For a combined group's Texas franchise tax report, how do you apportion receipts from sales to a Texas warehouse, sales to unaffiliated buyers in and out of Texas, and sales between the group's own members?

Plain-English summary

A Texas-based wholesale/distribution company (Taxpayer) and its combined group buy products from a separate supplier group, some of which pass through a third-party warehouse in Texas that the supplier still owns while stored there. Taxpayer then resells the products — sometimes directly to unaffiliated wholesalers/retailers in and out of Texas, sometimes by first moving them to its own facilities, and sometimes to its own affiliates who resell them further. The two combined groups asked the Comptroller how to apportion (source) these various receipt streams for Texas franchise tax.

The Comptroller answered four related questions:

1. Supplier's nexus/receipts from warehoused inventory. Just having inventory sitting in a Texas warehouse — even one owned by a third party, and even before any sale happens — counts as "doing business" in Texas and gives the supplier nexus. Receipts from products the supplier ships to Taxpayer's Texas consolidation warehouse count as both gross receipts from the supplier's entire business and gross receipts from business done in Texas.
2. Sales to unaffiliated buyers outside Texas. Receipts from Taxpayer's sales delivered/shipped to unaffiliated wholesalers or retailers outside Texas are part of the combined group's total receipts (the apportionment denominator) but are not Texas receipts (not in the numerator) — they aren't apportioned to Texas.
3. Sales to unaffiliated buyers inside Texas. The mirror image: receipts from sales delivered to unaffiliated buyers in Texas count as both total receipts and Texas receipts — full apportionment to Texas. The rule for tangible personal property looks at where delivery/transfer of possession actually happens, not where title technically passes.
4. Intra-group sales. Revenue from one combined-group member selling products to another member of the same combined group is excluded from total revenue entirely. Critically, because it's excluded from total revenue, it also cannot be counted in either the Texas-receipts numerator or the total-receipts denominator of the apportionment ratio — a group can't accidentally leave those intra-group sales out of total revenue while still counting them somewhere in the apportionment fraction.

There's a notable exception flagged in the ruling text itself: if a combined-group member located outside Texas has no Texas nexus and resells the group's product into Texas without substantial modification, the amount the ultimate third-party buyer pays IS counted as Texas receipts, even though the sale technically happened "between" group members first.

What this means for you

Wholesalers, distributors, and manufacturers with Texas warehouse operations

Simply storing inventory in a Texas warehouse — even one you don't operate and haven't sold from yet — can create Texas franchise tax nexus and Texas-sourced receipts. Track where products are physically warehoused, not just where sales close.

Companies filing combined Texas franchise tax reports with intra-group sales

Make sure intra-group sale receipts are excluded consistently — from total revenue AND from both sides of the apportionment ratio. The ruling specifically warns against excluding them from total revenue while still leaving them in the numerator or denominator, which would distort the apportionment percentage. Watch for the exception: if the selling group member lacks Texas nexus and the buyer resells the product into Texas unmodified, that eventual third-party sale price becomes Texas receipts despite the intra-group step.

Accountants and tax professionals

This ruling is a clean four-question walkthrough of nexus-by-inventory (Rule 3.586(c)(9)), delivery-based sourcing for tangible personal property (Rule 3.591(e)(29)(A), focused on possession transfer rather than title passage), and the Section 171.1055(b)/(c) mechanics for keeping intra-group receipts consistently out of both total revenue and the apportionment ratio.

Common questions

Q: Does having inventory in a Texas warehouse create nexus even if the owner hasn't sold anything from it yet?
A: Yes, per this ruling — inventory location in Texas alone is enough contact under Rule 3.586(c)(9) to be "doing business" in the state for franchise tax purposes.

Q: What determines whether a tangible-goods sale is a "Texas receipt" — where title passes or where the goods are delivered?
A: Where the goods are delivered/possession transfers to the buyer, per Rule 3.591(e)(29)(A) — not where legal title technically passes under the sales contract.

Q: If intra-group sales are excluded from total revenue, do they still count somewhere in the apportionment percentage?
A: No — this ruling holds they must be excluded from BOTH the Texas-receipts numerator and the total-receipts denominator, consistently.

Q: Is there any situation where an intra-group sale still creates Texas receipts?
A: Yes — if the group member that made the intra-group sale has no Texas nexus, and the buying member resells the product into Texas without substantial modification, the amount the ultimate outside buyer pays is treated as Texas receipts.

Citations and references

Statutes and rules:

• Tex. Tax Code § 171.001 (Tax Imposed)
• 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 3.586(b), (c)(9) (Margin: Nexus — inventory in state)
• 34 Tex. Admin. Code Rule 3.591(e)(29), (e)(29)(A) (Margin: Apportionment — tangible personal property, 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/201903010L

Original ruling text

March 6, 2019

INDIVIDUAL A

INDIVIDUAL B

RE: Private Letter Ruling #20180823074354

COMPANY A Taxpayer No. **

COMPANY B Taxpayer No. **

COMPANY C Taxpayer No. **

COMPANY D Taxpayer No. **

Dear INDIVIDUAL A and INDIVIDUAL B:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[1] We are responding to your request dated Aug. 3, 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.

