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  80R10965 CBH/DAK/KLA/MXM-D
 
  By: Keffer H.B. No. 3928
 
 
 
   
 
 
A BILL TO BE ENTITLED
AN ACT
relating to technical changes to the revised franchise tax.
       BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
       SECTION 1.  Section 171.0001, Tax Code, as effective January
1, 2008, is amended by amending Subdivisions (8), (9), (10), and
(17) and adding Subdivisions (11-a) and (13-a) to read as follows:
             (8)  "Controlling interest" means:
                   (A)  for a corporation, either 80 percent or more,
owned directly or indirectly, of the total combined voting power of
all classes of stock of the corporation, or 80 percent or more,
owned directly or indirectly, of the beneficial ownership interest
in the voting stock of the corporation; [and]
                   (B)  for a partnership, association, trust, or
other entity other than a limited liability company, 80 percent or
more, owned directly or indirectly, of the capital, profits, or
beneficial interest in the partnership, association, trust, or
other entity; and
                   (C)  for a limited liability company, either 80
percent or more, owned directly or indirectly, of the total
membership interest of the limited liability company or 80 percent
or more, owned directly or indirectly, of the beneficial ownership
interest in the membership interest of the limited liability
company.
             (9)  "Internal Revenue Code" means the Internal Revenue
Code of 1986 in effect for the federal tax year beginning on January
1, 2007 [2006], not including any changes made by federal law after
that date, and any regulations adopted under that code applicable
to that period.
             (10)  "Lending institution":
                   (A)  means a depository institution, or the
subsidiary or affiliate of that depository institution, whose
deposits are insured by the Federal Deposit Insurance Corporation
and:
                         (i)  [an entity that makes loans and] is
regulated by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance
Corporation, or the Office of Thrift Supervision; or
                         (ii)  is licensed by, registered with, or
otherwise regulated by the Texas Department of Banking, the Office
of Consumer Credit Commissioner, the Department of Savings and
Mortgage Lending, the Credit Union Department, or any comparable
regulatory body; and
                   (B)  includes an entity that makes loans and is
regulated by the Commodity Futures Trading Commission, or an entity
that is a "broker" or "dealer" as defined by the Securities Exchange
Act of 1934 at 15 U.S.C. Section 78c.
             (11-a)  "Natural person" means a human being or the
estate of a human being. The term does not include a purely legal
entity given recognition as the possessor of rights, privileges, or
responsibilities, such as a corporation, limited liability
company, partnership, or trust.
             (13-a)  "Security" has the meaning assigned by Section
475(c)(2), Internal Revenue Code, and includes instruments
described by Sections 475(e)(2)(B), (C), and (D) of that code.
             (17)  "Unitary business" means a single economic
enterprise that is made up of separate parts of a single entity or
of a commonly controlled group of entities that are sufficiently
interdependent, integrated, and interrelated through their
activities so as to provide a synergy and mutual benefit that
produces a sharing or exchange of value among them and a significant
flow of value to the separate parts. In determining whether a
unitary business exists, the comptroller shall consider any
relevant factor, including whether:
                   (A)  the activities of the group members[:
                         [(i)]  are in the same general line, such as
manufacturing, wholesaling, retailing of tangible personal
property, insurance, transportation, or finance; [or]
                   (B)  the activities of the group members [(ii)]
are steps in a vertically structured enterprise or process, such as
the steps involved in the production of natural resources,
including exploration, mining, refining, and marketing; or [and]
                   (C) [(B)]  the members are functionally
integrated through the exercise of strong centralized management,
such as authority over purchasing, financing, product line,
personnel, and marketing.
       SECTION 2.  Section 171.0002, Tax Code, as effective January
1, 2008, is amended to read as follows:
       Sec. 171.0002.  DEFINITION OF TAXABLE ENTITY.  (a)  Except as
otherwise provided by this section, "taxable entity" means a
partnership, limited liability partnership, corporation, banking
corporation, savings and loan association, limited liability
company, business trust, professional association, business
association, joint venture, joint stock company, holding company,
or other legal entity. The term includes a combined group. A joint
venture does not include joint operating or co-ownership
arrangements meeting the requirements of Treasury Regulation
Section 1.761-2(a)(3) that elect out of federal partnership
treatment as provided by Section 761(a), Internal Revenue Code.
       (b)  "Taxable entity" does not include:
             (1)  a sole proprietorship;
             (2)  a general partnership:
                   (A)  the direct ownership of which is entirely
composed of natural persons; and
                   (B)  the liability of which is not limited under a
statute of this state or another state, including by registration
as a limited liability partnership;
             (3)  a passive entity as defined by Section 171.0003;
or
             (4)  an entity that is exempt from taxation under
Subchapter B.
