1. (a) Effective date. The provisions of this section apply to franchise tax reports originally due on or after January 1, 2008.

2. (b) Nontaxable entities. See §3.581 of this title (relating to Margin: Taxable and Nontaxable Entities) for information concerning nontaxable entities. Notification to comptroller, except for passive entities, see §3.582 (relating to Margin: Passive Entities):

   1. (1) If a taxable entity has notified the comptroller that it is doing business in Texas, the entity must notify the comptroller in writing by the due date of the first report for which the entity qualifies as a nontaxable entity that the report and payment are not due because the entity qualifies as a nontaxable entity. After such notification, the entity must notify the comptroller in writing only when the entity no longer qualifies as a nontaxable entity.
   2. (2) If a nontaxable entity has not notified the comptroller that it is doing business in Texas, the nontaxable entity must notify the comptroller in writing only when the entity no longer qualifies as a nontaxable entity.

3. (c) Reports and due dates.

   1. (1) Each taxable entity subject to the franchise tax levied by Tax Code, §171.001, must file an initial franchise tax report, and thereafter an annual franchise tax report, and at the same time must pay the franchise tax and any applicable penalties and interest due by the taxable entity. It is the responsibility of a receiver to file franchise tax reports and pay the franchise tax of a taxable entity in receivership. A debtor in possession or the appointed trustee or receiver of a taxable entity in reorganization or arrangement proceedings under the Bankruptcy Act is responsible for filing franchise tax reports and paying the franchise tax pursuant to the plan of reorganization or arrangement.

      1. (A) "Beginning date" means:

         1. (i) for a taxable entity chartered or organized in this state, the date on which the taxable entity's charter or organization takes effect; and
         2. (ii) for a foreign taxable entity, the date on which the taxable entity begins doing business in this state.
      2. (B) Initial report. Both the initial report and payment of the tax due, if any, are due no later than 89 days after the first anniversary date of the beginning date. The initial franchise tax report and payment are for the privilege periods beginning on the beginning date and ending on December 31 following the first anniversary of the beginning date. For example, if a Texas taxable entity is chartered on June 1, 2008, the payment due with the initial report will be for the privilege periods from June 1, 2008 - December 31, 2009. In addition, when the first anniversary occurs during the period from October 4 - December 31, the tax paid with the initial report is for an additional privilege period beginning on January 1 following the first anniversary and ending on the following December 31. For example, if a Texas taxable entity is chartered on November 1, 2008, the payment due with the initial report will be for the privilege periods from November 1, 2008 - December 31, 2010. The taxable margin computed on the initial report is based on the business done during the period beginning on the beginning date and ending on the last accounting period ending date for federal income tax purposes that is at least 60 days before the original due date of the initial report, or, if there is no such ending date, then ending on the day that is the last day of the calendar month nearest to the end of the taxable entity's first year of business. If the period used to compute business done for purposes of the initial report differs from the taxable entity's last accounting period for federal income tax purposes, then the taxable entity's total revenue for purposes of the initial report shall be computed as if the taxable entity had reported its federal taxable income on an Internal Revenue Service form covering the period used to compute business done for purposes of the initial report.
      3. (C) Annual report. The annual franchise tax report must be filed and the tax paid no later than May 15 of each year. The annual tax is paid for the privilege period of the calendar year in which the report is due. The taxable margin computed on an annual report is based on the business done during the period beginning with the day after the last date upon which tax was computed under Tax Code, Chapter 171 on a previous report, and ending with the last accounting period ending date for federal income tax purposes ending in the calendar year before the calendar year in which the report is originally due, or, if there is no such ending date, then ending on December 31 of the calendar year before the calendar year in which the report is originally due. A taxable entity that uses a 52 - 53 week accounting year end and has an accounting year ending the first four days of January of the year in which the annual report is originally due may use the preceding December 31 as the date through which taxable margin is computed. If the period used to compute business done for purposes of the annual report differs from the taxable entity's last accounting period for federal income tax purposes, then the taxable entity's total revenue for purposes of the annual report shall be computed as if the taxable entity had reported its federal taxable income on an Internal Revenue Service form covering the period used to compute business done for purposes of the annual report.
      4. (D) Extensions. See §3.1 of this title (relating to Request for extension of Time in Which to File Report), for extensions of time to file an initial or final report. See §3.585 of this title (relating to Margin: Extensions), for extensions of time to file an annual report.
      5. (E) Final report. See §3.592 of this title (relating to Margin: Additional Tax) for information concerning the additional tax imposed by Tax Code, §171.0011.
      6. (F) Transition. See §3.595 of this title (relating to Margin: Transition) for transitional information concerning tax rates and privilege periods as a result of certain legislative changes.
      7. (G) Passive entities. See §3.582 of this title (relating to Margin: Passive Entities), for information concerning the reporting requirements for a passive entity.
      8. (H) Combined reporting. Taxable entities that are part of an affiliated group engaged in a unitary business must file a combined group report in lieu of individual reports, except that a public information report or ownership information report must be filed for each member of the combined group with nexus. A newly created taxable entity that is a member of a combined group is not required to report data on a separate initial report, and a combined group that would not otherwise be required to file an initial report shall not be required to file an initial report solely because a newly-created entity has become a member of the combined group. See §3.590 of this title (relating to Margin: Combined Reporting), for rules on filing a combined report.
   2. (2) The postmark date (or meter-mark if there is no postmark) on the envelope in which the report or payment is received determines the date of filing.
   3. (3) An information report must be filed, even if no tax is due. A taxable entity must file a no tax due information report for the privilege periods covered by an initial report or regular annual report in which no tax is due, as authorized under Tax Code, §171.204.

