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Texas taxpayers can breathe a collective sigh of relief since House Bill 1195 was signed into law on May 8, 2021. The bill provides that forgiveness on Paycheck Protection Program (PPP) loans will not be considered revenue for Texas franchise tax purposes. Additionally, HB 1195 clarifies that taxpayers may include qualifying expenses paid with PPP loans into their Texas franchise tax compensation or cost of goods sold calculations (if they otherwise qualify).

Prior to the passage of this bill, the Comptroller’s position was that taxpayers must include the proceeds from the forgiven PPP loans in total revenue on their franchise tax reports for the year in which the loan was forgiven. For a significant number of taxpayers, this would have resulted in the taxpayers being hit with an increased tax bill stemming from PPP loan forgiveness.

The 2020 CARES Act stipulated that PPP loan forgiveness would not be classified as taxable income for federal tax purposes even though loan forgiveness is usually taxed under federal income tax law as cancellation-of-debt (COD) income....

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KATY BALLARD

Martens, Todd & Leonard is pleased to announce the addition of associate Katy Ballard to its Texas state and local tax controversy team. Ms. Ballard will join the other members of the firm in representing Texas taxpayers before the State Office of Administrative Hearings, in the state district courts, Texas courts of appeals and Texas Supreme Court.

Prior to joining the firm, Ms. Ballard assisted corporate clients with IRS audit defense, tax controversy and due diligence as a member of McDermott Will & Emery’s U.S. and International Tax Group. Ms. Ballard then joined her McDermott Will & Emery group leaders when they moved their practice to KPMG.

Ms. Ballard graduated summa cum laude from Trinity College in Hartford, Connecticut, in 2013 and obtained her Juris Doctorate from the University of Texas School of Law in 2016.

In addition to her prior tax controversy work, Ms. Ballard also has first-hand knowledge of the tax obligations and challenges of Texas business owners through her experience as the owner and operator of a pet daycare...

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Texas Franchise Tax Update: Congressman Fires Back with Proposed Bill After Texas Comptroller Threatens to Tax PPP Loan Forgiveness

A Texas lawmaker has introduced a bill in the current legislative session reversing the Comptroller’s policy of treating federal Paycheck Protection Program (PPP) loan forgiveness as revenue for Texas franchise tax. The proposed bill also allows taxpayers to include the corresponding costs when calculating their compensation or cost of goods sold subtraction.

During the 2021 Texas Comptroller’s Tax Policy Update, an official at the Comptroller’s office stated that the Comptroller plans to require taxpayers to add any forgiven portion of a PPP loan they received to their total revenue, which is the starting point for the Texas franchise tax margin calculation. Although cancellation-of-debt (COD) income is typically taxed under federal income tax law, the U.S....

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In May of 2020, the Texas Supreme Court held in EBS Solutions, Inc. v. Hegar that a taxpayer may gain access to the Texas courts without first paying the tax assessment against it in full, if the taxpayer satisfies the appropriate jurisdictional requirements.[1] EBS Solutions was audited for Texas franchise tax and received an assessment of tax, penalties, and interest for four year of almost $300,000.[2] EBS disagreed with the Comptroller’s assessment and sought to challenge it. However, EBS was unable to pay the full assessment.

Generally, a taxpayer...

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Texas Franchise Tax Update: Texas Comptroller Adopts Comprehensive Changes to Apportionment Rule

The Texas Comptroller has adopted broad amendments to his Rule 3.591 governing franchise tax apportionment. In doing so, the agency rewrote numerous detailed rules for sourcing dozens of different types of receipts. Notably, for receipts from services that don’t fall under one of the specific rules, the Comptroller’s rule codifies the “end-product act” test which first appeared in a 1980 Comptroller Hearing (Decision No. 10,028) and was recently employed by the Third Court of Appeals in Hegar v. Sirius XM Radio, Inc., No 03-18-00573-CV (Tex. App.—Austin 2020, pet. filed). The Comptroller intends to apply the adopted rule retroactively except for a few provisions which he concedes are changes in policy.

The adopted rule also:

· Codifies recent policy excluding net...