       (c)  "Taxable entity" does not include an entity that is:
             (1)  a grantor trust as defined by Sections 671 and
7701(a)(30)(E), Internal Revenue Code, all of the grantors and
beneficiaries of which are natural persons or charitable entities
as described in Section 501(c)(3), Internal Revenue Code, excluding
a trust taxable as a business entity pursuant to Treasury
Regulation Section 301.7701-4(b);
             (2)  an estate of a natural person as defined by Section
7701(a)(30)(D), Internal Revenue Code, excluding an estate taxable
as a business entity pursuant to Treasury Regulation Section
301.7701-4(b);
             (3)  an escrow;
             (4)  [a family limited partnership that is a passive
entity in which at least 80 percent of the interests are held,
directly or indirectly, by members of the same family, including an
individual's ancestors, lineal descendants, spouse, and brothers
and sisters by the whole or half blood, and the estate of any of
these persons, and that is a limited partnership:
                   [(A)  formed pursuant to the Texas Revised Limited
Partnership Act (Article 6132a-1, Vernon's Texas Civil Statutes);
                   [(B)  formed pursuant to the limited partnership
law of any other state; or
                   [(C)  treated as a partnership for federal income
tax purposes;
             [(5)  a passive investment partnership that is a
passive entity and that is:
                   [(A)  formed pursuant to the Texas Revised Limited
Partnership Act (Article 6132a-1, Vernon's Texas Civil Statutes);
                   [(B)  formed pursuant to the limited partnership
law of any other state; or
                   [(C)  formed pursuant to the limited partnership
laws of any foreign country;
             [(6)  a passive investment partnership that is a
passive entity and is a general partnership;
             [(7)a trust that is a passive entity:
                   [(A)  that is taxable as a trust under Section
641, Internal Revenue Code;
                   [(B)  all of the beneficiaries of which are
natural persons or charitable entities as defined in Section
501(c)(3), Internal Revenue Code;
                   [(C)  that is not a trust taxable as a business
entity pursuant to Treasury Regulation Section 301.7701-4(b); and
                   [(D)  that is organized as a trust and is
described in Section 7701(a)(30)(E), Internal Revenue Code;
             [(8)]  a real estate investment trust (REIT) as defined
by Section 856, Internal Revenue Code, and its "qualified REIT
subsidiary" entities as defined by Section 856(i)(2), Internal
Revenue Code, provided that:
                   (A)  a REIT with any amount of its assets in direct
holdings of real estate, other than real estate it occupies for
business purposes, as opposed to holding interests in limited
partnerships or other entities that directly hold the real estate,
is a taxable entity; and
                   (B)  a limited partnership or other entity that
directly holds the real estate as described in Paragraph (A) is not
exempt under this subdivision, without regard to whether a REIT
holds an interest in it; [or]
             (5) [(9)]  a real estate mortgage investment conduit
(REMIC), as defined by Section 860D, Internal Revenue Code;
             (6)  a nonprofit self-insurance trust created under
Chapter 2212, Insurance Code, or a predecessor statute;
             (7)  a trust qualified under Section 401(a), Internal
Revenue Code; or
             (8)  a trust or other entity that is exempt under
Section 501(c)(9), Internal Revenue Code.
       (d)  An entity that can file as a sole proprietorship for
federal tax purposes is not a sole proprietorship for purposes of
Subsection (b)(1) and is not exempt under that subsection if the
entity is formed in a manner under the statutes of this state, [or]
another state, or a foreign country that limit the liability of the
entity.
       SECTION 3.  Section 171.0004(e), Tax Code, as effective
January 1, 2008, is amended to read as follows:
       (e)  For purposes of this section:
             (1)  the ownership of a royalty interest or a
nonoperating working interest in mineral rights does not constitute
conduct of an active trade or business; [and]
             (2)  payment of compensation to employees or
independent contractors for financial or legal services reasonably
necessary for the operation of the entity does not constitute
conduct of an active trade or business; and
             (3)  holding a seat on the board of directors of an
entity does not by itself constitute conduct of an active trade or
business.
       SECTION 4.  Section 171.001, Tax Code, as effective January
1, 2008, is amended by adding Subsection (c) to read as follows:
       (c)  The tax imposed under this section or Section 171.0011
is not imposed on an entity if, during the period on which the
report is based, the entity qualifies as a passive entity as defined
by Section 171.0003.
       SECTION 5.  Section 171.0011(b), Tax Code, as effective
January 1, 2008, is amended to read as follows:
       (b)  The additional tax is equal to the appropriate rate
under Section 171.002 of the taxable entity's taxable margin
computed on the period beginning on the day after the last day for
which the tax imposed on taxable margin or net taxable earned
surplus was computed and ending on the date the taxable entity is no
longer subject to the tax imposed under this chapter.
