption.

(b) If a corporation files the evidence establishing the

corporation's qualifications for an exemption within 15 months

after the last day of the calendar month in which the

corporation's charter or certificate of authority is dated, the

exemption is recognized, if it is finally established, as of the

date of the charter or certificate.

be established as provided by that section, but a corporation may

apply for and receive other exemptions as provided by this

section.

(d) Neither this section nor Section 171.063 of this code

requires a corporation that was granted a franchise tax exemption

before September 1, 1975, that was entitled to the exemption on

September 1, 1975, and that has held the exemption since that

date, to file an additional application, report, letter of

exemption, or other evidence of qualification for that exemption.

Acts 1981, 67th Leg., p. 1693, ch. 389, Sec. 1, eff. Jan. 1,

1982.

Sec. 171.052. CERTAIN CORPORATIONS. (a) Except as provided by

Subsection (c), an insurance organization, title insurance

company, or title insurance agent authorized to engage in

insurance business in this state now required to pay an annual

tax under Chapter 4 or 9, Insurance Code, measured by its gross

premium receipts is exempted from the franchise tax. A

nonadmitted insurance organization that is required to pay a

gross premium receipts tax during a tax year is exempted from the

franchise tax for that same tax year.

(b) Farm mutuals, local mutual aid associations, and burial

associations are not subject to the franchise tax.

any portion of which the entity is in violation of an order

issued by the Texas Department of Insurance under Section

2254.003(b), Insurance Code, that is final after appeal or that

is no longer subject to appeal.

Acts 1981, 67th Leg., p. 1693, ch. 389, Sec. 1, eff. Jan. 1,

1982. Amended by Acts 1985, 69th Leg., ch. 30, Sec. 1, eff. Aug.

26, 1985; Acts 1993, 73rd Leg., ch. 546, Sec. 2, eff. Jan. 1,

1994; Acts 2001, 77th Leg., ch. 1275, Sec. 1, eff. Sept. 1, 2001;

Acts 2003, 78th Leg., ch. 209, Sec. 33, eff. Oct. 1, 2003.

Amended by:

Acts 2006, 79th Leg., 3rd C.S., Ch.

1, Sec. 3, eff. January 1, 2008.

Sec. 171.0525. EXEMPTION--CERTAIN INSURANCE COMPANIES. A

corporation that is a farm mutual insurance company, local mutual

aid association, or burial association is exempted from the

franchise tax.

Added by Acts 2003, 78th Leg., ch. 1274, Sec. 23, eff. April 1,

2005.

Sec. 171.053. EXEMPTION--RAILWAY TERMINAL CORPORATION. A

corporation organized as a railway terminal corporation and

having no annual net income from its business is exempted from

the franchise tax.

Acts 1981, 67th Leg., p. 1693, ch. 389, Sec. 1, eff. Jan. 1,

1982.

Sec. 171.055. EXEMPTION--OPEN-END INVESTMENT COMPANY. An

open-end investment company, as defined by the Investment Company

Act of 1940 (Section 80a-1 et seq., 15 U.S.C.), that is subject

to that Act and that is registered under The Securities Act

(Article 581-1 et seq., Vernon's Texas Civil Statutes) is

exempted from the franchise tax.

Acts 1981, 67th Leg., p. 1693, ch. 389, Sec. 1, eff. Jan. 1,

1982.

Sec. 171.056. EXEMPTION--CORPORATION WITH BUSINESS INTEREST IN

SOLAR ENERGY DEVICES. A corporation engaged solely in the

business of manufacturing, selling, or installing solar energy

devices, as defined by Section 171.107 of this code, is exempted

from the franchise tax.

Acts 1981, 67th Leg., p. 1693, ch. 389, Sec. 1, eff. Jan. 1,

1982.

Sec. 171.057. EXEMPTION--NONPROFIT CORPORATION ORGANIZED TO

PROMOTE COUNTY, CITY, OR ANOTHER AREA. A nonprofit corporation

organized solely to promote the public interest of a county,

city, town, or another area in the state is exempted from the

franchise tax.

Acts 1981, 67th Leg., p. 1694, ch. 389, Sec. 1, eff. Jan. 1,

1982.

Sec. 171.058. EXEMPTION--NONPROFIT CORPORATION ORGANIZED FOR

RELIGIOUS PURPOSES. A nonprofit corporation organized for the

purpose of religious worship is exempted from the franchise tax.

