United States

Texas: Strong Centralized Management Means More than a Single Common Administrator

Apr 18, 2016
From KPMG TaxWatch

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Recently, a Texas ALJ addressed whether two businesses were required to file a unitary combined return. Although Texas has been a combined filing state since the implementation of the revised franchise tax, there have few rulings or cases addressing when combined filing is required. The taxpayer in the case was a high-end carpet and upholstery cleaning business whose customers were primarily individuals. The taxpayer was owned by a person who also owned a second company that did consulting for small businesses. The individual owner was primarily involved in running the small business consulting firm and gave the taxpayer’s personnel full responsibility for running the carpet and upholstery cleaning business. The businesses were housed in the same building and a single common employee provided accounting and administrative services to both companies. The entities filed separate franchise tax reports for the tax years at issue, but the Comptroller’s office later asserted that the entities were required to file a unitary combined return. After a special panel established by the Comptroller to address unitary determinations concluded that the parties were unitary, the matter came before the ALJ.

Under Texas law, the Comptroller is directed to look at certain factors to determine if a unitary business exists. The only factor relevant at issue was whether the members were functionally integrated through the exercise of strong centralized management, such as authority over purchasing, financing, product line, personnel, and marketing. The Comptroller asserted that the single common administrator performing accounting functions established strong centralized management. The ALJ disagreed, emphasizing that if “centralized management” existed, it must be “strong.” In his view, these shared administrative functions did not amount to centralized management, much less strong centralized management. Both entities operated independently of each other with respect to their critical functions, such as the delivery of their mutual services, hiring, firing, and management of personnel, purchasing of goods and services, and marketing activities. The ALJ concluded that the taxpayer had established by a preponderance of the evidence that the Comptroller’s office erred in concluding that that parties were engaged in a unitary business. Please contact Doug Maziur at 713-319-3866 with questions on this Texas Comptroller’s decision (Mar. 11, 2016).

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.