       SECTION 6.  Sections 171.002(a), (b), (c), and (d), Tax
Code, as effective January 1, 2008, are amended to read as follows:
       (a)  Subject to Section 171.003 and except as provided by
Subsection (b), the rate of the franchise tax is one percent [per
year of privilege period] of taxable margin.
       (b)  The rate of the franchise tax is 0.5 percent [per year of
privilege period] of taxable margin for those taxable entities
primarily engaged in retail or wholesale trade.
       (c)  A taxable entity is primarily engaged in retail or
wholesale trade only if:
             (1)  the total revenue from its activities in retail or
wholesale trade is greater than the total revenue from its
activities in trades other than the retail and wholesale trades;
             (2)  except as provided by Subsection (c-1), less than
50 percent of the total revenue from activities in retail or
wholesale trade comes from the sale of products it produces or
products produced by an entity that is part of an affiliated group
to which the taxable entity also belongs; and
             (3)  the taxable entity does not provide retail or
wholesale utilities, including telecommunications services, [and]
electricity, or gas.
       (d)  A taxable entity is not required to pay any tax and is
not considered to owe any tax for a period if:
             (1)  the amount of tax computed for the taxable entity
is less than $1,000; or
             (2)  the amount of the taxable entity's total revenue
from its entire business is less than or equal to $300,000 or the
amount determined under Section 171.006 per 12-month period on
which margin is based.
       SECTION 7.  The heading to Section 171.006, Tax Code, as
effective January 1, 2008, is amended to read as follows:
       Sec. 171.006.  ADJUSTMENT OF ELIGIBILITY FOR NO TAX DUE
[EXEMPTION] AND COMPENSATION DEDUCTION.
       SECTION 8.  Section 171.101(d), Tax Code, as effective
January 1, 2008, is amended to read as follows:
       (d)  An election under Subsection (a)(1)(B)(ii) shall be
made by the taxable entity on its annual report and is effective
only for that annual report.  A taxable entity shall notify the
comptroller of its election not later than the due date of the
annual [The election may be changed by filing an amended] report.
       SECTION 9.  Section 171.1011, Tax Code, as effective January
1, 2008, is amended by amending Subsections (b), (c), (d), (g-3),
(n), and (o) and adding Subsection (t) to read as follows:
       (b)  In this section, a reference to an amount reportable as
income [entered] on a line number on an Internal Revenue Service
form includes the corresponding amount reportable as income
[entered] on a variant of the form, or a subsequent form, with a
different line number. [The comptroller shall adopt rules as
necessary to accomplish the legislative intent prescribed by this
subsection and Subsection (a).]
       (c)  Except as provided by this section, and subject to
Section 171.1014, for the purpose of computing its taxable margin
under Section 171.101, the total revenue of a taxable entity is:
             (1)  for a taxable entity treated for federal income
tax purposes as a corporation, an amount computed by:
                   (A)  adding:
                         (i)  the amount reportable as income 
[entered] on line 1c, Internal Revenue Service Form 1120; and
                         (ii)  the amounts reportable as income 
[entered] on lines 4 through 10, Internal Revenue Service Form
1120; and
                   (B)  subtracting:
                         (i)  bad debt expensed for federal income
tax purposes that corresponds to items of gross receipts included
in Subsection (c)(1)(A) for the current reporting period or a past
reporting period;
                         (ii)  to the extent included in Subsection
(c)(1)(A), foreign royalties and foreign dividends, including
amounts determined under Section 78 or Sections 951-964, Internal
Revenue Code;
                         (iii)  to the extent included in Subsection
(c)(1)(A), net distributive income from a taxable entity 
[partnerships and from trusts and limited liability companies]
treated as a partnership or [partnerships for federal income tax
purposes and net distributive income from limited liability
companies and corporations treated] as an S corporation 
[corporations] for federal income tax purposes;
                         (iv)  allowable deductions from Internal
Revenue Service Form 1120, Schedule C, to the extent the relating
dividend income is included in total revenue;
                         (v)  to the extent included in Subsection
(c)(1)(A), items of income attributable to an entity that is a
disregarded entity for federal income tax purposes; and
                         (vi)  to the extent included in Subsection
(c)(1)(A), other amounts authorized by this section;
             (2)  for a taxable entity treated for federal income
tax purposes as a partnership, an amount computed by:
                   (A)  adding:
                         (i)  the amount reportable as income 
[entered] on line 1c, Internal Revenue Service Form 1065;
                         (ii)  the amounts reportable as income 
[entered] on lines 4 through 7, Internal Revenue Service Form 1065;
and
                         (iii)  the amounts reportable as income 
[entered] on lines 2, 3a, and 5 [2] through 11, Internal Revenue
Service Form 1065, Schedule K; and
                   (B)  subtracting:
                         (i)  bad debt expensed for federal income
tax purposes that corresponds to items of gross receipts included
in Subsection (c)(2)(A) for the current reporting period or a past
reporting period;
                         (ii)  to the extent included in Subsection
(c)(2)(A), foreign royalties and foreign dividends, including
amounts determined under Section 78 or Sections 951-964, Internal
Revenue Code;
                         (iii)  to the extent included in Subsection
(c)(2)(A), net distributive income from a taxable entity 
[partnerships and from trusts and limited liability companies]
treated as a partnership or [partnerships for federal income tax
purposes and net distributive income from limited liability
companies and corporations treated] as an S corporation 
[corporations] for federal income tax purposes;
                         (iv)  to the extent included in Subsection
(c)(2)(A), items of income attributable to an entity that is a
disregarded entity for federal income tax purposes; and
                         (v)  to the extent included in Subsection
(c)(2)(A), other amounts authorized by this section; or
             (3)  for a taxable entity other than a taxable entity
treated for federal income tax purposes as a corporation or
partnership, an amount determined in a manner substantially
equivalent to the amount for Subdivision (1) or (2) determined by
rules that the comptroller shall adopt.
