For a Texas-based wholesale/distribution combined group, how do you apportion receipts from sales to unaffiliated buyers in and out of Texas, and sales between the group's own members?

Plain-English summary

This is a companion, taxpayer-side ruling to STAR Accession No. 201903010L (also in this corpus), issued about six months earlier for the same fact pattern and questions but with the taxpayer's own supplier network. A Texas-based wholesale/distribution company and its combined group buy products from out-of-state suppliers and resell them — some directly to unaffiliated customers, some through the taxpayer's own facilities, and some between the taxpayer's own affiliates before final resale. The Comptroller answered three apportionment questions:

1. Sales to unaffiliated buyers outside Texas: these receipts count toward the combined group's total receipts (the apportionment denominator) but are NOT apportioned to Texas (not in the numerator), since Texas sourcing for tangible goods turns on where the property is delivered, not where the seller or its warehouse sits.
2. Sales to unaffiliated buyers in Texas: the mirror image — these count as both total receipts and Texas receipts, fully apportioned to Texas.
3. Sales between members of the same combined group: excluded from total revenue entirely, and — because they're excluded from total revenue — they must ALSO be excluded from BOTH the numerator and denominator of the apportionment ratio, not left in one side by mistake. The ruling flags one exception: if a group member with no Texas nexus resells the product into Texas without substantial modification, the ultimate third-party sale price DOES count as Texas receipts.

The Comptroller explicitly declined to rule on how the Taxpayer's own suppliers should apportion their receipts, since the suppliers hadn't separately requested a ruling — a private letter ruling only covers the requesting taxpayer.

What this means for you

Wholesalers and distributors filing combined Texas franchise tax reports

The delivery-location sourcing rule (not title-passage) and the "exclude intra-group sales from both sides of the apportionment fraction" rule apply regardless of how many tiers of affiliated resale sit between your combined group's initial purchase and its final unaffiliated sale.

Companies wondering whether a PLR covers their trading partners too

Note the Comptroller's explicit refusal here to extend the ruling to the taxpayer's suppliers, who hadn't requested their own ruling — a useful reminder that a PLR's binding effect is strictly limited to the requesting taxpayer, even when the same facts obviously implicate a counterparty's tax treatment.

Accountants and tax professionals

See the companion ruling STAR Accession No. 201903010L in this corpus for a nearly identical (and slightly more detailed) four-question version of this same apportionment analysis, issued about six months later for the same fact pattern extended to cover the supplier side's own nexus and receipts.

Common questions

Q: Does this ruling also tell us how the taxpayer's suppliers should apportion their own receipts?
A: No — the Comptroller expressly declined to rule on the suppliers' apportionment, since they hadn't separately requested a private letter ruling.

Q: Is there a companion ruling with more detail on this same fact pattern?
A: Yes — STAR Accession No. 201903010L (also in this corpus) covers substantially the same combined-group apportionment questions, plus an additional nexus question about the supplier side.

Q: Are there any exceptions to excluding intra-group sales from Texas receipts?
A: Yes — if a combined-group member with no Texas nexus resells the product into Texas without substantial modification, the amount the ultimate third-party buyer pays is included in Texas receipts despite the intra-group sale.

Citations and references

Statutes and rules:

• Tex. Tax Code § 171.001 (Tax Imposed)
• Tex. Tax Code § 171.101(a) (Determination of Taxable Margin — apportionment factor)
• Tex. Tax Code § 171.103(a)(1), (b) (Gross Receipts from Business Done in This State for Margin)
• Tex. Tax Code § 171.105(a), (c) (Gross Receipts from Entire Business for Margin)
• Tex. Tax Code § 171.1011 (Determination of Total Revenue from Entire Business)
• Tex. Tax Code § 171.1014(c)(3) (Combined Reporting — subtracting intra-group revenue)
• Tex. Tax Code § 171.1055(b), (c) (Exclusion of Certain Receipts for Margin Apportionment)
• 34 Tex. Admin. Code Rule 3.591(e)(29)(A) (Margin: Apportionment — delivery-based sourcing)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MAR
• Opinion: https://star.comptroller.texas.gov/view/201809006L

Original ruling text

Sept. 11, 2018

RE: Private Letter Ruling No. 20180328140912

*, Taxpayer No. *

Dear ***:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[ ENDNOTE: 1] We are responding to your request dated Feb. 26, 2018. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance, for purposes of the Texas franchise tax, on how to apportion gross receipts from the sale of products delivered to in-state and out-of-state locations.

