How did an accounting-year and S-election change affect the 1997 former Texas report, and where were export commissions sourced?

Plain-English summary

The year-end and S-election change required combined earned-surplus periods, while export commissions followed service location.

For the first taxpayer, the 1997 taxable-capital component used the financial condition at December 31, 1996 and receipts for calendar-year 1996.

Earned surplus and its receipts used February 1, 1995 through December 31, 1996. If the taxpayer filed short federal returns before and after converting to S status, it had to combine those amounts on the 1997 Texas report.

For the second taxpayer, export-trading commissions entered Texas receipts to the extent its services were performed in Texas. Shipment origin or destination did not control the commission sourcing.

What this means for you

Corporations changing year-end and S status

Short federal periods could have to be combined into one historical Texas earned-surplus period.

Export commission businesses

Commission receipts followed where the service was performed, not where the goods moved.

Common questions

Q: What date controlled taxable capital?
A: December 31, 1996.

Q: What earned-surplus period applied?
A: February 1, 1995 through December 31, 1996.

Q: Where were export commissions sourced?
A: Where the services were performed.

Citations and references

• 34 Tex. Admin. Code Sec. 3.544(a)(1)(C), as cited in the letter

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9610799L

Original ruling text

October 30, 1996

Dear ***:

In your letter of September 23, you requested information regarding the
application of franchise tax to an accounting period change and the
apportionment of commissions for two of your clients.

I have restated the situation for each client followed by a response.

1. A client whose accounting period ended on January 31 is considering an S
   corporation election and changing to an accounting period ending on December
2. When filing the 1997 franchise tax report, there will be an accounting
   period for the 12 months ending on January 31, 1996 and an accounting period
   ending for the 11 months ending on December 31, 1996. Which accounting period
   should we go by?

Response

For the purposes of my response, I presume that your client used the accounting
year ended January 31, 1995 on the 1996 franchise tax report.

The taxable capital should be based on the financial condition as of December
31, 1996. In computing the apportionment formula, your client should use
receipts for the 1996 calendar year accounting period (see enclosed Rule
3.544(a)(1)(C)).

The earned surplus component (including receipts for the apportionment formula)
should be based on the period from February 1, 1995 through December 31, 1996
(Rule 3.544(a)(1)(C)). Therefore, if your client files short period federal
income tax returns for the period prior to and subsequent to the conversion to
S corporation status, your client must combine the amounts on the returns to
compute net taxable earned surplus on the 1997 report.

2. A client is engaged in export trading receives commissions in Texas. 80%
   of the business is shipped from New York to China. Should every sale they make
   in the U.S. or only the portion shipped from Texas be included in Texas
   receipts on Schedule A, item 3.

Response

If your client is receiving a commission for sales made, the commissions should
be included in Texas receipts to the extent your client's services are
performed in Texas. Specifically, the receipts should be apportioned to the
location where the services are performed; not where the goods are shipped.

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

If you have any questions, contact Tax Policy Division. You may call toll free
1-800-531-5441, or our regular number is 512/463-4600. My extension is 3-4662.
You may write me at Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Bob Jeffcoat
Tax Policy Division