Acts 1981, 67th Leg., p. 1694, ch. 389, Sec. 1, eff. Jan. 1,

1982.

Sec. 171.059. EXEMPTION--NONPROFIT CORPORATION ORGANIZED TO

PROVIDE BURIAL PLACES. A nonprofit corporation organized to

provide places of burial is exempted from the franchise tax.

Acts 1981, 67th Leg., p. 1694, ch. 389, Sec. 1, eff. Jan. 1,

1982.

Sec. 171.060. EXEMPTION--NONPROFIT CORPORATION ORGANIZED FOR

AGRICULTURAL PURPOSES. A nonprofit corporation organized to hold

agricultural fairs and encourage agricultural pursuits is

exempted from the franchise tax.

Acts 1981, 67th Leg., p. 1694, ch. 389, Sec. 1, eff. Jan. 1,

1982.

Sec. 171.061. EXEMPTION--NONPROFIT CORPORATION ORGANIZED FOR

EDUCATIONAL PURPOSES. A nonprofit corporation organized solely

for educational purposes is exempted from the franchise tax.

Acts 1981, 67th Leg., p. 1694, ch. 389, Sec. 1, eff. Jan. 1,

1982. Amended by Acts 1995, 74th Leg., ch. 1002, Sec. 3, eff.

Jan. 1, 1996.

Sec. 171.062. EXEMPTION--NONPROFIT CORPORATION ORGANIZED FOR

PUBLIC CHARITY. A nonprofit corporation organized for purely

public charity is exempted from the franchise tax.

Acts 1981, 67th Leg., p. 1694, ch. 389, Sec. 1, eff. Jan. 1,

1982.

Sec. 171.063. EXEMPTION-NONPROFIT CORPORATION EXEMPT FROM

FEDERAL INCOME TAX. (a) The following corporations are exempt

from the franchise tax:

(1) a nonprofit corporation exempted from the federal income tax

under Section 501(c)(3), (4), (5), (6), (7), (8), (10), or (19),

Internal Revenue Code which in the case of a nonprofit hospital

means a hospital providing community benefits that include

charity care and government-sponsored indigent health care as set

forth in Subchapter D, Chapter 311, Health and Safety Code;

(2) a corporation exempted under Section 501(c)(2) or (25),

Internal Revenue Code, if the corporation or corporations for

which it holds title to property is either exempt from or not

subject to the franchise tax; and

(3) a corporation exempted from federal income tax under Section

501(c)(16), Internal Revenue Code.

(b) A corporation is entitled to an exemption under this section

based on the corporation's exemption from the federal income tax

if the corporation files with the comptroller evidence

establishing the corporation's exemption.

section is established by furnishing the comptroller with a copy

of the Internal Revenue Service's letter of exemption issued to

the corporation.

(d) If the Internal Revenue Service has not timely issued to a

corporation a letter of exemption, evidence establishing the

corporation's provisional exemption under this section is

sufficient if the corporation timely files with the comptroller

evidence that the corporation has applied in good faith for the

federal tax exemption. The evidence must be filed not later than

the 15th month after the day that is the last day of a calendar

month and that is nearest to the date of the corporation's

charter or certificate of authority.

(e) An exemption established under Subsection (c) or (d) of this

section is to be recognized, after it is finally established, as

of the date of the corporation's charter or certificate of

authority.

(f) If a corporation timely files evidence with the comptroller

under Subsection (d) of this section that it has applied for a

federal tax exemption and if the application is finally denied by

the Internal Revenue Service, this chapter does not impose a

penalty on the corporation from the date of its charter or

certificate of authority to the date of the final denial.

(g) If a corporation's federal tax exemption is withdrawn by the

Internal Revenue Service for failure of the corporation to

qualify or maintain its qualification for the exemption, the

corporation's exemption under this section ends on the effective

date of that withdrawal by the Internal Revenue Service. The

effective date of the withdrawal is considered the corporation's

beginning date for purposes of determining the corporation's

privilege periods and for all other purposes of this chapter.

(h) A requirement that a nonprofit hospital provide charity care

and community benefits under Subsection (a)(1) may be satisfied

by a donation of money to the Texas Healthy Kids Corporation

established by Chapter 109, Health and Safety Code, if:

(1) the money is donated to be used for a purpose described by

Section 109.033(c), Health and Safety Code; and

(2) not more than 10 percent of the charity care required under

any provision of Section 311.045, Health and Safety Code, may be

satisfied by the donation.

