Texas Income / Franchise tax: Comptroller explains implications of contract manufacturing on cost of goods sold

Tax Policy News, Tex. Comptroller (10/09). The comptroller explains that a taxable entity that contracts with an unrelated third-party to manufacture goods to the taxable entity's specifications is not considered a producer of those goods for purposes of the Texas revised franchise "margin" tax.

An entity that is not considered a producer is limited to acquisition, storage, handling and other specified costs as related to the entity's goods in determining its cost of goods sold deduction. That is, costs directly related to the production of goods that are typically allowed to a producer (such as research, experimental, engineering and design activity costs) are not allowed as part of the cost of goods sold for an entity that uses an unrelated third-party to produce its goods.