Texas Franchise Tax: Contract Manufacturing and Cost of Goods Sold

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 Texas Tax Code Section 171.002(c)(2).

An entity that is not considered a producer is limited to acquisition, storage, handling and other costs specified in Texas Tax Code Section 171.1012(d) as related to the entity's goods in determining its deduction for the cost of goods sold.

Costs directly related to the production of goods that are typically allowed a producer, such as research, experimental, engineering and design activity costs, are not allowed as cost of goods sold for an entity that uses an unrelated third party to produce its goods.

TAX NEWS - NOVEMBER 2009

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