Implications of the New Texas Sourcing Rules for Financial Institutions

Thoughtware Alert Published: Mar 03, 2021
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The Texas Comptroller of Public Accounts (Comptroller) adopted several changes to revenue sourcing rules affecting the inclusions and exclusions from the apportionment factor as well as the sourcing of service revenue. The amendments to Texas Admin Code 3.591 replace the term “Revenue” with “Gross Receipts” and include new and revised provisions that affect the sourcing of gross receipts from a variety of services. The gross receipts sourcing changes affect general services as well as telecommunications, advertising, internet hosting, digital property, capital assets and investments, financial derivatives, and the sale of single-member LLC interests.

Texas does not have a special formula for apportioning the taxable margin of financial institutions. However, a “banking corporation” excludes from the numerator of its apportionment factor interest earned on federal funds and interest earned on securities sold under an agreement to repurchase that are held in Texas in a correspondent bank domiciled in Texas, but must include the interest in gross receipts from the entity’s entire business.

Nonetheless, the general sales factor sourcing rules, and the amendments thereto, certainly affect financial institutions. The recent amendments make changes to several types of revenue. 

Interest Receipts 

The Comptroller makes minor changes to the provisions addressing the sourcing of interest, which continues to be sourced to the location of the payer. A new provision clarifies that interest received from a national bank is a Texas gross receipt if the bank’s principal place of business is in Texas, or the if bank is organized under the Texas Banking Code. 

Capital Gains 

The Comptroller amended the rules regarding capital assets and investments and clarifies that only the net gain from the sale of a capital asset is included in gross receipts. A net loss from the sale of a capital asset or investment is not included in gross receipts. 

Loan Servicing Fees 

The Comptroller specified the gross receipts from servicing loans secured by real property are sourced to the location of the collateral real property that secures the loan being serviced. The Comptroller provided guidance on sourcing “loan servicing” fees providing that gross receipts from servicing loans that are not secured by real property are sourced under the general rule addressing services. Gross receipts from loan servicing fees are sourced to where the “end product act” occurs. With exceptions, the gross receipts from loan servicing fees will generally be sourced to the taxpayer’s market. 

Hedging Contracts & Other Financial Derivatives 

The Comptroller added a new subsection to provide guidance for sourcing gross receipts from the settlement of hedging contracts and other financial derivatives for risk management purposes. These types of investments are intangibles, and the receipts are sourced to the location of the payer.

Sale of Loans & Securities 

The Comptroller provided that gross receipts from the sale of a loan or security treated as inventory of the seller for federal income tax purposes are included in gross receipts. Securities and loans held for investment or risk management purposes are not inventory. Gross receipts from the sale of a loan or security treated as inventory are sourced to the location of the payer. 

Sale of Limited Liability Company (LLC) Membership Interests 

The Comptroller provided guidance on the sourcing of the sale of a single-member LLC. The gross receipts from the sale of such an interest is considered the sale of an interest in an intangible asset and is to be sourced to the location of the payer.

Financial institutions should carefully reassess the calculation of their Texas sales factor in light of new Texas Admin Code 3.591.

For additional guidance on Texas Admin Code 3.591, contact your BKD Trusted Advisor™ or submit the Contact Us form below.

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