BILL ANALYSIS
C.S.H.B. 2627
By: Craddick
April 6, 1995
Committee Report (Substituted)
BACKGROUND
Chapter 171, Tax Code, imposes the franchise tax on corporations in
Texas or corporations that do business in Texas. Currently, a
corporation with multistate operations apportions its franchise tax
base to Texas in accordance with its business done in Texas, as
measured by its gross receipts in Texas. Corporations other than
banks and savings and loan associations apportion their gross
receipts from dividends and interest based on the "location of the
payor." If the legal domicile -- the state of incorporation -- of
the payor of the dividends or interest is not in Texas, the
receipts will not be included in Texas' receipts. On the other
hand, under current franchise tax law, a banking corporation with
its commercial domicile in Texas must include the dividends and
interest it receives as Texas receipts regardless of the location
or domicile of the payor.
PURPOSE
The bill changes the method of computing the franchise tax
apportionment for banking corporations. The current "single-factor" gross receipts method for apportionment percentage changes
to a "three-factor" apportionment percentage based on gross
receipts, property, and payroll.
The bill also excludes dividend interest received from federal
obligations for determining net taxable earned surplus.
RULEMAKING AUTHORITY
It is the committee's opinion that this bill does not expressly
grant any additional rulemaking authority to a state officer,
department, agency, or institution.
SECTION BY SECTION ANALYSIS
SECTION 1. Amends Section 171.001 (Tax Imposed), Subsection (b)(1),
to broaden the definition of a "banking corporation."
SECTION 2. Amends Section 171.101 (Determination of Net Taxable
Capital), Subsection (a), Tax Code, to reference new
Section 171.1065 for the purposes of apportioning a
banking corporation's taxable capital to the state for
franchise tax purposes.
SECTION 3. Amends Section 171.103 (Determination Of Gross Receipts
From Business Done In This State For Taxable Capital),
Tax Code, to specify Section 171.1031 regarding savings
and loan associations, and to Sections 171.1033-171.1037
regarding banking corporations, for the purposes of
apportioning taxable capital.
SECTION 4. Amends Section 171.1031 (Apportionment of Taxable
Capital and Taxable Earned Surplus of Banking
Corporation and Savings and Loan Association), Tax Code,
Subsections (a) and (b), and deletes (c).
Changes title to read "Apportionment of Taxable Capital
and Taxable Earned Surplus of Savings and Loan
Association."
(a) & (b) Eliminates all references to banking
corporations to reflect only savings and loan
associations.
SECTION 5. Amends Section 171.1032 (Determination of Gross Receipts
From Business Done in this State for Taxable Earned
Surplus), Subsection (a), Tax Code, to reference Section
171.1031 regarding savings and loan associations and
Sections 171.1033-171.1037 regarding banking
corporations, for the purposes of determining gross
receipts from business done in this state for taxable
earned surplus.
SECTION 6. Amends Subchapter C, Chapter 171, Tax Code, by adding
Sections 171.1033-171.1037.
Section 171.1033 DETERMINATION OF GROSS RECEIPTS,
PROPERTY, AND PAYROLL FACTORS FOR APPORTIONMENT OF
TAXABLE CAPITAL AND TAXABLE EARNED SURPLUS OF BANKING
CORPORATION. Provides that a banking corporation will
determine its gross receipts factor, its property
factor, and its payroll factor for purposes of
apportioning its taxable capital and taxable earned
surplus, as per Sections 171.1034-1037.
Section 171.1034 GROSS RECEIPTS FACTOR: BANKING
CORPORATION.
Establishes computation of the gross receipts factor.
Section 171.1035 PROPERTY FACTOR: BANKING CORPORATION.
Establishes computation of the property factor.
Section 171.1036 PAYROLL FACTOR: BANKING CORPORATION.
Establishes computation of the payroll factor.
Section 171.1037 SPECIAL RULES AND DEFINITIONS FOR
BANKING CORPORATION APPORTIONMENT FACTORS.
(a) This Section applies to Sections 171.1033-171.1037.
(1) Establishes criteria for determining the
location of a borrower.
(2) Establishes criteria for determining the
location of a credit card holder.
(3) Establishes criteria for determining whether a
loan is secured by real property.
(4) Establishes whether a taxpayer is taxable or
not.
(b) This Section applies to Sections 171.1033-171.1037
Defines "billing address," "commercial domicile,"
"compensation," "credit card," "credit card issuer's
reimbursement fee," "employee," "gross rents," "loan,"
"merchant discount," "participation," "person,"
"principal base of operations," "real property owned,"
"tangible personal property owned," "regular place of
business," "state," "syndication," and "transportation
property."