       (d)  Subject to Section 171.1014, a taxable entity
[corporation] that is part of a federal consolidated group shall
compute its total revenue under Subsection (c) as if it had filed a
separate return for federal income tax purposes.
       (g-3)  A taxable entity that provides legal services shall
exclude from its total revenue[, to the extent included under
Subsection (c)(1)(A), (c)(2)(A), or (c)(3)]:
             (1)  to the extent included under Subsection (c)(1)(A),
(c)(2)(A), or (c)(3), the following flow-through funds that are
mandated by law, contract, or fiduciary duty to be distributed to
the claimant by the claimant's attorney or to other entities on
behalf of a claimant by the claimant's attorney:
                   (A)  damages due the claimant;
                   (B)  funds subject to a lien or other contractual
obligation arising out of the representation, other than fees owed
to the attorney;
                   (C)  funds subject to a subrogation interest or
other third-party contractual claim; and
                   (D)  fees paid an attorney in the matter who is not
a member, partner, shareholder, or employee of the taxable entity;
             (2)  to the extent included under Subsection (c)(1)(A),
(c)(2)(A), or (c)(3), reimbursement of the taxable entity's
expenses incurred in prosecuting a claimant's matter that are
specific to the matter and that are not general operating expenses;
and
             (3)  the actual out-of-pocket expenses of the attorney,
not to exceed $500 per case, of providing pro bono legal services to
a person, but only if the attorney maintains records of the pro bono
services for auditing purposes in accordance with the manner in
which those services are reported to the State Bar of Texas.
       (n)  Except as provided by Subsection (o), a taxable entity
that is a health care provider shall exclude from its total
revenue[, to the extent included under Subsection (c)(1)(A),
(c)(2)(A), or (c)(3)]:
             (1)  to the extent included under Subsection (c)(1)(A),
(c)(2)(A), or (c)(3), the total amount of payments the health care
provider received:
                   (A)  under the Medicaid program, Medicare
program, Indigent Health Care and Treatment Act (Chapter 61, Health
and Safety Code), and Children's Health Insurance Program (CHIP);
                   (B)  for professional services provided in
relation to a workers' compensation claim under Title 5, Labor
Code; and
                   (C)  for professional services provided to a
beneficiary rendered under the TRICARE military health system; and
             (2)  the actual cost to the health care provider for any
uncompensated care provided, but only if the provider maintains
records of the uncompensated care for auditing purposes and, if the
provider later receives payment for all or part of that care, the
provider adjusts the amount excluded for the tax year in which the
payment is received.
       (o)  A health care provider that is a health care institution
shall exclude from its total revenue[, to the extent included under
Subsection (c)(1)(A), (c)(2)(A), or (c)(3),] 50 percent of the
amounts described by Subsection (n).
       (t)  The comptroller shall adopt rules as necessary to
accomplish the legislative intent prescribed by this section.
       SECTION 10.  Section 171.1011(l)(1), Tax Code, as effective
January 1, 2008, is amended to read as follows:
             (1)  "Sales commission" means:
                   (A)  any form of compensation paid to a person for
engaging in an act for which a license is required by Chapter 1101,
Occupations Code; or [and]
                   (B)  compensation paid to a sales representative
by a principal in an amount that is based on the amount or level of
certain orders for or sales of the principal's product and that the
principal is required to report on Internal Revenue Service Form
1099-MISC.