This ruling only applies to *** (Taxpayer), under the facts presented. We decline to issue a ruling regarding the apportionment of the receipts of Taxpayer’s suppliers, as the suppliers have not requested a ruling from this agency.

Facts Presented

The relevant facts are based on information contained in your private letter ruling request.

Taxpayer is a Texas-based company that operates a wholesale and distribution business. Taxpayer and its wholly-owned affiliates purchase products from suppliers located inside and outside of Texas (Suppliers) and sell the products throughout the United States from various distribution centers. Taxpayer and its wholly-owned affiliates (Taxpayer’s Combined Group) file a combined group report for Texas franchise tax.

Suppliers and their affiliates ship Taxpayer’s purchases from locations outside of Texas to Taxpayer’s Texas consolidation warehouse via common carrier.

Taxpayer sells a portion of the products located at the consolidation warehouse to unaffiliated wholesalers or retailers in or outside of Texas. Taxpayer delivers or ships these products to unaffiliated wholesalers or retailers in or outside of Texas. Unaffiliated wholesalers and retailers do not pick up the products from Taxpayer or Taxpayer affiliates. Taxpayer also sells products to its affiliates, who are located both in and outside of Texas, and who subsequently resell the products to unaffiliated wholesalers or retailers located in or outside of Texas.

Taxpayer transports some of its products to its other facilities located in or outside of Texas and then sells the products to unaffiliated wholesalers or retailers located in or outside of Texas. Taxpayer delivers or ships these products to unaffiliated wholesalers or retailers in or outside of Texas. Unaffiliated wholesalers and retailers do not pick up the products from Taxpayer or Taxpayer affiliates.

Questions, Rulings, and Analysis

Our restatements of your questions are shown below, followed by our responses and analyses.

Question One:

How should Taxpayer’s Combined Group apportion receipts arising from sales of products to unaffiliated retail or wholesale customers located outside of Texas?

Ruling One:

Receipts arising from sales of products Taxpayer delivers or ships to unaffiliated retail or wholesale customers located outside of Texas constitute gross receipts from the combined group’s entire business. The receipts are not receipts from business done in this state and should not be apportioned to Texas.

Question Two:

How should Taxpayer’s Combined Group apportion receipts arising from sales of products to unaffiliated retail or wholesale customers located in Texas?

Ruling Two:

Receipts arising from the sale of products Taxpayer delivers or ships to unaffiliated retail or wholesale customers located in Texas constitute gross receipts from the combined group’s entire business for apportionment purposes. In addition, the receipts are receipts from business done in this state and should be apportioned to Texas.

Analysis for Questions One and Two:

The franchise tax applies to each taxable entity doing business in Texas or organized in Texas. Section 171.001 (Tax Imposed). Taxpayer and its wholly-owned affiliates comprise a combined group and file a combined report under Section 171.1014 (Combined Reporting; Affiliated Group Engaged in Unitary Business). The franchise tax is imposed on the combined group’s taxable margin, which is the portion of the combined group’s receipts attributable to business done in Texas. Section 171.106 (Apportionment of Margin to this State).

A combined group calculates taxable margin by multiplying total margin by a fraction known as the apportionment factor. Section 171.101(a) (Determination of Taxable Margin). The denominator of the apportionment factor is the combined group’s gross receipts from its entire business. See Section 171.105(c). The numerator of the apportionment factor is the combined group’s gross receipts from business done in Texas. Section 171.103(b).

