Did Texas's affiliated-entity service exemption apply when a corporation provided taxable services to a partnership partly owned by an affiliate?

Plain-English summary

A corporation provided credit reporting, debt collection, insurance, information, data processing, personnel, and other support services to a partnership. One of the partnership's two general partners was a corporate subsidiary that filed a consolidated federal return with the service provider.

The Comptroller denied the Texas Tax Code § 151.346 affiliated-entity exemption. Because the partnership itself could not be included in a consolidated return with the corporation, the services provided to the partnership were taxable.

The attached request argued that the statute's use of “entities” should extend the exemption through the affiliated corporate partner. The Comptroller's response did not adopt that interpretation.

What this means for you

Under the 1988 conclusion, common operations and ownership through one partner did not replace the consolidated-return requirement for the actual service recipient.

Common questions

Was the partnership an exempt affiliate? No.

Did the corporate partner's consolidated return make the partnership eligible? No.

Were the services to the partnership taxable? Yes.

Citations and references

• Texas Tax Code § 151.346, applied to affiliated-entity service transactions.
• 26 U.S.C. § 1504, discussed in the attached request but not adopted as a basis for exemption.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8802L0867A10

Original ruling text

February 5, 1988

Dear ***:

On behalf of Mr. Bullock, I hope you'll accept my apology for the delay
in
answering your question involving changes in the sales tax law. This
isn't the way we normally do business.

Our people were, and still are, swamped by a deluge of inquiries as they
attempted to interpret provisions of the new law and draft rules which
would not adversely impact businesses. In many instances, an answer to a
question just wasn't available when the question arrived.

Tax Code Sec. 151.346 refers to an affiliated entity as being one of
which
is a corporation and files a consolidated tax return. Being that COMPANY
A
is a partnership and cannot be included in a consolidated return with a
corporation (CORP Z), the services would be taxable to COMPANY A.

This opinion is based upon the facts you presented. If there are
additional or different facts, this opinion may change.

Please feel free to contact me if you have additional questions. You may
write me, call toll-free 1-800-252-5555 from anywhere in Texas or phone
512/463-4600.

Sincerely,
Mona Shoemate
Tax Policy Division

December 29, 1987

Comptroller of Public Accounts
Sales Tax Division
Capitol Station
Austin, TX 78774

Dear Sir:

We request a ruling that credit reporting, debt collection, insurance,
information and data processing services provided by CORP Z to COMPANY
A are exempt from sales tax under Section 151.346 of the Tax Code.

CORP Z is a Delaware corporation qualified to do business in Texas.
Its primary business is the manufacture and sale of plastic resins; more
than 97% of its revenues come from the sale of the two resins it manu-
factures.

COMPANY A, a partnership organized under the Texas Uniform Partnership
Act, has a plant in Deer Park, Texas on land leased from CORP Z. COMPANY
A's plant is on the CORP Z plant site and is under common administration
of the site manager, a CORP Z officer.

A subsidiary of CORP Z, CORP Y, also a Delaware corporation qualified
to do business in Texas, is one of the two equal general partners in
COMPANY A. CORP Y files a consolidated Federal tax return with CORP Z.

COMPANY A employs no personnel directly. Rather, under a contract, CORP
Z supplies all the personnel who work full-time to carry on COMPANY A's
business. Under the same contract, CORP Z supplies virtually all other
normal business support services not provided by the CORP Z employees
working full-time on COMPANY A matters. Thus, for instance, a single
data-processing department provides services to both CORP Z and COMPANY
A. The services are billed at rates intended to compensate CORP Z for
its costs, including a return on its money employed in providing the ser-
vices; it is not intended that CORP Z make a commercial profit or loss
on the arrangement, which is simply an attempt to make the most efficient
use of common resources.

Tax Code Section 151.346 provides that "[t]here are exempt from the taxes
imposed by this chapter service transactions among affiliated entities,
at least one of which is a corporation, that report their income to the
Internal Revenue Service on a single consolidated return for the tax year
in which the transaction occurs." An "affiliated entity" is not defined;
the section merely provides that the term "includes an entity that would
be classified as a member of an affiliated group under 26 U.S.C. Section
1504 but for the exclusions provided by that section."

If CORP Z provided the services to CORP Y, a corporation, the exemption
would clearly apply. The section creates an ambiguity, though, in the
case of partnerships or other non-corporate entities. While the section
of the Internal Revenue Code referred to is limited to corporations, Tax
Code Section 151.346, by use of the phrase "entities, at least one of
which is a corporation," clearly contemplates application to
non-corporate
entities that are excluded from 26 U.S.C. 1504 by its terms.

Since the partnership form is well-established and has a long history in
the common law as well as statutory authority (Vernons Ann. Civ. St. Art.
6132b), a partnership would certainly seem to be one of the types of en-
tities to which Tax Code Section 151.346 was meant to apply. However, a
partnership cannot be included in a consolidated federal tax return with
a corporation.

To avoid this inconsistency, we ask that you issue a ruling that the ex-
ception in Section 151.346 applies also to services provided by a corpo-
ration to a partnership in which one of the partners is a member of the
provider corporation's affiliated group, and specifically that the ser-
vices supplied by CORP Z to COMPANY A are excluded from taxation under
Section 151.346.

Please advise us if you need any further information. We await your
reply.

Sincerely,