4. (d) Calculation of margin.

   1. (1) Calculation. A taxable entity must make an annual election to deduct cost of goods sold or compensation by the due date of its return. If an election is not made by the due date of the return, the taxable entity's margin will be calculated as indicated in subparagraph (C) of this paragraph. This election may not be amended. A taxable entity's margin equals the least of three calculations:

      1. (A) Total revenue minus cost of goods sold;
      2. (B) Total revenue minus compensation; or
      3. (C) Total revenue times 70%.

   2. (2) Rate. A tax rate of 1.0% of taxable margin applies to most taxable entities. A tax rate of 0.5% of taxable margin applies to taxable entities primarily engaged in retail or wholesale trade under division F or G of the 1987 Standard Industrial Classification Manual published by the Federal Office of Management and Budget. A taxable entity is primarily engaged in retail or wholesale trade only if:

      1. (A) the total revenue from its activities in retail and wholesale trade is greater than the total revenue from its activities in trades other than the retail and wholesale trade;
      2. (B) less than 50% 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, except for those businesses under Major Group 58 (eating and drinking establishments); and
      3. (C) the taxable entity does not provide retail or wholesale utilities, including telecommunications services, electricity or gas.
   3. (3) No tax due. A taxable entity will owe no tax if its tax due is less than $1,000 or its total revenue is less than or equal to $300,000, or the amount determined under Tax Code, §171.006, per 12 month period on which the report is based. A taxable entity that does not owe any tax under this subsection must file a no tax due information report as authorized by subsection (c)(3) of this section.

   4. (4) Discount. A taxable entity is entitled to a discount of the tax imposed as follows:

      1. (A) If total revenue is greater than $300,000 and less than $400,000, the discount is 80% of tax due.
      2. (B) If total revenue is greater than or equal to $400,000 and less than $500,000, the discount is 60% of tax due.
      3. (C) If total revenue is greater than or equal to $500,000 and less than $700,000, the discount is 40% of tax due.
      4. (D) If total revenue is greater than or equal to $700,000 and less than $900,000, the discount is 20% of tax due.
   5. (5) E-Z Computation. A taxable entity with total revenue of $10 million or less may elect to pay the franchise tax by using the E-Z Computation method. Under the E-Z Computation a taxable entity's tax liability is computed by multiplying the taxable entity's total revenue times their apportionment factor times 0.575% (.00575) and subtracting any applicable discount as provided by paragraph (4) of this subsection. No other credits or adjustments are allowed if a taxable entity elects to compute its tax liability under the E-Z Computation.

   6. (6) Tiered partnership.

      1. (A) Paragraphs (3), (4) and (5) of this subsection, do not apply to an upper tier entity if, before the attribution of any total revenue by a lower tier entity to an upper tier entity, the lower tier entity does not meet the criteria.
      2. (B) The lower tier entity must submit a report to the comptroller showing the amount of total revenue that each upper tier entity should include with the upper tier entity's own taxable margin calculation, according to the ownership interest of the upper tier entity.