Taxpayer’s Combined Group must include in gross receipts from its entire business, the receipts from each sale of tangible personal property included in total revenue. Section 171.105(a). Here, because receipts from sales of products to unaffiliated retail or wholesale customers are included in the combined group’s total revenue, those receipts are also included in gross receipts from the combined group’s entire business for apportionment purposes (i.e., the denominator of the apportionment factor).

Receipts from the sale of tangible personal property are receipts from business done in Texas only if the property is delivered or shipped to a buyer in this state. Section 171.103(a)(1). Under Rule 3.591(e)(29)(A) (Margin: Apportionment), delivery of tangible personal property is complete upon transfer of possession of the property to the purchaser. The location of title passage and other conditions of the sale are not relevant to the determination of whether receipts from the sale of tangible personal property are Texas receipts.

When Taxpayer and its affiliates deliver products to buyers at locations outside of Texas, the sales do not constitute gross receipts from business done in this state and are not included in receipts from the combined group’s business done in Texas for apportionment purposes (i.e., the numerator of the apportionment factor). When Taxpayer and its affiliates deliver products to buyers in Texas, the sales constitute gross receipts from business done in this state and are included in receipts from the combined group’s business done in Texas.

Question Three:

Are receipts arising from sales of products by either Taxpayer or its affiliates to other members of Taxpayer’s Combined Group excluded from the total revenue reported by Taxpayer’s Combined Group? If the receipts are excluded from total revenue, should Taxpayer’s Combined Group include the receipts when calculating its apportionment factor?

Ruling Three:

Revenue received by one member of Taxpayer’s Combined Group from the sale of products to another member of the combined group is excluded from the total revenue of Taxpayer’s Combined Group. In apportioning margin, receipts that a combined group excludes from total revenue under Section 171.1011 (Determination of Total Revenue from Entire Business) may not be included in the combined group’s receipts from its business done in this state, as determined under Section 171.103, or the combined group’s receipts from its entire business, as determined under Section 171.105. Revenue received from the sale of tangible personal property into Texas by a member of Taxpayer’s Combined Group located outside of Texas and who does not have nexus with Texas must be included in Texas receipts.

Analysis for Question Three:

Under 171.1014(c)(3), a combined group determining its total revenue must subtract revenue received from an individual member of the combined group. Taxpayer and its affiliates sell products among themselves. Taxpayer’s Combined Group must subtract the receipts from these internal sales from total revenue.

Under Section 171.1055(b), in apportioning margin, receipts resulting from “transactions between individual members of a combined group that are excluded under Section 171.1014(c)(3) may not be included in the receipts of the taxable entity from its business done in this state as determined under Section 171.103.” However, Section 171.1055(b) also contains an exception to this general rule:

Receipts ultimately derived from the sale of tangible personal property between individual members of a combined group where one member party to the transaction does not have nexus in this state shall be included in the receipts of the taxable entity from its business done in this state as determined under Section 171.103 to the extent that the member of the combined group that does not have nexus in this state resells the tangible personal property without substantial modification to a purchaser in this state. ‘Receipts ultimately derived from the sale’ means the amount paid for the tangible personal property by the third party purchaser.

If a Taxpayer affiliate located outside of Texas has no nexus with Texas and resells products into this state without substantial modification, the revenue from these transactions will be included in Texas receipts. Similarly, under Section 171.1055(c), “Transactions between individual members of a combined group that are excluded under Section 171.1014(c)(3) may not be included in the receipts of the taxable entity from its entire business done as determined under Section 171.105.”

Because the sales of products between individual members of Taxpayer’s Combined Group are excluded from the combined group’s total revenue under Section 171.1014(c)(3), the receipts from these transactions are not considered when apportioning margin.

The Texas Tax Code and Texas Administrative Code are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20180328140912.

Sincerely,

Tax Policy Division – Direct Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.