       SECTION 11.  Section 171.1012(a)(3)(A), Tax Code, as
effective January 1, 2008, is amended to read as follows:
                   (A)  "Tangible personal property" means:
                         (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, [by the creator of the
property] for which, as costs are incurred in producing the
property, it is intended or is reasonably likely that any
[tangible] 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 by
Section 151.0031.
       SECTION 12.  Sections 171.1012(c), (g), (h), and (k), Tax
Code, as effective January 1, 2008, are amended to read as follows:
       (c)  The cost of goods sold includes all direct costs of
acquiring or producing the goods, including:
             (1)  labor costs;
             (2)  cost of materials that are an integral part of
specific property produced;
             (3)  cost of materials that are consumed in the
ordinary course of performing production activities;
             (4)  handling costs, including costs attributable to
processing, assembling, repackaging, and inbound transportation
costs;
             (5)  storage costs, including the costs of carrying,
storing, or warehousing property, subject to Subsection (e);
             (6)  depreciation, depletion, and amortization,
reported on the federal income tax return on which the report under
this chapter is based, to the extent associated with and necessary
for the production of goods, including recovery described by
Section 197, Internal Revenue Code;
             (7)  the cost of renting or leasing equipment,
facilities, or real property directly used for the production of
the goods, including pollution control equipment and intangible
drilling and dry hole costs;
             (8)  the cost of repairing and maintaining equipment,
facilities, or real property directly used for the production of
the goods, including pollution control devices;
             (9)  costs attributable to research, experimental,
engineering, and design activities directly related to the
production of the goods[, including all research or experimental
expenditures described by Section 174, Internal Revenue Code];
             (10)  geological and geophysical costs incurred to
identify and locate property that has the potential to produce
minerals;
             (11)  taxes paid in relation to acquiring or producing
any material, or taxes paid in relation to services that are a
direct cost of production;
             (12)  the cost of producing or acquiring electricity
sold; and
             (13)  a contribution to a partnership in which the
taxable entity owns an interest that is used to fund activities, the
costs of which would otherwise be treated as cost of goods sold of
the partnership, but only to the extent that those costs are related
to goods distributed to the taxable entity as goods-in-kind in the
ordinary course of production activities rather than being sold.
       (g)  A taxable entity that is allowed a subtraction by this
section for a cost of goods sold and that is subject to Section
263A, 460, or 471, Internal Revenue Code, may [shall] capitalize
that cost in the same manner and to the same extent that the taxable
entity capitalized that cost on its federal income tax return or may
expense those costs [is required or allowed to capitalize the cost
under federal law and regulations], except for costs excluded under
Subsection (e), or in accordance with Subsections (c), (d), and
(f).  If the taxable entity elects to capitalize costs, it must
capitalize each cost allowed under this section that it capitalized
on its federal income tax return. If the taxable entity later
elects to begin expensing a cost that may be allowed under this
section as a cost of goods sold, the entity may not deduct any cost
in ending inventory from a previous report. If the taxable entity
elects to expense a cost of goods sold that may be allowed under
this section, a cost incurred before the first day of the period on
which the report is based may not be subtracted as a cost of goods
sold. If the taxable entity elects to expense a cost of goods sold
and later elects to capitalize that cost of goods sold, a cost
expensed on a previous report may not be capitalized.
       (h)  A taxable entity shall determine its cost of goods sold,
except as otherwise provided by this section, in accordance with
the methods used on the federal income tax return on which the
report under this chapter is based [permitted by federal statutes
and regulations]. This subsection does not affect the type or
category of cost of goods sold that may be subtracted under this
section.
       (k)  Notwithstanding any other provision of this section, if
the taxable entity is a lending institution that offers loans to the
public and elects to subtract cost of goods sold, the entity, other
than an entity primarily engaged in an activity described by
category 5932 of the 1987 Standard Industrial Classification Manual
published by the federal Office of Management and Budget, may
subtract as a cost of goods sold an amount equal to interest
expense.
       SECTION 13.  Sections 171.1013(a), (b), and (c), Tax Code,
as effective January 1, 2008, are amended to read as follows:
       (a)  Except as otherwise provided by this section, "wages and
cash compensation" means the amount entered in the Medicare wages
and tips box of Internal Revenue Service Form W-2 or any subsequent
form with a different number or designation that substantially
provides the same information. The term also includes, to the
extent not included above:
             (1)  net distributive income from partnerships and from
trusts and limited liability companies treated as partnerships for
federal income tax purposes, but only if the person receiving the
distribution is a natural person;
             (2)  net distributive income from limited liability
companies and corporations treated as S corporations for federal
income tax purposes, but only if the person receiving the
distribution is a natural person; [and]
             (3)  stock awards and stock options deducted for
federal income tax purposes; and
             (4)  net distributive income from a limited liability
company treated as a sole proprietorship for federal income tax
purposes, but only if the person receiving the distribution is a
natural person.
