United States

Texas: Oil and Gas Affiliates Qualified for Sales Tax Exemption on Intercorporate Services

Feb 26, 2018
From KPMG TaxWatch

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The Texas Comptroller of Public Accounts recently determined that an oil and gas company was eligible to claim the intercorporate services exemption on taxable services provided by affiliated entities. The parent company was a Texas limited partnership that elected to be treated as an S corporation. As part of a planned restructuring, the taxpayer planned to move its twelve existing divisions into four newly formed subsidiaries. Two of the subsidiaries would be taxed as C corporations and file a federal consolidated return. The other two subsidiaries were disregarded entities included on the parent’s federal 1120-S. All four subsidiaries performed taxable services for the parent, the other subsidiaries, and in some cases, unrelated third parties. Under Texas law, a sales tax exemption exists for certain transactions between affiliated entities, at least one of which is a corporation, that reports their income on a federal consolidated return for the tax year in which the transaction occurs. The exemption also applies if both the seller and the purchaser are members of an affiliated group under IRC § 1504, but one or both entities is not permitted to file a consolidated federal return because of the exclusions in IRC § 1504(b). In addition, under previous Comptroller guidance, an LLC that elects to be treated as a disregarded entity may qualify for the exemption if the parent company reports the disregarded entity’s income on a single consolidated federal income tax return with the other affiliated entities. Although the parent was excluded under IRC § 1504(b) from the affiliated group for federal income tax purposes due to its S corporation status, the Comptroller determined, under Rule 3.331(c)(2), that the parent and subsidiaries were all part of an affiliated group for purposes of the sales tax exemption. Therefore, the services provided between members of the affiliated group were exempt from sales tax, even though the parent reported its income (and the income of the disregarded subsidiaries) on a separate return from the corporate subsidiaries. Please contact David Davis at 214-840-6791 with questions.

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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.