- Updated regulations from the Texas comptroller could have a significant impact on printing companies doing business in Texas.
- Your tax filing requirements in Texas depend on whether you’ve established nexus, and the definition has recently shifted to include economic nexus.
- Sourcing rules for receipts from advertising are connected to reasonable locations of the audience.
- These changes are applied retroactively, and you may qualify for a tax refund, or you could discover additional compliance requirements for your company.
Could your printing company have new tax filing requirements in Texas?
On January 4, 2021, final revisions to the Texas Comptroller of Public Accounts’ sourcing rule under 34 Tex. Admin. Code Sec. 3.591 Margin: Apportionment, were filed with the Texas Secretary of State. The final rule was published in the Texas Register on January 15, 2021. Most changes are retroactive to January 1, 2008, which opens the possibility that some taxpayers have overpaid or underpaid in prior years.
The expansive changes cover multiple industries and could have wide-ranging impacts, especially for the printing industry. Consider some notable changes regarding sourcing rules and revenue apportionment.
What is nexus?
With most states, a taxpayer may have a tax filing requirement because they have a substantial connection to a state, known as nexus. This connection gives the state the right to subject the taxpayer to tax. The most commonly known nexus standard is a physical presence in the state, whether permanent or temporary.
In addition to physical presence, Texas has an economic nexus threshold: $500,000 or more in sales apportioned to Texas will create a tax filing requirement. This, along with changes to apportionment for printing companies, could lead to some companies being subject to the Texas franchise tax — even though they never physically cross into the state.
Sourcing rules for advertising revenue
The final rule consolidates the sourcing rules for receipts from advertising for newspapers, magazines, radio, television, and other media into one subsection, Sec. 3.591(e)(1). This provides a uniform sourcing rule across all media and, in theory, is supposed to simplify the apportionment process. The final rule provides that gross receipts from advertising services are sourced to reasonable locations of the audience, including:
- Physical locations of the advertising
- Audience locations recorded in the books and records of the service provider
- Locations listed in published rating statistics
If the locations of nationwide advertising audiences cannot otherwise be reasonably determined, then 8.7% of the gross receipts are sourced to Texas.
Texas did, however, retain one condition: advertising receipts attributable to a radio or television transmitter in Texas may be sourced to Texas under the prior Sec. 3.591(e)(22) for reports originally due prior to January 1, 2021.
Applying these changes to printing companies
For most companies, it’s easy to know where your sales are — because you know where the items are being shipped, and can therefore determine your filing requirements. To determine nexus for a non-tangible item such as advertising, Texas has added an extra step specific to the printing industry, who now have to look to the location of the audience. This information is not always easy to obtain.
For large printers with a nationwide audience, it takes less than $5.75 million in gross revenue to trigger a filing requirement, since 8.7% of that revenue is apportioned to Texas. Printing companies should see if there is a way to reduce revenue being sourced to Texas, if they can more accurately determine where their final audience is located. Keep in mind that the tax rate in Texas is relatively low, so you may need a cost-benefit analysis to determine if a deeper dive is worth it.
And remember, these changes are retroactive to January 1, 2008 — so you could potentially file for a refund. Or, in the case of prior exposure, you may need to file a voluntary disclosure agreement, which could eliminate any penalties and interest for the past due filings.
How we can help
Our team of tax professionals is here to help you understand these changes and how they might impact your company. If you have specific questions regarding how these Texas changes affect you, please reach out to our SALT practice at SALTGroup@claconnect.com.