Texas Tax Alert: Net Gains and Texas Apportionment

The Texas Supreme Court ruled in Hallmark Marketing¹ that a taxpayer is not required to subtract net losses on sales of investments and capital assets from the sales denominator (line 25 of the Margin tax return, gross receipts everywhere) in determining the apportionment factor for Texas Margin tax purposes. 

The issue in this case is the conflict between Texas statute section 171.105, and the comptroller’s rule 3.591(e)(2). Under the statute, the denominator of the apportionment factor is an entity’s gross receipts from its entire business which include only the net gain from the sale of investment or capital assets. Under rule 3.591(e)(2), the comptroller has interpreted the statute to mean that the sales denominator should include the taxpayer’s cumulative gain and loss on its various investment and capital asset sales and if such results in a net loss, this loss should be taken against other receipts but not below zero.  

The court disagreed with the comptroller and stated “simply put, the comptroller’s reading would rewrite the statute to say Hallmark should include ’only the net gain or net loss.’ Not only would this add to the statute’s plain language, it would effectively write the word ’only’ out of the statute.”

Net gains and losses must be offset against one another when determining total revenue (line 10 of the Margin tax return); however, only net gains are includible in the sales denominator. In the numerator, we include only tangible assets that are located in Texas at the time of the sale or intangibles if the location of the payer is in Texas. Under the court’s holding, a taxpayer may be able to increase the sales denominator, resulting in a reduced apportionment factor, therefore, owning less Texas tax.  

For questions about this regulation or other state and local tax matters, please contact us.

^{1. Hallmark Marketing Co., LLC v. Hegar, et al., Tex. S. CT., No 14-1075, 04/15/2016.}