United States

Texas: Comptroller’s Office Revises Policy on Inclusion of Net Losses in the Apportionment Factor

Aug 14, 2017
From KPMG TaxWatch

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Last year, the Texas Supreme Court held that a taxpayer was not required to include a net loss resulting from the sale of an investment in computing its apportionment factor. Under Texas law, a multistate taxpayer apportions its taxable margin to Texas using a single-sales factor apportionment formula. The apportionment factor numerator equals the taxpayer’s Texas gross receipts, while the denominator is the taxpayer’s total gross receipts. However, for sales of capital assets or investments, per Texas statute, “only the net gain” from the sale is included in the apportionment factor. A Comptroller regulation provides that if the combination of net gains and losses from the sale of investments or assets results in an aggregate net loss, a taxpayer must net the loss against other receipts in the apportionment formula (but not below zero). The taxpayer at issue had a $628 million loss from the sale of investments. On its return, the taxpayer did not include the net loss in its denominator. If the taxpayer had done so, its denominator would have been reduced, which would have increased the taxpayer’s overall Texas apportionment. On audit, the Texas Comptroller determined that the taxpayer should have included the loss in its denominator and issued an assessment accordingly. The taxpayer protested and ultimately the state’s high court held that, by the plain language of the statute, only net gains were included.

In light of the decision, the Comptroller’s Tax Policy Division recently announced a revised policy that applies for all open tax years. Although the case did not address the computation of the numerator, the policy division stated that the holding equally applies to the computation of Texas gross receipts. To calculate gross receipts everywhere, all gains and losses from all sales of investments and capital assets will be added together to determine the net gain or net loss. If the combination results in a net loss, the entity’s gross receipts everywhere (at least from sales of investments and capital assets) are zero. If the combination results in a net gain, the net gain is the entity’s gross receipts everywhere (plus any other gross receipts the entity has from other than sales of investments and capital assets). If the entity has Texas and out-of-state sales of investments and capital assets, a separate calculation is made to determine Texas receipts by adding together Texas gains and losses. If the combination of Texas gains and losses results in a net loss, the entity’s Texas receipts from sales of capital assets and investments are zero. If the combination of Texas gains and losses results in a net gain, the Texas net gain is reported as Texas receipts. In no instance, however, is an overall apportionment factor of greater than one allowed. For a combined group, all gains and losses from the sale of investments and capital assets are added together to determine the net gain or net loss. For more information on the revised policy, please contact Doug Maziur at 713-319-3866.


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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.