5. (e) Penalty and interest on delinquent taxes.

   1. (1) Tax Code, §171.362, imposes a 5.0% penalty on the amount of franchise tax due by a taxable entity that fails to report or pay the tax when due. If any part of the tax is not reported or paid within 30 days after the due date, an additional 5.0% penalty is imposed on the amount of tax unpaid. There is a minimum penalty of $1.00. Delinquent taxes accrue interest beginning 60 days after the due date. For example, if payment is made on the 61st day after the due date, one day's interest is due. The annual rate of interest on delinquent taxes is the prime rate plus one percent, as published in The Wall Street Journal on the first day of each calendar year that is not a Saturday, Sunday, or legal holiday.
   2. (2) When a taxable entity is issued an audit assessment or other underpayment notice based on a deficiency, penalties under Tax Code, §171.362, and interest are applied as of the date that the underpaid tax was originally due, including any extensions, not from the date of the deficiency determination or date the deficiency determination is final.

   3. (3) A deficiency determination is final 30 days after the date on which the service of the notice of the determination is completed. Service by mail is complete when the notice is deposited with the United States Postal Service.

      1. (A) The amount of a determination is due and payable 10 days after it becomes final. If the amount of the determination is not paid within 10 days after the day it became final, a penalty under Tax Code, §111.0081, of 10% of the tax assessed will be added. For example, if a deficiency determination is made in the amount of $1,000 tax (plus the initial penalty and interest), but the total amount of the deficiency is not paid until the 41st day after the deficiency notice is served, $1,200 plus interest would be due (i.e., $1,000 tax, $100 initial penalty for not paying when originally due, $100 penalty for not paying deficiency determination within 10 days after it became final, plus interest accrued to the date of payment at the applicable statutory rate).
      2. (B) A petition for redetermination must be filed within 30 days after the date on which the service of the notice of determination is completed, or the redetermination is barred.
      3. (C) A decision on a petition for redetermination becomes final 20 days after service on the petitioner of the notice of the decision. The amount of a determination is due and payable 20 days after the decision is final. If the amount of the determination is not paid within 20 days after the day the decision becomes final, a penalty under Tax Code, §111.0081, of 10% of the tax assessed will be added. Using the previous example, on the 41st day after service of the decision, $1,200 plus interest would be due (i.e., $1,000 tax, $100 initial penalty, $100 additional penalty and the applicable accrued interest).
   4. (4) A jeopardy determination is final 20 days after the date on which the service of the notice is completed unless a petition for redetermination is filed before the determination becomes final. Service by mail is complete when the notice is deposited with the United States Postal Service. The amount of the determination is due and payable immediately. If the amount determined is not paid within 20 days from the date of service, a penalty, under Tax Code, §111.022, of 10% of the amount of tax and interest assessed will be added.
   5. (5) If the comptroller determines that a taxable entity exercised reasonable diligence to comply with the statutory filing or payment requirements, the comptroller may waive penalties or interest for the late filing of a report or for a late payment. The taxable entity requesting waiver must furnish a detailed description of the circumstances that caused the late filing or late payment and the diligence exercised by the taxable entity in attempting to comply with the statutory requirements. See §3.5 of this title (relating to Waiver of Penalty or Interest) for additional information.
   6. (6) If a taxable entity fails to comply with Tax Code, §171.212, the taxable entity is liable for a penalty of 10% of the tax that should have been reported and had not previously been reported to the comptroller under Tax Code, §171.212. This penalty is in addition to any other penalty provided by law.

6. (f) Amended reports. In filing an amended report, the taxable entity must type or print on the report, immediately above the taxable entity name, the phrase "Amended Report." The report should be forwarded with a cover letter of explanation, with enclosures necessary to support the amendment. Applicable penalties and interest must be reported and paid along with any additional amount of tax shown to be due on the amended report.