       (b)  Subject to Section 171.1014, a taxable entity that
elects to subtract compensation for the purpose of computing its
taxable margin under Section 171.101 may subtract an amount equal
to:
             (1)  subject to the limitation in Subsection (c), all
wages and cash compensation paid by the taxable entity to its
officers, directors, owners, partners, and employees; and
             (2)  the cost of all benefits, to the extent deductible
for federal income tax purposes, the taxable entity provides to its
officers, directors, owners, partners, and employees, including
workers' compensation benefits, health care, employer
contributions made to employees' health savings accounts, and
retirement [to the extent deductible for federal income tax
purposes].
       (c)  Notwithstanding the actual amount of wages and cash
compensation paid by a taxable entity to its officers, directors,
owners, partners, and employees, a taxable entity may not include
more than $300,000, or the amount determined under Section 171.006,
per 12-month period on which margin is based, for any person in the
amount of wages and cash compensation it determines under this
section [Section 171.101]. If a person is paid by more than one
entity of a combined group, the combined group may not subtract in
relation to that person a total of more than $300,000, or the amount
determined under Section 171.006, per 12-month period on which
margin is based.
       SECTION 14.  Section 171.1014, Tax Code, as effective
January 1, 2008, is amended by amending Subsections (b), (d), and
(f) and adding Subsections (d-1), (h), and (i) to read as follows:
       (b)  The combined group is a single taxable entity for
purposes of the application of the tax imposed under this chapter,
including Section 171.002(d).
       (d)  For purposes of Section 171.101, a combined group shall
make an election to subtract either cost of goods sold or
compensation that applies to all of its members. Regardless of the
election, the taxable margin of the combined group may not exceed 70
percent of the combined group's total revenue from its entire
business, as provided by Section 171.101(a)(1)(A).
       (d-1)  A member of a combined group may claim as cost of goods
sold those costs that qualify under Section 171.1012 if the goods
for which the costs are incurred are owned by another member of the
combined group.
       (f)  For purposes of Section 171.101, a combined group that
elects to subtract compensation shall determine that amount by:
             (1)  determining the compensation for each of its
members as provided by Section 171.1013 as if each member were an
individual taxable entity, subject to the limitation prescribed by
Section 171.1013(c);
             (2)  adding the amounts of compensation determined
under Subdivision (1) together; and
             (3)  subtracting from the amount determined under
Subdivision (2) any compensation amounts paid from one member of
the combined group to another member of the combined group, but only
to the extent the corresponding item of total revenue was
subtracted under Subsection (c)(3).
       (h)  Each taxable entity that is part of a combined group
report shall, for purposes of determining margin and apportionment,
include its activities for the same period used by the combined
group.
       (i)  Each member of the combined group shall be jointly and
severally liable for the tax of the combined group.
       SECTION 15.  Section 171.1015, Tax Code, as effective
January 1, 2008, is amended to read as follows:
       Sec. 171.1015.  REPORTING FOR CERTAIN PARTNERSHIPS IN TIERED
PARTNERSHIP ARRANGEMENT. (a) In this section, "tiered partnership
arrangement" means an ownership structure in which all of the
interests in one partnership, trust, or limited liability company
that is treated for federal income taxes as a partnership or a
limited liability company treated as an S corporation for federal
income tax purposes (a "lower tier entity" [an "upper tier
partnership"]) are owned by one or more other taxable entities (an
"upper [a "lower] tier entity"). A tiered partnership arrangement
may have two or more tiers.
       (b)  In addition to the tax it is required to pay under this
chapter on its own taxable margin, a taxable entity that is an upper
[a lower] tier entity may pay the tax on the taxable margin of a
lower tier entity [higher tier partnership] if the lower tier
entity [higher tier partnership] submits a report to the
comptroller showing the amount of taxable margin that each higher
[lower] tier entity that owns it should include within the higher
[lower] tier entity's own taxable margin, according to the profits
interest of the higher [lower] tier entity. [An upper tier
partnership is not required to pay tax under this chapter on any
taxable margin reported under this section.]
       (c)  This section does not apply to that percentage of the
taxable margin attributable to a higher [lower] tier entity by a
lower tier entity [an upper tier partnership] if the higher [lower]
tier entity is not subject to the tax under this chapter. In this
case, the lower tier entity [higher tier partnership] is liable for
the tax on its taxable margin.
       (d)  The comptroller shall adopt rules to administer this
section.