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Local governments, like cities and counties, collect local taxes to finance their governmental operations. Generally, local governments receive local sales taxes based upon orders that local businesses receive within their boundaries. Local governments may also receive local use taxes when goods are delivered to customers within their boundaries. A seller collects local use taxes only when the local sales tax where the item is sold is less than the maximum rate (2%) and the local use tax is not of the same type (such as a city tax or a county tax) as the local sales tax that applied. This may occur, for example, when a seller receives an order outside city limits and sells the product for delivery to a customer residing within city limits.

Generally, local governments want businesses to relocate within their boundaries. In doing so, the relocated businesses provide jobs, goods, services and generate sales and property taxes for the local government’s operations.

To induce a business to relocate to a particular city, the city may offer the business incentives,...

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Introduction

In Sunstate Equipment Co. v. Hegar, the Court denied the cost of goods sold (COGS) subtraction for the heavy equipment rental company’s costs to deliver and pick-up equipment. In Hegar v. American Multi-Cinema, Inc., the Court denied the COGS subtraction for AMC’s film exhibition costs. While AMC ultimately lost, as we explain below, the Court’s rejection of an argument that the Legislature can “clarify” prior law and thereby give it retroactive effect may undermine the Comptroller’s position in other cases.

Sunstate Equipment Co. v. Hegar

On April 3, 2020, the Texas Supreme Court published its opinion in Sunstate Equipment Co., LLC v. Hegar1 denying Sunstate a COGS subtraction for the costs Sunstate incurred to deliver and later pick-up the heavy construction equipment that Sunstate had rented to its customers for use at construction sites.

Background. Sunstate rents out heavy construction and industrial equipment to its customers. This includes...

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Introduction

This paper discusses the relief provided by Texas in response to the COVID-19 crisis, including taxpayers’ responsibilities for Texas sales tax and Texas franchise tax reporting. The Comptroller has provided a blanket, automatic extension for Report Year 2020 Texas franchise tax reporting and payments to July 15, 2020. The Comptroller has not extended the sales tax reporting deadlines but has offered potential relief to taxpayers depending on their circumstances. Many local appraisal districts have extended rendition deadlines and the Comptroller has offered motor vehicle registration and titling extensions. The Comptroller has temporarily shuttered his field offices and has offered some relief to taxpayers in administrative redetermination proceedings. The Comptroller expects tax revenue to fall significantly but has not yet released an estimate of the impact of COVID-19 on tax collections.

Franchise Tax Relief

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On April 3, 2020, the Texas Supreme Court issued its opinion in Hegar v. Gulf Copper & Manufacturing Corporation in which it found the oil rig repair company could reduce its revenue by the payments it made to hourly subcontractors but limited its COGS subtraction to the costs incurred as a producer of goods.1 The Supreme Court determined that Gulf Copper did not qualify as a “deemed” owner of goods and remanded the case to the trial court to determine how much Gulf Copper could subtract as an “actual” owner of goods.

Gulf Copper inspects, repairs, and upgrades offshore drilling rigs for rig owners and drilling contractors who use the rigs to drill offshore oil and gas wells. Each rig must be custom-modified or rebuilt so that it can be used to drill well(s) efficiently, safely, and legally in particular areas. Gulf Copper manufactures component parts which it installs on the rigs. To perform its work, Gulf Copper hires subcontractors to supplement its employee workforce.

The Comptroller audited Gulf Copper’s Report Year 2009 Texas franchise tax...

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On September 27, 2019, the Texas Comptroller proposed amendments to his Texas franchise tax nexus rules that would make out-of-state entities with no physical presence in Texas subject to Texas franchise tax. The preamble to the proposed amendments explains that the amendments are “in response to the United States Supreme Court decision in South Dakota v. Wayfair, Inc.” 138 S. Ct. 2080 (2018); 44 Tex. Reg. 5605 (2019) (to be codified as an amendment to 34 Tex. Admin. Code § 3.586). The Comptroller’s proposed amendments may violate the U.S. Supreme Court’s precedents setting limits on states’ taxing powers.

For decades, states were prohibited from imposing sales taxes on out-of-state entities that lacked a physical presence inside the state. Quill Corp. v. North Dakota, 504 U.S. 298 (1992). This physical presence requirement gave out-of-state e-retailers a competitive advantage—the ability to makes sales without charging tax—over their in-state counterparts. Then, in 2018, the U.S. Supreme Court struck down the “physical presence” requirement....

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