TAX NEWS - DECEMber 2009

Texas Income / Franchise tax: Receipts from intrastate segment of interstate transportation are not sourced to Texas

For purposes of apportioning its taxable capital under the former Texas franchise tax for the 2003 and 2004 report years at issue, the comptroller held that a local rail transportation company's receipts from transporting goods in a segment of interstate commerce were not part of Texas intrastate commerce, even when its own transportation services occurred entirely in Texas. That is, a transportation company could exclude receipts from transporting freight to and from various interchange points within Texas as "Texas receipts," so long as the freight had previously been transported into Texas from outside the State, or was subsequently destined to be transported outside Texas by other rail carriers as part of an interstate journey.

Pursuant to an administrative rule in effect for the years at issue, Texas receipts only included receipts for transporting goods from a Texas point of origin to an ultimate Texas delivery point. In this respect, Texas "intrastate commerce" for a transportation company's tax apportionment purposes meant only business begun and completed in Texas, and did not include intrastate segments of transportation within the interstate commerce journey.

Note that the former Texas franchise tax in effect for the years at issue was imposed on "taxable surplus" apportioned to Texas, which was based on a percentage of gross receipts from business done in Texas to gross receipts from the entire business of the corporation. While this opinion addressed a surplus-based period under the former Texas franchise tax, the applicable apportionment regulation forming the basis of this opinion was not materially changed for post-2007 tax reports under the revised Texas franchise 'margin' tax regime.