Armanino Blog

Texas Proposes Changes to Franchise Tax Sourcing Rules

by Mark Cummings, Stephanie Shorkley
December 28, 2020


The Texas Comptroller of Public Accounts proposed several changes to revenue sourcing rules when it filed proposed changes to 34 Tex. Admin. Code Section 3.591 (Rule 3.591) Margin Apportionment to the Office of the Secretary of State on November 2, 2020. The proposed amendments aim to (1) incorporate recent statutory amendments; (2) define new terms and modify existing definitions; (3) reflect current guidance; and (4) make significant changes to existing provisions for the sourcing of revenue relating to the sale of general services, internet hosting, advertising, digital property, single-member LLC interest, capital assets and investments, financial derivatives, loan servicing and broadcasting.


The proposed changes to 34 Tex. Admin. Code Section 3.591 are detailed below. Once the changes are finalized, they will be effective retroactively starting January 1, 2008, unless noted below.


Under Texas law, receipts from providing a service are apportioned to the location where the service is performed. If services are performed both inside and outside Texas, then the receipts are attributed to Texas in proportion to the fair value of the services that are rendered in Texas. The proposed amendment to Section 3.591(e)(26)(A) would specify that a service is performed at the location of the receipts-producing, end-product act or acts.

If there is a receipts-producing, end-product act, the location of other acts, even acts that are essential to the performance of the receipts-producing act, would not be considered. If the service is performed inside and outside Texas for a single charge, then the receipts from the service would be Texas gross receipts based on the fair value of the services performed in Texas. This aligns with language in the Sirius XM Radio, Inc case, which is still being appealed to the Texas Supreme Court.

Computer Hardware and Digital Property

The proposed amendments under Subsection 3.591 (e)(3) would source gross receipts from the sale or lease of computer hardware together with any software installed on the hardware. Therefore, the revision would source any software installed on computer hardware and the sale of computer hardware to the location where the property is ultimately delivered.

The provision would no longer be treated as receipts derived from an intangible that would be sourced to the payor's location under Subsection 3.591(b)(8). The proposed amendment would source gross receipts from such activities as follows:

  • Digital property not transferred as fixed physical media: would be sourced as an intangible to the location of the payor.
  • Digital property as a service: would be sourced to the "location of performance" defined as "location of the receipts-producing, end-product act."
  • Digital property as part of an internet hosting service: would be sourced as internet hosting receipts (i.e., the location of the customer).
  • Use of digital property would be sourced under the rule for sourcing gross receipts from the use of intangible assets.
  • Sales or leases of software installed on computer hardware or digital property transferred by fixed physical media would be sourced as the sale of tangible personal property (TPP).
  • Sales or leases of digital property transferred by means other than by fixed physical media would be sourced as the sale of intangible property (i.e., the location of the payor).

Internet Hosting Services

The proposed amendment of the renumbered provision 3.591(e)(13) states that receipts from internet hosting services are sourced to the location of the customer, consistent with Texas Tax Code § 171.106(g). The definition of "internet hosting" receipts is broad and extends beyond the ordinary meaning. The proposed amendment lists several examples of what constitutes "internet hosting," such as access to data, data processing, database search services, marketplace provider services, video gaming and streaming services. The proposed amendment also lists factors to distinguish between the purchase of access to computer services over the internet versus the purchase or lease of digital property over the internet.

Lastly, the proposed amendment would provide that the "customer's" physical location is determined by where the customer consumes the service. This may cause internet hosting services to be sourced to multiple customer locations or to various customers.

Television Broadcaster Licensing

Under Subsection 3.591(e)(51), the proposed amendment would source licensing income from broadcasting to Texas if the legal domicile of the broadcaster’s customer is in the state for reports due on or after January 1, 2018.

Loans and Other Financial Instruments

  • Loan servicing - Under Subsection 3.591(e)(16)(A) of the proposed amendments, gross receipts from servicing loans secured by real property would continue to be sourced to the location of the real property.
  • Net investments, capital assets & hedging contracts - Under Subsection 3.591(e)(2) of the proposed amendments, the comptroller intended to reflect the Texas Supreme Court’s decision in Hallmark Marketing Co. that net losses are not included in gross receipts, but rather only net gain from the sale of a capital asset or investment would be included in gross receipts. Moreover, net gains or net loss would be determined on a sale-by-sale basis.
  • Securities sold through an exchange – Under Subsection 3.591(e)(25) of the proposed amendments, when the buyer is not known, securities sold through an exchange should be apportioned at a rate of 8.7%.
  • Financial derivatives - Under Subsection 3.591(e)(10) of the proposed amendments, gross receipts from the settlement of financial derivative contracts would be sourced to the location of the payor.


The changes in gross receipts sourcing indicate that Texas appears to be shifting from cost-of-performance (COP) to market sourcing. Previously, for services performed inside and outside Texas, such receipts were Texas receipts based on the fair value of the services rendered in Texas. While the “fair value of services rendered” was somewhat unclear, it was generally more aligned with the traditional COP sourcing methods than market sourcing.

As with the Sirius case, the state is clearly wanting to go in a different direction. However, while the comptroller is changing its regulations, the statute itself remains unchanged.

Out-of-state taxpayers may be affected by the proposed amendments that will source a more significant amount of gross receipts to Texas. Some SaaS companies have been specifically targeted by the comptroller.

In-state Texas services entities should review their previous filing positions and consider filing protective claims if they sourced their revenue to Texas under the prior interpretation of the regulations. The comptroller is applying these changes retroactively.

For questions on how your business may be exposed to income tax liability by the proposed guidance, contact our experts.

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Mark Cummings - Tax, Armanino
Managing Director
Stephanie Shorkley - Tax, San Ramon | Armanino
Senior Manager
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