Can a corporation amend a Texas franchise tax report to include excise/motor-fuel taxes in gross receipts when its own books excluded them, arguing GAAP would also allow inclusion?

Plain-English summary

This is an internal Tax Policy memorandum (companion to the motor-fuel-tax gross-receipts ruling issued the same period). A taxpayer had not included certain excise/motor-fuel taxes in its reported receipts - its books and audited financial statements excluded them - but now wanted them included in the audited receipts. The taxpayer argued GAAP allows including the taxes in revenue, pointing to other corporations' SEC reports that include excise taxes in revenue (without citing a specific GAAP pronouncement). The question was really about amending a franchise tax report, focused on the taxable capital (GAAP) component. The Comptroller framed it as an "alternative GAAP" matter and said no adjustment is warranted.

• What an amended report can fix. Rule 3.547(c)(5)(A) allows an amended report to correct an accounting error - a mathematical mistake, a mistake in the application of accounting principles in effect on the date the tax is based on, or an oversight or unintentional misuse of facts that existed on that date. Subsequent events are not considered.
• What it cannot do. The agency does not allow a corporation to amend a franchise tax report to use an alternative acceptable method to calculate the tax (Comptroller's Decision No. 41,637). The taxpayer must establish that the method it originally used was in error.
• Why this taxpayer loses. Because it did not report the taxes as revenue on its GAAP financial statements - and no independent auditor noted that as an error - the exclusion is presumably acceptable under GAAP.
• Disclosure vs. reporting. The taxpayer relied on GAAP disclosure requirements, but disclosure requirements are distinguishable from reporting requirements. Unless the taxpayer can establish that excluding the taxes was an error under GAAP, there should be no adjustment to gross receipts as originally reported.

Currency note: This applies the pre-2008 franchise tax and its amended-report rules, replaced by the current margin tax (House Bills 3 and 3928) effective January 1, 2008. Treat as historical.

What this means for you

Taxpayers considering an amended franchise tax report

Amendment was for fixing mistakes, not for switching to a different-but-also-valid accounting method that happens to produce a better tax result. If your original return followed an acceptable GAAP treatment (here, excluding the excise taxes from revenue), you could not amend to the other acceptable treatment just because GAAP would have permitted it too. You had to show the original was actually wrong.

Accountants and tax professionals

Under Rule 3.547(c)(5)(A), an amendment must correct a genuine accounting error judged as of the original report date; alternative-method changes are barred (Comptroller's Decision No. 41,637). Note the disclosure-vs-reporting distinction: pointing to how other companies disclose excise taxes, or to GAAP disclosure rules, does not establish that your own revenue-recognition choice was an error. Absent that proof, the originally reported receipts stand.

Common questions

Q: Can I amend to include excise taxes in gross receipts because GAAP would allow it?
A: No, not if your original exclusion was itself an acceptable GAAP method. You must show the original reporting was an accounting error.

Q: What counts as an accounting error for an amended report?
A: A mathematical mistake, a mistake in applying accounting principles in effect on the report date, or an oversight or unintentional misuse of facts existing then (Rule 3.547(c)(5)(A)).

Q: Does GAAP disclosure of excise taxes help?
A: No. Disclosure requirements are distinguishable from reporting requirements, so they do not establish that excluding the taxes from revenue was an error.

Citations and references

Rules and decisions:

• 34 Tex. Admin. Code Sec. 3.547(c)(5)(A) (an amended report may correct an accounting error, not adopt an alternative acceptable method)
• Comptroller's Decision No. 41,637 (no amendment to switch to an alternative acceptable method)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200302918L

Original ruling text

February 5, 2003

To: Keith Johnson

From: Jerry Bobbitt

Subject: Gross Receipts Question

In your inquiry, you referenced an earlier taxability response that addressed
the treatment of motor fuels taxes for franchise tax apportionment purposes.
Because of some concerns in Tax Policy about the "imposed on customer vs.
imposed on seller" factor, we've had to reconsider taking that factor into
account in our review of the issue. We intend to issue a revised letter
ruling.

You've indicated that the taxpayer has not included the taxes in its reported
receipts, but is requesting that they be included in the audited receipts. The
taxpayer's books and audited financial statements do not include the amounts in
its revenue accounts. The taxpayer asserts that GAAP does allow the taxes to
be included in revenues. Although it does not cite a specific GAAP
pronouncement, it has provided copies of other corporations' SEC reports that
include excise taxes in their reported revenues.

With the numerous references to GAAP, I'll focus on the taxable capital
component of the tax. I agree with your characterization that the issue is an
alternative GAAP matter.

Franchise Tax Rule 3.547(c)(5)(A) provides:

An amended report may be filed to correct an accounting error. An accounting
error results from a mathematical mistake, a mistake in the application of
accounting principles in effect on the date on which the tax is based, or an
oversight or unintentional misuse of facts that existed on the date on which
the tax is based. Subsequent events (i.e., events or transactions occurring
after the date on which the report is based) will not be considered, even if
the subsequent event provides additional evidence with respect to conditions
that existed on the date upon which the tax is based.

Under this rule, the agency does not allow a corporation to amend a franchise
tax report to use an alternative acceptable method to calculate franchise tax.
See Comptroller Decision No. 41,637. The taxpayer would have to establish that
the method in which it originally filed its franchise tax reports was in error.
If the taxpayer did not report the taxes as revenue on its GAAP financial
statements, then the exclusion of the taxes is presumably acceptable under
GAAP. No reference is made to the independent auditor noting that such
reporting was in error.

Your inquiry states that the taxpayer is relying on GAAP disclosure
requirements with respect to the excise taxes. Disclosure requirements are
distinguishable from reporting requirements. Therefore, if the taxpayer cannot
establish that the exclusion of the taxes from its reported revenues was an
error under GAAP, there should be no adjustments made to the gross receipts as
originally reported.

Please let me know if you have any questions.

Jerry Bobbitt