Acts 1981, 67th Leg., p. 1694, ch. 389, Sec. 1, eff. Jan. 1,

1982. Amended by Acts 1987, 70th Leg., ch. 324, Sec. 3, eff. Aug.

31, 1987; Acts 1989, 71st Leg., ch. 239, Sec. 1, eff. June 2,

1989; Acts 1991, 72nd Leg., 1st C.S., ch. 5, Sec. 8.04, eff. Jan.

1, 1992; Acts 1995, 74th Leg., ch. 781, Sec. 6, eff. Sept. 1,

1995; Acts 1995, 74th Leg., ch. 1002, Sec. 4, eff. Jan. 1, 1996;

Acts 1997, 75th Leg., ch. 550, Sec. 3, eff. Jan. 1, 1998; Acts

1997, 75th Leg., ch. 1185, Sec. 3, eff. Jan. 1, 1998; Acts 1999,

76th Leg., ch. 1467, Sec. 2.50, 2.51, eff. Jan. 1, 2000.

Sec. 171.064. EXEMPTION--NONPROFIT CORPORATION ORGANIZED FOR

CONSERVATION PURPOSES. A nonprofit corporation organized solely

to educate the public about the protection and conservation of

fish, game, other wildlife, grasslands, or forests is exempted

from the franchise tax.

Acts 1981, 67th Leg., p. 1695, ch. 389, Sec. 1, eff. Jan. 1,

1982. Amended by Acts 1995, 74th Leg., ch. 1002, Sec. 5, eff.

Jan. 1, 1996.

Sec. 171.065. EXEMPTION--NONPROFIT CORPORATION ORGANIZED TO

PROVIDE WATER SUPPLY OR SEWER SERVICES. A nonprofit water supply

or sewer service corporation organized in behalf of a city or

town under Chapter 67, Water Code, is exempted from the franchise

tax.

Acts 1981, 67th Leg., p. 1695, ch. 389, Sec. 1, eff. Jan. 1,

1982. Amended by Acts 1999, 76th Leg., ch. 62, Sec. 18.47, eff.

Sept. 1, 1999.

Sec. 171.066. EXEMPTION--NONPROFIT CORPORATION INVOLVED WITH

CITY NATURAL GAS FACILITY. A nonprofit corporation organized to

construct, acquire, own, lease, or operate a natural gas facility

in behalf and for the benefit of a city or residents of a city is

exempted from the franchise tax.

Acts 1981, 67th Leg., p. 1695, ch. 389, Sec. 1, eff. Jan. 1,

1982.

Sec. 171.067. EXEMPTION--NONPROFIT CORPORATION ORGANIZED TO

PROVIDE CONVALESCENT HOMES FOR ELDERLY. A nonprofit corporation

organized to provide a convalescent home or other housing for

persons who are at least 62 years old or who are handicapped or

disabled is exempted from the franchise tax, whether or not the

corporation is organized for purely public charity.

Acts 1981, 67th Leg., p. 1695, ch. 389, Sec. 1, eff. Jan. 1,

1982.

Sec. 171.068. EXEMPTION--NONPROFIT CORPORATION ORGANIZED TO

PROVIDE COOPERATIVE HOUSING. A nonprofit corporation engaged

solely in the business of owning residential property for the

purpose of providing cooperative housing for persons is exempted

from the franchise tax.

Acts 1981, 67th Leg., p. 1695, ch. 389, Sec. 1, eff. Jan. 1,

1982.

Sec. 171.069. EXEMPTION--MARKETING ASSOCIATIONS. A marketing

association incorporated under Chapter 52, Agriculture Code, is

exempted from the franchise tax.

Acts 1981, 67th Leg., p. 1695, ch. 389, Sec. 1, eff. Jan. 1,

1982. Amended by Acts 1995, 74th Leg., ch. 1002, Sec. 6, eff.

Jan. 1, 1996.

Sec. 171.070. EXEMPTION--LODGES. A lodge incorporated under

Article 1399 et seq., Revised Civil Statutes of Texas, 1925, is

exempted from the franchise tax.

Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,

1982.

Sec. 171.071. EXEMPTION--FARMERS' COOPERATIVE SOCIETY. A

farmers' cooperative society incorporated under Chapter 51,

Agriculture Code, is exempted from the franchise tax.

Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,

1982. Amended by Acts 1995, 74th Leg., ch. 1002, Sec. 7, eff.

Jan. 1, 1996.

Sec. 171.072. EXEMPTION--HOUSING FINANCE CORPORATION. A housing

finance corporation incorporated under the Texas Housing Finance

Corporations Act (Chapter 394, Local Government Code) is exempted

from the franchise tax.

Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,

1982. Amended by Acts 1987, 70th Leg., ch. 149, Sec. 44, eff.

Sept. 1, 1987.

Sec. 171.073. EXEMPTION--HOSPITAL LAUNDRY COOPERATIVE

ASSOCIATION. A hospital laundry cooperative association

incorporated under Subchapter A, Chapter 301, Health and Safety

Code, is exempted from the franchise tax.

Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,

1982. Amended by Acts 1991, 72nd Leg., ch. 14, Sec. 284(16), eff.

Sept. 1, 1991.

Sec. 171.074. EXEMPTION--DEVELOPMENT CORPORATION. A nonprofit

corporation organized under the Development Corporation Act

(Subtitle C1, Title 12, Local Government Code) is exempted from

the franchise tax.

Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,

1982. Amended by Acts 1983, 68th Leg., p. 1039, ch. 235, art. 7,

Sec. 2(a), eff. Sept. 1, 1983.

Amended by:

Acts 2007, 80th Leg., R.S., Ch.

885, Sec. 3.72, eff. April 1, 2009.

Sec. 171.075. EXEMPTION--COOPERATIVE ASSOCIATION. A cooperative

association incorporated under Subchapter B, Chapter 301, Health

and Safety Code, or under the Cooperative Association Act

(Article 1396--50.01, Vernon's Texas Civil Statutes) is exempted

from the franchise tax.

Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,

1982. Amended by Acts 1991, 72nd Leg., ch. 14, Sec. 284(29), eff.

Sept. 1, 1991.

Sec. 171.076. EXEMPTION--COOPERATIVE CREDIT ASSOCIATION. A

cooperative credit association incorporated under Chapter 55,

Agriculture Code, an organization organized under 12 U.S.C.

Section 2071, or an agricultural credit association regulated by

the Farm Credit Administration is exempted from the franchise

tax.

Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,

1982. Amended by Acts 1995, 74th Leg., ch. 1002, Sec. 8, eff.

Jan. 1, 1996; Acts 2001, 77th Leg., ch. 1263, Sec. 56, eff. Sept.

1, 2001.

Sec. 171.077. EXEMPTION--CREDIT UNION. A credit union

incorporated under Subtitle D, Title 3, Finance Code, is exempted

from the franchise tax.

Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,

1982. Amended by Acts 1999, 76th Leg., ch. 62, Sec. 7.93, eff.

Sept. 1, 1999.

Sec. 171.079. EXEMPTION--ELECTRIC COOPERATIVE CORPORATION. An

electric cooperative corporation incorporated under Chapter 161,

Utilities Code, that is not a participant in a joint powers

agency is exempted from the franchise tax.

Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,

1982. Amended by Acts 1995, 74th Leg., ch. 765, Sec. 2.27, eff.

Sept. 1, 1995; Acts 1999, 76th Leg., ch. 62, Sec. 18.48, eff.

Sept. 1, 1999.

Sec. 171.080. EXEMPTION--TELEPHONE COOPERATIVE CORPORATIONS. A

telephone cooperative corporation incorporated under Chapter 162,

Utilities Code, is exempted from the franchise tax.

Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,

1982. Amended by Acts 1999, 76th Leg., ch. 62, Sec. 18.49, eff.

Sept. 1, 1999.

Sec. 171.081. EXEMPTION--CORPORATION EXEMPT BY ANOTHER LAW.

Another statute that exempts a corporation from the franchise tax

is not affected by this chapter.

Acts 1981, 67th Leg., p. 1696, ch. 389, Sec. 1, eff. Jan. 1,

1982.

Sec. 171.082. EXEMPTION--CERTAIN HOMEOWNERS' ASSOCIATIONS. (a)

A nonprofit corporation is exempted from the franchise tax if:

(1) the corporation is organized and operated primarily to

obtain, manage, construct, and maintain the property in or of a

residential condominium or residential real estate development;

and

(2) the owners of individual lots, residences, or residential

units control at least 51 percent of the votes of the corporation

and that voting control, however acquired, is not held by:

(A) a single individual or family; or

(B) one or more developers, declarants, banks, investors, or

other similar parties.

