Were commissions earned in Texas and shoe sales delivered in California Texas receipts under the former franchise tax?

Plain-English summary

Texas service commissions were Texas receipts, but shoe sales delivered in California were not and did not throw back.

In the first transaction, the taxpayer accepted orders in Texas, arranged overseas manufacturing, and earned a customer-paid commission. Because it performed the service in Texas, the commission entered Texas receipts for both taxable capital and earned surplus.

In the second transaction, the taxpayer billed for the entire shoe order, arranged shipment from the overseas manufacturer to Los Angeles, and required customers to pick up the goods at the port or a California customs warehouse. Delivery therefore occurred in California, so none of the sales receipts were Texas receipts.

The throwback rule did not apply because the goods were shipped from one location outside Texas to another location outside Texas.

What this means for you

Wholesalers using overseas manufacturers

Commission services and sales of goods followed different sourcing rules even when they involved similar customer orders.

Tax professionals

Identify whether the taxpayer earns a commission for Texas services or sells the goods, then document the actual shipment origin and delivery location.

Common questions

Q: Were the commissions Texas receipts?
A: Yes.

Q: Were the California-delivered shoe sales Texas receipts?
A: No.

Q: Did the throwback rule apply?
A: No, because the shipment ran from outside Texas to outside Texas.

Citations and references

• 34 Tex. Admin. Code Secs. 3.549(e)(38), 3.557(e)(33), 3.549(e)(41), and 3.557(e)(37)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9702415L

Original ruling text

February 27, 1997

Dear ***:

Thank you for your February 14, 1996 letter, as well as your February 27, 1996
follow-up letter, concerning the determination of Texas receipts for your
client.

You stated in your letter that your client, the Taxpayer, is a Texas entity
whose principal place of business is located in Texas. The Taxpayer has one
employee located outside the state of Texas (in California) who works from a
home office. The Taxpayer is engaged in the wholesale sale of shoes which the
Taxpayer orders from overseas factories. The Taxpayer's customers are local,
regional and national retailers.

I have summarized the two types transactions that the Taxpayer enters into and
have restated your specific questions below.

Transaction One.
The Taxpayer receives and accepts orders from its customers at its Texas
office. The Taxpayer then places orders for the product with overseas
manufacturers. The overseas manufacturer ships the product directly to the
Taxpayer's customers. The customer is responsible for making all of the
shipping arrangements. The manufacturer bills and receives payment from the
customer for the product. A commission is paid, by the customer, to the
Taxpayer based on the dollar amount of the order.

Question: Is the commission received by the Taxpayer a Texas receipt for the
purpose of calculating either the earned surplus or taxable capital component
of the Texas franchise tax?

Answer: Yes. The commissions earned by the Taxpayer would be considered Texas
receipts for both components of the franchise tax. Based on the information
provided, the Taxpayer is providing a service, in Texas, to its customers.
Receipts from the performance of services are apportioned based on the location
where the service is performed. See franchise tax rules 3.549(e)(38) and
3.557(e)(33).

Transaction Two.
The Taxpayer solicits and receives orders from its customers which are accepted
at its Texas office. The orders are placed by the Taxpayer with an overseas
manufacturer. The Taxpayer arranges shipment of the product to a port in Los
Angeles. The customers arrange to pick up the product at the Los Angeles Port.
On occasion, the product may be shipped with other orders and may be
transported to a custom broker's warehouse in California for distribution.
Again, the customer must arrange to pick up the product at the custom broker's
warehouse. The Taxpayer bills its customers for the entire amount of the
order.

Question: Are the Taxpayer's receipts from these sales Texas receipts for the
purpose of calculating either the earned surplus or taxable capital component
of the Texas franchise tax?

Answer: No. None of these receipts would be considered Texas receipts as the
delivery of the tangible personal property to the customer took place in
California. See Rule 3.549(e)(41) and Rule 3.557(e)(37). The "throwback rule"
will not apply to these sales because the tangible personal property is being
shipped from one location outside of Texas to another location outside of
Texas.

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

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