For Texas franchise-tax apportionment, what do 'location of payor' and 'legal domicile' mean, and are they the same for taxable capital and earned surplus?

Plain-English summary

A taxpayer asked what "location of payor" and "legal domicile" mean for franchise-tax apportionment, and whether they differ between the two parts of the old tax. The Comptroller confirmed the definitions are the same for taxable capital and earned surplus apportionment.

• Location of payor. Under Rule 3.549(b)(7), the "location of payor" is the legal domicile of the payor.
• Legal domicile. Under Rule 3.549(b)(6):
  • a corporation's legal domicile is its state of incorporation;
  • a partnership's or trust's legal domicile is its principal place of business - the location of its day-to-day operations, or its commercial domicile if those operations are conducted equally or fairly evenly in more than one state.
• Rule alignment. The Comptroller said it would amend Rule 3.557 so its definitions match Rule 3.549.

What this means for you

Companies sourcing receipts by payor location (pre-2008)

Some receipts were sourced to where the payor was based. This letter tells you how to find that location: for a corporate payor, its state of incorporation; for a partnership or trust payor, where it actually operates (or its commercial domicile if operations straddle states). The same rule applied whether you were computing taxable capital or earned surplus.

Tax professionals

Anchor "location of payor" to the payor's legal domicile under Rule 3.549(b)(6)-(7), and apply it identically across both franchise-tax bases. Because the letter notes Rule 3.557 was to be conformed, don't treat any earlier inconsistency in 3.557 as controlling. All of this is pre-margin-tax; re-check current apportionment sourcing.

Common questions

Q: Is "legal domicile" the same for taxable capital and earned surplus?
A: Yes. The letter confirms the definitions of "location of payor" and "legal domicile" are the same for both.

Q: What is a corporation's legal domicile?
A: Its state of incorporation (Rule 3.549(b)(6)).

Q: What about a partnership or trust?
A: Its principal place of business - the location of day-to-day operations, or its commercial domicile if operations are spread evenly across more than one state.

Citations and references

Rules:

• Franchise Tax Rule 3.549(b)(7), 34 Tex. Admin. Code - "location of payor" is the payor's legal domicile
• Franchise Tax Rule 3.549(b)(6), 34 Tex. Admin. Code - legal domicile: corporation's state of incorporation, or partnership/trust's principal place of business/commercial domicile
• Franchise Tax Rule 3.557, 34 Tex. Admin. Code - to be amended for consistent definitions

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200107370L

Original ruling text

July 19, 2001

To: **

Dear **:

Thank you for your email regarding the definitions for "location of payor" and
"legal domicile".

The definitions of "location of payor" and "legal domicile" are the same for
both Taxable Capital apportionment and Earned Surplus apportionment.

Rule 3.549(b)(7) Taxable Capital: Apportionment, defines "location of payor" as
the legal domicile of the payor. Rule 3.549(b)(6) states, "The legal domicile
of a corporation is its state of incorporation. The legal domicile of a
partnership or trust is the principal place of business of the partnership or
trust. The principal place of business of a partnership or trust is the
location of its day-to-day operations. If the day-to-day operations of the
partnership or trust are conducted equally or fairly evenly in more than one
state, then the principal place of business is the commercial domicile."

We will be amending Rule 3.557 so that it contains definitions of "location of
payor" and "legal domicile" that are consistent with Rule 3.549.

The rules mentioned above are available via the Comptroller's website at
www.window.state.tx.us. From the home page, click on the link to "Texas
Taxes," then on the link to the "Franchise Tax." On the "Franchise Tax" page
you will find links to "Franchise Tax Rules."

This response is based on the facts presented and current law. If there are
different or additional facts, the response may change.

If you have questions about this, my internet address is
[email protected], or you may call toll-free at 1-800-531-5441,
extension 5-9952.

Sincerely,

Teresa Bostick
Tax Policy Division
Texas State Comptroller