How did a money-transmission processor apportion service charges when Texas agents began transactions and New Jersey personnel completed them?

Plain-English summary

The entire money-transmission service charge entered gross receipts, while the Texas numerator reflected the fair value of work performed by Texas agents.

The corporation used Texas vendors as agents to originate money transmissions. Each agent retained part of the service charge as compensation and remitted the rest. The corporation had no Texas employees, only the originating terminal, and incurred completion costs in New Jersey.

The Comptroller applied a single gross-receipts factor:

• Full customer charge in denominator: the agent's retained share was a cost and could not reduce gross receipts under Sections 171.112(a) and 171.1121(a).
• Texas agent work in numerator: services performed by agents on the corporation's behalf in Texas contributed to Texas receipts.
• New Jersey work outside numerator: completion services entered total receipts but not Texas receipts.

For services performed both inside and outside Texas, Rules 3.549(e)(38) and 3.557(e)(33) used fair value. Texas law provided no fixed percentage like the one the taxpayer referenced from New Jersey. The Comptroller said comparing Texas service costs with out-of-state processing costs might be the best reasonable allocation method on these facts.

Currency note: This is a pre-2008 service-apportionment ruling. Texas replaced the former franchise tax with the margin tax effective January 1, 2008.

What this means for you

Money transmitters and agent networks

Agent compensation did not reduce gross revenue. Agent-performed Texas services still counted even without direct Texas employees.

Tax professionals

Support the fair-value allocation with evidence. Cost ratios were accepted as a possible method here, not a statutory safe harbor.

Common questions

Q: Could the company subtract the agents' retained fees?
A: No.

Q: Did Texas agent work enter Texas receipts?
A: Yes, at its fair value.

Q: Did New Jersey completion work enter the Texas numerator?
A: No, but it remained in total receipts.

Citations and references

• Texas Tax Code Secs. 171.106(a)-(b), 171.112(a), 171.1121(a), 171.103(2), and 171.1032(a)(2)
• 34 Tex. Admin. Code Secs. 3.549(e)(38) and 3.557(e)(33)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9903705L

Original ruling text

March 10, 1999

Dear **:

Thank you for the information contained in your letter of February 1, 1999
concerning the activities of a corporation that processes money transmissions.
This response represents the Texas franchise tax implications of the situation
described in the ruling request.

You have indicated that the corporation receives a service charge for
processing money transmissions. The company has an agency relationship with
vendors in Texas. These agents retain a portion of the service charge as
compensation for their services. The remainder of the charge is remitted to
the corporation. The corporation does not employ any individuals in Texas.
Its only equipment in the state is the terminal from which the transaction
originates. The costs of completion occur in New Jersey.

You have asked what portion of the service charges would be subject to tax in
Texas. For Texas franchise tax purposes, the relevant question is how the
service charges should be apportioned in the computation of the tax.

The taxable capital and earned surplus components of the franchise tax are both
apportioned by using a single gross receipts factor. The apportionment factor
is a fraction, the numerator of which is the corporation's gross receipts from
Texas, and the denominator of which is the corporation's gross receipts from
its entire business. Sec. 171.106(a) and (b), Texas Tax Code.

For taxable capital, "gross receipts" are defined as all revenues that would be
recognized under a generally accepted accounting principles method of
accounting, without a deduction for costs incurred, unless otherwise provided
for by the franchise tax statute. Sec. 171.112(a), Texas Tax Code.

For earned surplus, "gross receipts" are defined as all revenues reportable by
a corporation on its federal tax return, without a deduction for costs
incurred, unless otherwise specifically provided for by the franchise tax
statute. Sec. 171.1121(a), Texas Tax Code.

In apportioning the respective tax bases, the corporation's gross receipts from
each service performed in Texas must be reported as Texas gross receipts.
Sections 171.103(2) and 171.1032(a)(2), Texas Tax Code. If services are
performed inside and outside Texas, the receipts are Texas receipts on the
basis of the fair value of the services rendered in Texas. Franchise Tax Rules
3.549(e)(38) and 3.557(e)(33).

In applying the above cited guidelines to the situation described in the ruling
request, we would make the following conclusions.

The entire amount of the service charge for processing the money transmissions
should be included in the corporation's gross receipts. The amount retained by
the agents cannot reduce the receipts factor because the statute precludes the
deduction of costs in the computation of a corporation's gross receipts.

With respect to determining the amount of the charges that are to be reported
as Texas gross receipts, the statute holds that services performed in Texas are
Texas gross receipts. Therefore, the work done by the agents (on behalf of the
corporation) in Texas would be factored into the corporation's Texas gross
receipts.

The ruling request indicated that the costs of completing the transactions
occur in New Jersey. This work would be factored into the corporation's total
gross receipts, but not its Texas gross receipts.

None of the Texas franchise tax authorities addressing apportionment provide
specific percentage factors as you indicate New Jersey provides for. Because
the services described involve work done inside and outside Texas, the costs
attributed to the services in Texas relative to the costs attributed to the
out-of-state processing may be the best means of apportioning the service
charges. In our opinion, such an approach would be consistent with the
statutory apportionment requirements.

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

If you have any questions, please call toll-free 1-800-531-5441, extension
3-4496 or (512)463-4496.

Sincerely,

Jerry Bobbitt
Tax Policy Division