       SECTION 16.  Section 171.111, Tax Code, as effective January
1, 2008, is amended to read as follows:
       Sec. 171.111.  TEMPORARY CREDIT ON TAXABLE MARGIN.  (a)  On
the first report originally due under this chapter on or after
January 1, 2008, [Not later than March 1, 2007,] a taxable entity
must [may] notify the comptroller in writing of its intent to
[preserve its right to] take a credit in an amount allowed by this
section on the tax due on taxable margin. The taxable entity may
thereafter elect to claim the credit for the current year and future
year at or before the original due date of any report due after
January 1, 2008 [2007], until the taxable entity revokes the
election or this section expires, whichever is earlier. A taxable
entity may claim the credit for not more than 10 [20] consecutive
privilege periods beginning with the first report originally due
under this chapter on or after January 1, 2008 [2007]. A taxable
entity may make only one election under this section and the
election may not be conveyed, assigned, or transferred to another
entity.
       (b)  The credit allowed under this section for any privilege
period is computed by:
             (1)  determining the amount of the business loss
carryforwards of the taxable entity under Section 171.110(e), as
that section applied to annual reports originally due before
January 1, 2008, that were not exhausted on a report originally due
under this chapter before January 1, 2008[, as of the end of the
taxable entity's accounting year ending in 2006, of the difference
between (i) the taxable entity's deductible temporary differences
and net operating loss carryforwards, net of related valuation
allowance amounts, shown on the taxable entity's books and records
on the last day of its taxable year ending in 2006, and (ii) the
taxable entity's taxable temporary differences as shown on those
books and records on that date. The amount of other net deferred
tax items may be less than zero. For the purpose of computing the
amount of the taxable entity's other net deferred tax items, any
credit carryforward allowed under this chapter shall be excluded
from the amount of deductible temporary differences to the extent
such credit carryforward amount, net of any related valuation
allowance amount, is otherwise included in the taxable entity's
deductible temporary differences, net of related valuation
allowance amounts, shown on the taxable entity's books and records
on the last day of the taxable entity's taxable year ending in
2006];
             (2)  [apportioning the amount determined under
Subdivision (1) to this state in the same manner taxable margin is
apportioned under Section 171.106 on the first report due on or
after January 1, 2007;
             [(3)]  multiplying the amount determined under
Subdivision (1) [(2)]  by 10 percent; and
             (3) [(4)]  multiplying the amount determined under
Subdivision (2) [(3)]  by the appropriate tax rate prescribed by
Section 171.002, as that section applies to an annual report
originally due on or after January 1, 2008 [171.002(a)(2)].
       (c)  [A taxable entity that notifies the comptroller of its
intent to preserve its right to take a credit allowed by this
section shall submit with its notice of intent a statement of the
amount determined under Subsection (b)(1).] The comptroller may
request that the taxable entity submit, with each [in the] annual
report [for each succeeding privilege period] in which the taxable
entity is eligible to take a credit, information relating to the
amount determined under Subsection (b)(1). The taxable entity
shall submit in the form and content the comptroller requires any
information relating to [the assets and liabilities that determine
the amount of the credit,] the amount determined under Subsection
(b)(1)[,] or any other matter relevant to the computation of the
credit for which the taxable entity is eligible.
       (d)  A credit that a taxable entity is entitled to under this
section does not convey, and may not be assigned or transferred, in
relation to a transaction in which the taxable entity is purchased
by another entity.
       (d-1)  Subject to Subsection (a), a taxable entity may carry
forward unused credits. A taxable entity may not claim credits
under this section unless the taxable entity was subject to a report
based on net taxable earned surplus originally due before January
1, 2008.
       (e)  This section expires September 1, 2017 [2026].
       SECTION 17.  Section 171.1121(b), Tax Code, as effective
January 1, 2008, is amended to read as follows:
       (b)  Except as otherwise provided by this section, a taxable
entity shall use the same accounting methods to apportion margin as
used in computing margin [reportable federal taxable income].
       SECTION 18.  Section 171.1532(b), Tax Code, as effective
January 1, 2008, is amended to read as follows:
       (b)  The tax covering the regular annual period, other than a
regular annual period included on the initial report, is based on
the business done by the taxable entity during the period beginning
with the day after the last date upon which taxable margin or net
taxable earned surplus on a previous report was based and ending
with its last accounting period ending date for federal income tax
purposes in the year before the year in which the report is
originally due.
       SECTION 19.  Section 171.201(a), Tax Code, as effective
January 1, 2008, is amended to read as follows:
       (a)  Except as provided by Section 171.2022, a taxable entity
on which the franchise tax is imposed shall file an initial report
with the comptroller containing:
             (1)  financial information of the taxable entity
necessary to compute the tax under this chapter [showing the
financial condition of the taxable entity on the day that is the
last day of a calendar month and that is nearest to the end of the
taxable entity's first year of business];
             (2)  the name and address of:
                   (A)  each officer, director, and manager of the
taxable entity;
                   (B)  for a limited partnership, each general
partner;
                   (C)  for a general partnership or limited
liability partnership, each managing partner or, if there is not a
managing partner, each partner; or
                   (D)  for a trust, each trustee;
             (3)  the name and address of the agent of the taxable
entity designated under Section 171.354; and
             (4)  other information required by the comptroller.
