Texas Register, Volume 38, Number 22, Pages 3397-3446, May 31, 2013 Page: 3,417

                                
than service costs, that are capitalized under IRC, 263A; and
service costs that are allocable to the acquisition or production
of goods, subject to a four percent cap.
Finally, comments received from the SBoT and TSCPA also in-
cluded recommendations for suggested revisions to subsection
(g)(12) of this section and to 3.584 (concerning Margin: Re-
ports and Payments) and 3.589 (concerning Margin: Compen-
sation). The comptroller will consider these recommendations
when she proposes revisions to those rules.
The amendment is adopted under Tax Code, 111.002, which
provides the comptroller with the authority to prescribe, adopt,
and enforce rules relating to the administration and enforcement
of the provisions of Tax Code, Title 2.
The amendment implements Tax Code, 171.1012.
3.588. Margin: Cost of Goods Sold.
(a) Effective Date. The provisions of this section apply to fran-
chise tax reports originally due on or after January 1, 2008.
(b) Definitions. The following words and terms, when used
in this section, shall have the following meanings, unless the context
clearly indicates otherwise.
(1) Arm's length--The standard of conduct under which en-
tities that are not related parties and that have substantially equal bar-
gaining power, each acting in its own interest, would negotiate or carry
out a particular transaction.
(2) Computer program--A series of instructions that are
coded for acceptance or use by a computer system and that are
designed to permit the computer system to process data and provide
results and information. The series of instructions may be contained
in or on magnetic tapes, printed instructions, or other tangible or
electronic media.
(3) Goods--Real or tangible personal property sold in the
ordinary course of business of a taxable entity. "Goods" includes:
(A) the husbandry of animals;
(B) the growing and harvesting of crops;
(C) the severance of timber from realty.
(4) Heavy     construction  equipment--Self-propelled,
self-powered, or pull-type equipment that weighs at least 3,000 pounds
and is intended to be used for construction. The term does not include
a motor vehicle required to be titled and registered.
(5) Lending institution--An entity that makes loans and:
(A) is regulated by the Federal Reserve Board, the Of-
fice of the Comptroller of the Currency, the Federal Deposit Insurance
Corporation, the Commodity Futures Trading Commission, the Office
of Thrift Supervision, the Texas Department of Banking, the Office of
Consumer Credit Commissioner, the Credit Union Department, or any
comparable regulatory body;
(B) is licensed by, registered with, or otherwise regu-
lated by the Department of Savings and Mortgage Lending;
(C) is a "broker" or "dealer" as defined by the Securities
Exchange Act of 1934 at 15 U.S.C. 78c; or
(D) provides financing to unrelated parties solely for
agricultural production.
(6) Principal business activity--The activity in which a tax-
able entity derives the largest percentage of its "total revenue".

(7)  Production--Construction, manufacture, installation
occurring during the manufacturing or construction process, develop-
ment, mining, extraction, improvement, creation, raising, or growth.
(8) Related party--A person, corporation, or other entity,
including an entity that is treated as a pass-through or disregarded entity
for purposes of federal taxation, whether the person, corporation, or
entity is subject to the tax under this chapter or not, in which one person,
corporation, or entity, or set of related persons, corporations, or entities,
directly or indirectly owns or controls a controlling interest in another
entity.
(9) Service costs--Indirect costs and administrative over-
head costs that can be identified specifically with a service department
or function, or that directly benefit or are incurred by reason of a ser-
vice department or function. For purposes of this section, a service
department includes personnel (including costs of recruiting, hiring,
relocating, assigning, and maintaining personnel records or employ-
ees); accounting (including accounts payable, disbursements, and pay-
roll functions); data processing; security; legal; general financial plan-
ning and management; and other similar departments or functions.
(10) Tangible personal property--
(A) includes:
(i) personal property that can be seen, weighed,
measured, felt, or touched or that is perceptible to the senses in any
other manner;
(ii) films, sound recordings, videotapes, live and
prerecorded television and radio programs, books, and other similar
property embodying words, ideas, concepts, images, or sound, without
regard to the means or methods of distribution or the medium in which
the property is embodied, for which, as costs are incurred in producing
the property, it is intended or is reasonably likely that any medium in
which the property is embodied will be mass-distributed by the creator
or any one or more third parties in a form that is not substantially
altered; and
(iii) a computer program, as defined in paragraph (2)
of this subsection.
(B) does not include:
(i) intangible property or
(ii)  services.
(11) Undocumented worker--A person who is not lawfully
entitled to be present and employed in the United States.
(c) General rules for determining cost of goods sold.
(1) Affiliated entities. Notwithstanding any other provi-
sion of this section, a payment made by one member of an affiliated
group to another member of that affiliated group not included in the
combined group may be subtracted as a cost of goods sold only if it is
a transaction made at arm's length.
(2) Capitalization or expensing of certain costs. The elec-
tion to capitalize or expense allowable costs is made by filing the fran-
chise tax report using one method or the other. The election is for the
entire period on which the report is based and may not be changed after
the due date or the date the report is filed, whichever is later. A taxable
entity that is allowed a subtraction by this section for a cost of goods
sold and that is subject to Internal Revenue Code, 263A, 460, or 471
(including a taxable entity subject to 471 that elects to use LIFO under
472), may elect to:
(A) Capitalize those costs in the same manner and to the
same extent that the taxable entity capitalized those costs on its federal

ADOPTED RULES May 31, 2013     38 TexReg 3417