United States

Texas: Government Contractor Prohibited from Disclosing Contracts; Franchise Tax Refund Denied

Jan 29, 2018
From KPMG TaxWatch

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A Texas Administrative Law Judge (ALJ) recently addressed whether a government contractor was entitled to a franchise tax refund as a result of filing an amended report changing its methodology for sourcing receipts from sales of intangibles (software). After an auditor requested certain information to support the taxpayer’s revised sourcing methodology, the taxpayer responded that it could not provide original contracts for the sales at issue because they included sensitive information. In fact, the taxpayer argued, it was prohibited by federal law from disclosing the contract contents to anyone without proper security clearance. Instead, the taxpayer provided the auditor with a description of the various business units at issue and spreadsheets summarizing what it asserted were intangible software sales.

Under Texas law, receipts from the sale of intangibles are apportioned based on the location of the payor. Gross receipts from sales of computer programs are receipts from sales of intangible assets and are apportioned to the legal domicile of the payor. However, receipts from the sale of computer software services are apportioned to the location where the services are performed. The taxpayer argued that it incorrectly sourced its receipts as if it was selling services, rather than an intangible (software). Thus, to prevail, the taxpayer had to demonstrate that the receipts at issue were related to the sale of intangibles, as opposed to services. The ALJ, although agreeing that the applicable federal and state law provisions placed the taxpayer in a difficult position, ultimately concluded that the taxpayer had not established by a preponderance of evidence that franchise taxes were erroneously collected or paid. In the ALJ’s view, there was no authority upon which the Comptroller could provide a refund without original transaction documents. The taxpayer, the ALJ noted, should be able to work with the appropriate federal authorities to gain permission to provide redacted documents to a state tax agency in circumstances such as these. Please contact Doug Maziur at 713-319-3886 with questions on this determination. 

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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.