   1. (1) A taxable entity may file an amended report for the purpose of correcting a mathematical or other error in a report or for the purpose of supporting a claim for refund. An amended report may not be filed to change between a cost of goods sold deduction and a compensation deduction.
   2. (2) A taxable entity that has been audited by the Internal Revenue Service must file an amended franchise tax report within 120 days after the Revenue Agent's Report (RAR) is final, if the RAR results in changes to taxable margin reported for franchise tax purposes. An RAR is final when all administrative appeals with the Internal Revenue Service have been exhausted or waived. An administrative appeal with the Internal Revenue Service does not include an action or proceeding in the United States Tax Court or any other federal court.
   3. (3) A taxable entity whose taxable margin is changed as a result of an audit or other adjustment by a competent authority other than the Internal Revenue Service must file an amended franchise tax report within 120 days after the adjustment is final. An adjustment is final when all administrative or other appeals have been exhausted or waived. For the purposes of this section, a competent authority includes, but is not limited to, the United States Tax Court, United States District Courts, United States Courts of Appeals, and United States Supreme Court.
   4. (4) A taxable entity must file an amended franchise tax report within 120 days after the taxable entity files an amended federal income tax return that changes the taxable entity's taxable margin. A taxable entity is considered to have filed an amended federal income tax return if the taxable entity is a member of an affiliated group during a period in which an amended consolidated federal income tax return is filed.
   5. (5) A final determination resulting from an Internal Revenue Service administrative proceeding (including an audit), or a judicial proceeding arising from an administrative proceeding, that affects the amount of franchise tax liability must be reported to the comptroller before the expiration of 120 days after the day on which the determination becomes final. See Tax Code, §111.206.
   6. (6) Because the 10% penalty provided for in Tax Code, §171.212 only applies to deficiencies, failure to file an amended return in which a refund would result will not cause a 10% penalty to be imposed.
7. (g) Comptroller audit. During the course of an audit or other examination of a taxable entity's franchise tax account, the comptroller may examine financial statements, working papers, registers, memoranda, contracts, corporate minutes, and any other business papers used in connection with its accounting system. In connection with the examination, the comptroller may also examine any of the taxable entity's officers or employees under oath.
8. (h) Payment of determination. The payment of a determination issued to a taxable entity for an estimated tax liability shall not satisfy the reporting requirements set forth in Tax Code, Chapter 171, Subchapter E, concerning reports and records.

9. (i) Information report. Each taxable entity on which the franchise tax is imposed must file an information report.

   1. (1) For a taxable entity other than a corporation or limited liability company, an ownership information report as described in Tax Code, §171.201 and §171.202 is due at the same time each initial and annual report is due.

   2. (2) For a corporation or limited liability company a public information report as described in Tax Code, §171.203, is due at the same time each initial and annual report is due. An authorized person must sign the public information report on behalf of the taxable entity under a certification that:

      1. (A) all information contained in the report is true and correct to the best of the authorized person's knowledge; and
      2. (B) a copy of the report has been mailed to each person named in the report who is an officer, director, or manager and who is not employed by the taxable entity or a related (at least 10% ownership) taxable entity on the date the report is filed.
      3. (C) A report that is filed electronically complies with the signature and certification requirements of this provision.
   3. (3) Failure to file or sign a public information report or ownership information report shall result in the forfeiture of corporate or business privileges as provided by Tax Code, §171.251 and §171.2515. If the corporate or business privileges are forfeited, each officer or director of the taxable entity may be liable for each debt of the taxable entity that is created or incurred in Texas after the date on which the report is due and before the corporate or business privileges are revived, as provided by Tax Code, §171.255.
   4. (4) The provisions of paragraph (3) of this subsection, concerning forfeiture of corporate privileges do not apply to a banking taxable entity or a savings and loan association, as defined in Tax Code, §171.001.

   5. (5) For purposes of this subsection:

      1. (A) authorized person means, in the case of a corporation, an officer, director or other authorized person of the corporation;
      2. (B) authorized person means, in the case of a limited liability company, a member, manager or other authorized person of the limited liability company;
      3. (C) authorized person means, in the case of a limited partnership, a partner or other authorized person of the partnership;
      4. (D) director includes a manager of a limited liability company, a general partner in a limited partnership and a general partner in a partnership registered as a limited liability partnership;
      5. (E) authorized person also includes a paid preparer authorized to sign the report.
   6. (6) Taxable entities that are members of a combined group and do not have nexus in Texas are not required to file an ownership information report or a public information report.

Source Note:The provisions of this §3.584 adopted to be effective January 1, 2008, 32 TexReg 10022.