(b) For purposes of this section, a condominium project is

considered residential if the project is legally restricted for

use as residences. A real estate development is considered

residential if the property is legally restricted for use as

residences.

Acts 1981, 67th Leg., p. 2758, ch. 752, Sec. 4, eff. May 1, 1982.

Amended by Acts 1995, 74th Leg., ch. 1002, Sec. 9, eff. Jan. 1,

1996.

Sec. 171.083. EXEMPTION--EMERGENCY MEDICAL SERVICE CORPORATION.

A nonprofit corporation that is organized for the sole purpose of

and engages exclusively in providing emergency medical services,

including rescue and ambulance services, is exempted from the

franchise tax.

Acts 1981, 67th Leg., p. 2785, ch. 752, Sec. 14, eff. May 1,

1982.

Sec. 171.084. EXEMPTION--CERTAIN TRADE SHOW PARTICIPANTS. (a)

A corporation is exempted from the franchise tax if:

(1) the only business activity conducted by or on behalf of the

corporation in this state is related to the solicitation of

orders conducted by representatives of the corporation who:

(A) solicit orders of personal property to be sent outside this

state for approval or rejection by the corporation and, if

approved, to be filled by shipment or delivery from a point

outside this state; or

(B) solicit orders in the name of or for the benefit of a

customer or prospective customer of the corporation, if the

orders are filled or intended to be filled by the customer or

prospective customer of the corporation by making orders to the

corporation described by Paragraph (A) of this subdivision; and

(2) the solicitation of orders is conducted on an occasional

basis at trade shows:

(A) promoted by wholesale centers;

(B) promoted by nonprofit trade or professional associations for

the purpose of facilitating the solicitation of orders from

members of the trade or profession; or

meeting facilities.

(b) For purposes of this section, the solicitation of orders is

conducted on an occasional basis only if the solicitation is

conducted during not more than five periods during the business

period of the corporation to which a tax report applies and if no

single period during which solicitation is conducted is longer

than 120 hours.

wholesale facility that has permanent tenants and that promotes

at least four national or regional trade shows in a calendar

year. A tenant leasing space at a wholesale center for a period

longer than the period prescribed by Subsection (b) may qualify

for the exemption provided by this section only if the tenant

solicits orders on an occasional basis at the trade show as

prescribed by Subsection (b).

Added by Acts 1987, 70th Leg., ch. 778, Sec. 1, eff. May 1, 1988.

Amended by Acts 2003, 78th Leg., ch. 209, Sec. 34, eff. Oct. 1,

2003.

Sec. 171.085. EXEMPTION; RECYCLING OPERATION. A corporation

engaged solely in the business of recycling sludge, as defined by

Section 361.003, Solid Waste Disposal Act (Chapter 361, Health

and Safety Code), is exempted from the franchise tax.

Added by Acts 1989, 71st Leg., ch. 641, Sec. 3, eff. Sept. 1,

1991. Amended by Acts 1990, 71st Leg., 6th C.S., ch. 10, art. 2,

Sec. 33, eff. Sept. 6, 1990.

Sec. 171.087. EXEMPTION--NONPROFIT CORPORATION ORGANIZED FOR

STUDENT LOAN FUNDS OR STUDENT SCHOLARSHIP PURPOSES. A nonprofit

corporation organized solely to provide a student loan fund or

student scholarships is exempted from the franchise tax.

Added by Acts 1995, 74th Leg., ch. 1002, Sec. 10, eff. Jan. 1,

1996.

Sec. 171.088. EXEMPTION--NONCORPORATE ENTITY ELIGIBLE FOR

CERTAIN EXEMPTIONS. An entity that is not a corporation but

that, because of its activities, would qualify for a specific

exemption under this subchapter if it were a corporation,

qualifies for the exemption and is exempt from the tax in the

same manner and under the same conditions as a corporation.

Added by Acts 2006, 79th Leg., 3rd C.S., Ch.

1, Sec. 4, eff. January 1, 2008.

