Can a corporation use a three-factor apportionment formula instead of the single gross-receipts factor on a Texas franchise tax return?

Plain-English summary

A corporation filed an amended 1992 franchise tax report claiming a refund. It argued that it should be allowed to apportion both franchise-tax base components — taxable capital and earned surplus — using a three-factor formula (property, payroll, and sales) instead of the state's single gross-receipts factor. The Comptroller denied the refund claim.

The reason: under Tex. Tax Code Sec. 171.106, the single, gross-receipts apportionment factor is the only method allowed for apportioning the franchise-tax base components. The three-factor formula — formerly authorized by Sec. 171.108 — had been repealed by House Bill 1306 for report periods beginning 05/01/1989, well before the 1992 report at issue.

The letter told the taxpayer it was entitled to a refund hearing if it submitted a written request to the Audit Processing Section within 20 days, with a copy of the letter and supporting documentation.

Important currency note: This letter applies the pre-2008 franchise tax. The 2007 legislation (House Bill 3 and House Bill 3928) restructured the tax into the current margin tax effective January 1, 2008, with its own apportionment rules. Use this letter only as historical guidance on the pre-2008 single-factor rule, and confirm current apportionment law.

What this means for you

Corporations apportioning Texas franchise tax

Texas has long used a single-sales-factor (gross-receipts) approach for the franchise tax — there is no election to switch to a three-factor formula. A refund claim built on three-factor apportionment failed for exactly that reason.

Accountants and tax professionals

Note the timeline: the three-factor formula under Sec. 171.108 was repealed by House Bill 1306 for report periods beginning May 1, 1989, so it was unavailable for the 1992 report. Also note the procedural point — a denied franchise-tax refund carries a right to a hearing on a short (20-day) deadline. The current margin tax likewise apportions by a single gross-receipts factor, but verify the current statute before relying on this letter.

Common questions

Q: Could the corporation use a three-factor formula for its 1992 franchise tax?
A: No. The three-factor formula (former Sec. 171.108) was repealed for report periods beginning May 1, 1989, and the single gross-receipts factor is the only allowed method under Sec. 171.106.

Q: Why was the refund denied?
A: Because the refund depended on using a three-factor apportionment formula that Texas law no longer allowed.

Q: What could the taxpayer do next?
A: Request a refund hearing in writing within 20 days of the letter, with a copy of the letter and supporting documentation.

Citations and references

Statutes and rules:

• Tex. Tax Code Sec. 171.106 (the single gross-receipts factor is the only apportionment method for the franchise-tax base components)
• Tex. Tax Code Sec. 171.108 (former three-factor apportionment formula, repealed by House Bill 1306 for report periods beginning 05/01/1989)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9606102L

Original ruling text

Supersede type: Partial
Document superseded on: 02/21/2020
Issue(s) that caused the document to be superseded: Three factor formula
Reason(s): Statutory change - House Bill 1306, effective 03/15/1989, repealed Tax Code 171.108 relating to the use of the three factor formula for franchise tax returns covering report periods beginning 05/01/1989.

June 20, 1996

RE: **

Taxpayer Number **

Dear **:

I have reviewed the amended franchise tax report for the 1992 tax year that was recently submitted by someone in your organization. Your refund claim has been denied.

Your refund request was based on an adjustment to the apportionment factor for both the taxable capital and earned surplus components of the franchise tax. You have requested that we allow your corporation to use a 3-factor apportionment formula instead of the single, gross receipts apportionment factor.

The single, gross receipts apportionment factor is the only alternative allowed under the Texas Tax Code (TTC) for the apportionment of the franchise tax base components. See TTC Sec. 171.106.

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

You are entitled to a refund hearing. If you would like to request one, please send your written request within twenty (20) days of the date of this letter to the Audit Processing Section of Revenue Accounting. This request must be accompanied by a copy of this letter and any documentation needed to support your claim.

If you have any questions about this or any other franchise tax matter, please call me at 1-800-531-5441, extension 34612. My direct number is (512) 463-4612. You may write me at Tax Policy Division, Comptroller of Public Accounts, Austin, Texas 78774.

Sincerely,

Janet Spies

Tax Policy Division