SECTION 7. Amends Subchapter C, Chapter 171, Tax Code, by adding
Section 171.1065 APPORTIONMENT OF TAXABLE CAPITAL AND
TAXABLE EARNED SURPLUS OF BANKING CORPORATIONS.
(a) Provides that a banking corporation will apportion
its taxable capital and taxable earned surplus to this
state based on the average of the three factors of gross
receipts, property, and payroll. The items to be
included in the computation of each of these three
factors are described in Sections 171.1034-171.1036.
(b) If one of the factors is missing, the sum of the
other two then divided by two is the apportionment
percentage. If two factors are missing, the remaining
factor is the apportionment percentage. A factor is
missing if both the numerator and denominator are zero.
(c) Factors are computed according to the method of
accounting required to be used by the taxpayer in
determining taxable capital or earned surplus for the
period on which the tax is based.
(d) If the apportionment percentage does not fairly
represent the extent of the taxpayer's business activity
in this state, the taxpayer may petition or the
comptroller may require the apportionment percentage in
respect to any part of the taxpayer's business activity:
(1) use of separate accounting methods; (2) excluding
one or more factors; (3) including one or more
additional factors; or (4) employing any other method
to effectuate an equitable apportionment of the
taxpayer's income.
SECTION 8. Amends Section 171.110 (Determination of Net Taxable
Earned Surplus), Tax Code, by amending Subsection (a)
and adding Subsection (h).
(a) References Section 171.1065, to determine a banking
corporation's apportioned taxable earned surplus.
(h) Provides that dividends and interest received from
federal obligations are not included in earned surplus
or gross receipts for purposes of determining net
taxable earned surplus.
Defines "federal obligations," "obligation," "United
States Government," "United States Government Agency,"
and "United States Government-Sponsored Agency," for
purposes of this section.
SECTION 9. Amends Section 171.316, Tax Code, by establishing a
conservator under Subchapter B, Chapter 6, Texas Banking
Act, to pay the franchise tax of any banking corporation
certified by the comptroller as being delinquent in the
payment of its franchise tax.
SECTION 10. Effective Date: January 1, 1996, and applies to a
report due on or after that date.
SECTION 11. Emergency Clause.
COMPARISON OF ORIGINAL TO SUBSTITUTE
C.S.H.B. 2627 makes technical changes in the computation (SECTION
6) of the three apportionment factors:
Addition of a section on apportionment of receipts from the
lease or rental of tangible personal property.
Clarification of the extent to which leased/rented
transportation property is considered to be used in this
state.
Clarification of what is considered a gross receipt from
investment assets and activities and from trading assets and
activities, and addition of provision for an alternate method
for apportionment of gross receipts from such activities.
Clarification of the average value and location of property
used in computing the property factor of the apportionment
formula.
Addition of definitions of the terms "participation" and
"person."
C.S.H.B. 2627 also makes changes in SECTION 7 of the bill, by
referencing Section 171.1061 for determining the taxable capital
and taxable earned surplus of a banking corporation. Also
clarifies that a taxpayer is required to use the same methods of
accounting required under existing law in determining apportionment
factors.
SUMMARY OF COMMITTEE ACTION
Public notice was posted in accordance with the rules, and a public
hearing was held on March 21, 1995. Representative Craddick
explained the bill. Without objection, H.B. 2627 was left pending
before the committee.
On March 28, 1995, the committee met in a public hearing, and H.B.
2627 was laid out on pending business. Representative Craddick
explained the bill. The committee considered a complete substitute
by Representative Craddick. The Committee considered amendment #1
to the substitute by Representative Craddick. Without objection,
the committee adopted committee amendment #1. The Chair directed
the committee staff to incorporate committee amendment #1 into the
substitute. Without objection, the committee adopted C.S.H.B.
2627. By a record vote of 7 ayes, 0 nays, 0 present not voting and
4 absent, the committee voted to report H.B. 2627 to the House as
substituted with the recommendation that it be sent to the Local &
Consent Calendar, and that it do pass.
Testimony received in favor of the bill:
(3/21/95) Karen M. Neeley, representing Independent
Banking Assn. of Texas
Neutral testimony received on the bill:
(3/21/95) Wade Anderson, representing the
Comptroller of Public Accounts
(3/28/95) Teresa Comer, representing the
Comptroller of Public Accounts
Mike Reissig, representing the Comptroller of
Public Accounts