SUBCHAPTER C. DETERMINATION OF TAXABLE MARGIN; ALLOCATION AND

APPORTIONMENT

Sec. 171.101. DETERMINATION OF TAXABLE MARGIN. (a) The taxable

margin of a taxable entity is computed by:

(1) determining the taxable entity's margin, which is the lesser

of:

(A) 70 percent of the taxable entity's total revenue from its

entire business, as determined under Section 171.1011; or

(B) an amount computed by:

(i) determining the taxable entity's total revenue from its

entire business, under Section 171.1011;

(ii) subtracting, at the election of the taxable entity, either:

(a) cost of goods sold, as determined under Section 171.1012; or

(b) compensation, as determined under Section 171.1013; and

(iii) subtracting, in addition to any subtractions made under

Subparagraph (ii)(a) or (b), compensation, as determined under

Section 171.1013, paid to an individual during the period the

individual is serving on active duty as a member of the armed

forces of the United States if the individual is a resident of

this state at the time the individual is ordered to active duty

and the cost of training a replacement for the individual;

(2) apportioning the taxable entity's margin to this state as

provided by Section 171.106 to determine the taxable entity's

apportioned margin; and

(3) subtracting from the amount computed under Subdivision (2)

any other allowable deductions to determine the taxable entity's

taxable margin.

(b) Notwithstanding Subsection (a)(1)(B)(ii), a staff leasing

services company may subtract only compensation as determined

under Section 171.1013.

is zero or less is computed as a zero.

(d) An election under Subsection (a)(1)(B)(ii) shall be made by

the taxable entity on its annual report and is effective only for

that annual report. A taxable entity shall notify the

comptroller of its election not later than the due date of the

annual report.

Acts 1981, 67th Leg., p. 1697, ch. 389, Sec. 1, eff. Jan. 1,

1982. Amended by Acts 1991, 72nd Leg., ch. 901, Sec. 53(b), eff.

Aug. 26, 1991; Acts 1991, 72nd Leg., 1st C.S., ch. 5, Sec. 8.05,

eff. Jan. 1, 1992.

Amended by:

Acts 2006, 79th Leg., 3rd C.S., Ch.

1, Sec. 5, eff. January 1, 2008.

Acts 2007, 80th Leg., R.S., Ch.

1282, Sec. 11, eff. January 1, 2008.

Sec. 171.1011. DETERMINATION OF TOTAL REVENUE FROM ENTIRE

BUSINESS. (a) In this section, a 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.

(b) In this section, a 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.

171.1014, for the purpose of computing its taxable margin under

Section 171.101, the total revenue of a taxable entity is:

(1) for a taxable entity treated for federal income tax purposes

as a corporation, an amount 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 Section

171.1015(b); and

(B) subtracting:

(i) bad debt expensed for federal income tax purposes that

corresponds to items of gross receipts included in Subsection

(c)(1)(A) for the current reporting period or a past reporting

period;

(ii) to the extent included in Subsection (c)(1)(A), foreign

royalties and foreign dividends, including amounts determined

under Section 78 or Sections 951-964, Internal Revenue Code;

(iii) to the extent included in Subsection (c)(1)(A), net

distributive income from a taxable entity treated as a

partnership or as an S corporation for federal income tax

purposes;

(iv) allowable deductions from Internal Revenue Service Form

1120, Schedule C, to the extent the relating dividend income is

included in total revenue;

(v) to the extent included in Subsection (c)(1)(A), items of

income attributable to an entity that is a disregarded entity for

federal income tax purposes; and

(vi) to the extent included in Subsection (c)(1)(A), other

amounts authorized by this section;

(2) for a taxable entity treated for federal income tax purposes

as a partnership, an amount 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 Section

171.1015(b); and

(B) subtracting:

(i) bad debt expensed for federal income tax purposes that

corresponds to items of gross receipts included in Subsection

(c)(2)(A) for the current reporting period or a past reporting

period;

(ii) to the extent included in Subsection (c)(2)(A), foreign

royalties and foreign dividends, including amounts determined

under Section 78 or Sections 951-964, Internal Revenue Code;

(iii) to the extent included in Subsection (c)(2)(A), net

distributive income from a taxable entity treated as a

partnership or as an S corporation for federal income tax

purposes;

(iv) to the extent included in Subsection (c)(2)(A), items of

income attributable to an entity that is a disregarded entity for

federal income tax purposes; and

(v) to the extent included in Subsection (c)(2)(A), other

amounts authorized by this section; or

(3) for a taxable entity other than a taxable entity treated for

federal income tax purposes as a corporation or partnership, an

amount determined in a manner substantially equivalent to the

amount for Subdivision (1) or (2) determined by rules that the

comptroller shall adopt.