Facts Presented

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

COMPANY A (Taxpayer), is a Texas-based company that operates a wholesale and distribution business. Taxpayer and its wholly owned affiliates (Taxpayer’s Combined Group) purchase products from COMPANY B, COMPANY C, and COMPANY D (Supplier). Both Taxpayer and Supplier are located both inside and outside of Texas. Supplier sells its products throughout the United States from various distribution centers. Taxpayer and its wholly owned affiliates file a combined group report for Texas franchise tax. Supplier and its affiliates (Supplier’s Combined Group) also file a combined group report for Texas franchise tax.

For a portion of the products sold to Taxpayer, Supplier first ships the products to a third-party warehouse located in Texas with Supplier maintaining ownership of the products while located in the third-party warehouse. When Supplier sells products to Taxpayer and its affiliates, title passes to Taxpayer or its affiliates when Supplier ships the products.

Supplier also ships Taxpayer’s purchases to Taxpayer’s Texas consolidation warehouse via common carrier from locations outside of Texas. Taxpayer sells a portion of the products located at the consolidation warehouse to unaffiliated wholesalers or retailers in and 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’s affiliates. Taxpayer also sells products to its affiliates, located both in and outside of Texas, that 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 and outside of Texas and then sells the products to unaffiliated wholesalers or retailers in or outside the state. 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’s affiliates.

Questions, Rulings, and Analysis

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

Question One: Do receipts arising from the sale of Supplier’s products shipped to the Taxpayer’s Texas consolidation warehouse constitute gross receipts everywhere and gross receipts from business done in Texas for the Supplier’s Combined Group?

Ruling One: Receipts arising from the sale of Supplier’s products to the Taxpayer’s Texas consolidation warehouse constitute gross receipts from entire business and gross receipts from business done in Texas for the Supplier’s Combined Group.

Analysis for Question One:

The Texas franchise tax is imposed on each taxable entity that does business in Texas or is chartered or organized in Texas. See Section 171.001 (Tax Imposed). Rule 3.586(b) (Margin: Nexus) states, “A taxable entity is subject to franchise tax in this state when it has sufficient contact with this state to be taxed without violating the United States Constitution.” Having inventory in Texas is considered “doing business” in this state. See Rule 3.586(c)(9). Here, Supplier ships products to a public third-party warehouse located in Texas with Supplier maintaining ownership of the products while located in the public third-party warehouse. Since the Supplier has inventory in Texas, Supplier has nexus with Texas and is subject to the franchise tax in this state.

Rule 3.591(e)(29) (Margin: Apportionment) states that Texas gross receipts include receipts from each sale of tangible personal property that is delivered or shipped to a purchaser in Texas. Therefore, receipts from all products sold and shipped to Taxpayer’s Texas consolidation warehouse by the Supplier are Texas gross receipts.

Per Section 171.105(c) (Determination of Gross Receipts from Entire Business for Margin), a combined group shall include in its gross receipts, the gross receipts of each taxable entity that is a member of the combined group, regardless of whether the entity has nexus with Texas for the purpose of taxation. The products will be sold and delivered by the Supplier or its affiliates from locations inside or outside of Texas to the Taxpayer’s consolidation warehouse. Supplier and its affiliates are required to file a Taxpayer’s Combined Group report under Section 171.1014 (Combined Reporting; Affiliated Group Engaged in Unitary Business). Since the Supplier and its affiliates constitute a combined group, the receipts arising from these sales will constitute gross receipts from entire business for the Supplier’s Combined Group.

According to Section 171.103(b) (Determination of Gross Receipts from Business Done in This State for Margin), a combined group must include in its gross receipts from business done in Texas, the gross receipts from business done in Texas of each taxable entity that is a member of the combined group and has a nexus with Texas for the purpose of taxation. Regardless of whether the products are delivered from Supplier's locations inside or outside of Texas, the receipts from the sale of products delivered to Taxpayer's Texas consolidation warehouse constitute gross receipts from business done in Texas for the Supplier’s Combined Group.

Therefore, receipts arising from the sale of products to the Taxpayer’s Texas consolidation warehouse constitute gross receipts from entire business and gross receipts from business done in Texas for the Supplier’s Combined Group.

Question Two:

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

Ruling Two:

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 Three:

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

Ruling Three:

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 Two and Three:

Taxpayer’s Combined Group must include in gross receipts from its entire business, the receipts from each sale of tangible personal property. Section 171.105(a). Receipts from sales of products to unaffiliated retail or wholesale customers, whether located outside of or in Texas, are 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), 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 Four:

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 Four:

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.

Analysis for Question Four:

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) (Exclusion of Certain Receipts for Margin Apportionment), 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 Taxpayer's 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. 20180823074354.

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.