85R32 ADM-D     By: Taylor of Collin S.B. No. 142       A BILL TO BE ENTITLED   AN ACT   relating to the determination of cost of goods sold for purposes of   computing the franchise tax.          BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:          SECTION 1.  Section 171.101(a), Tax Code, is amended to read   as follows:          (a)  The taxable margin of a taxable entity is computed by:                (1)  determining the taxable entity's margin, which is   the lesser of:                      (A)  the amount provided by this paragraph, which   is the lesser of:                            (i)  70 percent of the taxable entity's total   revenue from its entire business, as determined under Section   171.1011; or                            (ii)  an amount equal to the taxable entity's   total revenue from its entire business as determined under Section   171.1011 minus $1 million; or                      (B)  an amount computed by determining the taxable   entity's total revenue from its entire business under Section   171.1011 and subtracting the greater of:                            (i)  $1 million; or                            (ii)  an amount equal to the sum of:                                  (a)  at the election of the taxable   entity, either:                                        (1)  cost of goods sold, as   determined under Section 171.1012 or 171.10121; or                                        (2)  compensation, as determined   under Section 171.1013; and                                  (b)  any compensation, as determined   under Section 171.1013, paid to an individual during the period the   individual is serving on active duty as a member of the armed forces   of the United States if the individual is a resident of this state   at the time the individual is ordered to active duty and the cost of   training a replacement for the individual;                (2)  apportioning the taxable entity's margin to this   state as provided by Section 171.106 to determine the taxable   entity's apportioned margin; and                (3)  subtracting from the amount computed under   Subdivision (2) any other allowable deductions to determine the   taxable entity's taxable margin.          SECTION 2.  Section 171.1011(v), Tax Code, is amended to   read as follows:          (v)  A taxable entity primarily engaged in the business of   transporting goods by waterways that does not subtract cost of   goods sold in computing its taxable margin shall exclude from its   total revenue direct costs of providing transportation services by   intrastate or interstate waterways to the same extent that a   taxable entity that sells in the ordinary course of business real or   tangible personal property would be authorized by Section 171.1012   or 171.10121 to subtract those costs as costs of goods sold in   computing its taxable margin, notwithstanding Section   171.1012(e)(3).          SECTION 3.  Subchapter C, Chapter 171, Tax Code, is amended   by adding Section 171.10121 to read as follows:          Sec. 171.10121.  ALTERNATIVE DETERMINATION OF COST OF GOODS   SOLD. In lieu of determining cost of goods sold as provided by   Section 171.1012 and subject to Section 171.1014, a taxable entity   that elects to subtract cost of goods sold for the purpose of   computing its taxable margin may determine the amount of that cost   of goods sold as follows:                (1)  for a taxable entity treated for federal income   tax purposes as a corporation, the cost of goods sold is the amount   reportable as cost of goods sold on line 2, Internal Revenue Service   Form 1120;                (2)  for a taxable entity treated for federal income   tax purposes as a partnership, the cost of goods sold is the amount   reportable as cost of goods sold on line 2, Internal Revenue Service   Form 1065;                (3)  for a taxable entity treated for federal income   tax purposes as an S corporation, the cost of goods sold is the   amount reportable as cost of goods sold on line 2, Internal Revenue   Service Form 1120S; or                (4)  for any other taxable entity, the cost of goods   sold is an amount determined in a manner substantially equivalent   to the amount for Subdivision (1), (2), or (3) determined by rules   the comptroller shall adopt.          SECTION 4.  Section 171.1014, Tax Code, is amended by   amending Subsection (e) and adding Subsection (e-1) to read as   follows:          (e)  For purposes of Section 171.101, a combined group that   elects to subtract costs of goods sold shall determine that amount   by:                (1)  determining the cost of goods sold for each of its   members as provided by Section 171.1012 or 171.10121 as if the   member were an individual taxable entity;                (2)  adding the amounts of cost of goods sold   determined under Subdivision (1) together; and                (3)  subtracting from the amount determined under   Subdivision (2) any cost of goods sold amounts paid from one member   of the combined group to another member of the combined group, but   only to the extent the corresponding item of total revenue was   subtracted under Subsection (c)(3).          (e-1)  For purposes of Subsection (e), each member of a   combined group may elect to determine its cost of goods sold under   either Section 171.1012 or 171.10121.          SECTION 5.  This Act applies only to a report originally due   on or after the effective date of this Act.          SECTION 6.  This Act takes effect January 1, 2018.