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Multistate Tax Alert: Texas Comptroller Proposes Amendments to Franchise (Margin) Tax Cost of Goods Sold Regulation

The proposed amendments would also clarify the definition of “service costs”


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Overview

The Texas Comptroller of Public Accounts (the “Comptroller”) recently proposed amendments to its Franchise (Margin) Tax cost of goods sold (“COGS”) regulation, 34 Tex. Admin. Code §3.588. The proposed amendments would allow taxpayers to include in their COGS calculation all direct and indirect labor costs that are capitalized under Internal Revenue Code (“IRC”) §263A or IRC §460, excluding service costs. The proposed amendments would also clarify the definition of “service costs” and include such costs as “overhead costs” subject to a 4% “total service cost” limit in calculating the COGS deduction. The amendments, if adopted, would permit taxpayers to recalculate their COGS deductions to include the aforementioned costs, which could create a potential refund opportunity. The proposed amendments would also codify the recent policy change by the Comptroller,1 which allows a taxpayer to file an amended Franchise Tax report that utilizes a margin computation method election that was not made on an originally filed return. 

In this Tax Alert you can download, we summarize the proposed amendments to the COGS regulation.

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1 STAR Accession No. 201206444L (June 12, 2012).

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