(d) Subject to Section 171.1014, a taxable entity that is part

of a federal consolidated group shall compute its total revenue

under Subsection (c) as if it had filed a separate return for

federal income tax purposes.

(e) A taxable entity that owns an interest in a passive entity

shall exclude from the taxable entity's total revenue the taxable

entity's share of the net income of the passive entity, but only

to the extent the net income of the passive entity was generated

by the margin of any other taxable entity.

(f) A taxable entity shall exclude from its total revenue, to

the extent included under Subsection (c)(1)(A), (c)(2)(A), or

(c)(3), flow-through funds that are mandated by law or fiduciary

duty to be distributed to other entities, including taxes

collected from a third party by the taxable entity and remitted

by the taxable entity to a taxing authority.

(g) A taxable entity shall exclude from its total revenue, to

the extent included under Subsection (c)(1)(A), (c)(2)(A), or

(c)(3), only the following flow-through funds that are mandated

by contract to be distributed to other entities:

(1) sales commissions to nonemployees, including split-fee real

estate commissions;

(2) the tax basis as determined under the Internal Revenue Code

of securities underwritten; and

(3) 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.

(g-1) A taxable entity that is a lending institution shall

exclude from its total revenue, to the extent included under

Subsection (c)(1)(A), (c)(2)(A), or (c)(3), proceeds from the

principal repayment of loans.

(g-2) A taxable entity shall exclude from its total revenue, to

the extent included under Subsection (c)(1)(A), (c)(2)(A), or

(c)(3), the tax basis as determined under the Internal Revenue

Code of securities and loans sold.

(g-3) A taxable entity that provides legal services shall

exclude from its total revenue:

(1) to the extent included under Subsection (c)(1)(A),

(c)(2)(A), or (c)(3), 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:

(A) damages due the claimant;

(B) funds subject to a lien or other contractual obligation

arising out of the representation, other than fees owed to the

attorney;

contractual claim; and

(D) fees paid an attorney in the matter who is not a member,

partner, shareholder, or employee of the taxable entity;

(2) to the extent included under Subsection (c)(1)(A),

(c)(2)(A), or (c)(3), 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

(3) $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.

(g-4) A taxable entity that is a pharmacy cooperative shall

exclude from its total revenue, to the extent included under

Subsection (c)(1)(A), (c)(2)(A), or (c)(3), flow-through funds

from rebates from pharmacy wholesalers that are distributed to

the pharmacy cooperative's shareholders.

(g-6) A taxable entity that is a qualified destination

management company as defined by Section 151.0565 shall exclude

from its total revenue, to the extent included under Subsection

(c)(1)(A), (c)(2)(A), or (c)(3), payments made to other persons

to provide services, labor, or materials in connection with the

provision of destination management services as defined by

Section 151.0565.

(h) If the taxable entity belongs to an affiliated group, the

taxable entity may not exclude payments described by Subsection

(f), (g), (g-1), (g-2), (g-3), or (g-4) that are made to entities

that are members of the affiliated group.

(i) Except as provided by Subsection (g), a payment made under

an ordinary contract for the provision of services in the regular

course of business may not be excluded.

(j) Any amount excluded under this section may not be included

in the determination of cost of goods sold under Section 171.1012

or the determination of compensation under Section 171.1013.

(k) A taxable entity that is a staff leasing services company

shall exclude from its total revenue payments received from a

client company for wages, payroll taxes on those wages, employee

benefits, and workers' compensation benefits for the assigned

employees of the client company.

(l) For purposes of Subsection (g)(1):

(1) "Sales commission" means:

(A) any form of compensation paid to a person for engaging in an

act for which a license is required by Chapter 1101, Occupations

Code; 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.

(2) "Principal" means a person who:

(A) manufactures, produces, imports, distributes, or acts as an

independent agent for the distribution of a product for sale;

(B) uses a sales representative to solicit orders for the

product; and

sales commission.

(m) A taxable entity shall exclude from its total revenue, to

the extent included under Subsection (c)(1)(A), (c)(2)(A), or

(c)(3), dividends and interest received from federal obligations.

(m-1) A taxable entity that is a management company shall

exclude from its total revenue reimbursements of

State Codes and Statutes

State Codes and Statutes

State Codes and Statutes

State Codes and Statutes

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