       SECTION 20.  Sections 171.203(a), (b), (d), and (e), Tax
Code, as effective January 1, 2008, are amended to read as follows:
       (a)  A corporation or limited liability company on which the
franchise tax is imposed, regardless of whether the corporation or
limited liability company is required to pay any tax, shall file a
report with the comptroller containing:
             (1)  the name of each corporation or limited liability
company in which the corporation or limited liability company
filing the report owns a 10 percent or greater interest and the
percentage owned by the corporation or limited liability company;
             (2)  the name of each corporation or limited liability
company that owns a 10 percent or greater interest in the
corporation or limited liability company filing the report;
             (3)  the name, title, and mailing address of each
person who is an officer or director of the corporation or limited
liability company on the date the report is filed and the expiration
date of each person's term as an officer or director, if any;
             (4)  the name and address of the agent of the
corporation or limited liability company designated under Section
171.354; and
             (5)  the address of the corporation's or limited
liability company's principal office and principal place of
business.
       (b)  The corporation or limited liability company shall file
the report once a year on a form prescribed by the comptroller.
       (d)  The corporation or limited liability company shall send
a copy of the report to each person named in the report under
Subsection (a)(3) who is not currently employed by the corporation
or limited liability company or a related corporation or limited
liability company listed in Subsection (a)(1) or (2). An officer or
director of the corporation or limited liability company or another
authorized person must sign the report under a certification that:
             (1)  all information contained in the report is true
and correct to the best of the person's knowledge; and
             (2)  a copy of the report has been mailed to each person
identified in this subsection on the date the return is filed.
       (e)  If a person's name is included in a report under
Subsection (a)(3) and the person is not an officer or director of
the corporation or limited liability company on the date the report
is filed, the person may file with the comptroller a sworn statement
disclaiming the person's status as shown on the report. The
comptroller shall maintain a record of statements filed under this
subsection and shall make that information available on request
using the same procedures the comptroller uses for other requests
for public information.
       SECTION 21.  Section 171.204, Tax Code, is amended by adding
Subsection (c) to read as follows:
       (c)  The comptroller may require any entity to file
information as necessary to verify that the entity is not subject to
the tax imposed under this chapter.
       SECTION 22.  Subchapter G, Chapter 171, Tax Code, is amended
by adding Section 171.3015 to read as follows:
       Sec. 171.3015.  FORFEITURE OF CERTIFICATE OR REGISTRATION OF
TAXABLE ENTITY.  The comptroller may, for the same reasons and using
the same procedures the comptroller uses in relation to the
forfeiture of a corporation's charter or certificate of authority,
forfeit the certificate or registration of a taxable entity.
       SECTION 23.  Section 171.309, Tax Code, is amended to read as
follows:
       Sec. 171.309.  FORFEITURE BY SECRETARY OF STATE. The
secretary of state may forfeit the charter, [or] certificate, or
registration of a taxable entity [of authority of a corporation]
if:
             (1)  the secretary receives the comptroller's
certification under Section 171.302 [of this code]; and
             (2)  the taxable entity [corporation] does not revive
its forfeited [corporate] privileges within 120 days after the date
that the [corporate] privileges were forfeited[; and
             [(3)  the corporation does not have assets from which a
judgment for any tax, penalty, or court costs imposed by this
chapter may be satisfied].
       SECTION 24.  Section 17, Chapter 1, Acts of the 79th
Legislature, 3rd Called Session, 2006, is amended to read as
follows:
       Sec. 17.  [(a)  The repeal of Section 171.111, Tax Code, by
this Act does not affect a credit that accrued under that section
before the effective date of this Act.
       [(b)]  A corporation that has any unused credits established
[accrued] before the effective date of this Act under Section
171.111, Tax Code, may claim those unused credits on or with the tax
report for the period in which the credits were established
[accrued], and the former law under which the corporation
established [accrued] the credits is continued in effect for
purposes of determining the amount of the credits the corporation
may claim and the manner in which the corporation may claim the
credits.
       SECTION 25.  Sections 18(b) through (f), Chapter 1, Acts of
the 79th Legislature, 3rd Called Session, 2006, are amended to read
as follows:
       (b)  This section does not affect a credit authorized by a
provision listed in Subsection (a) of this section that was
established [accrued] under Chapter 171, Tax Code, before the
effective date of this Act or a credit that continues to accrue
under Section 19 of this Act.
       (c)  A corporation that has any unused credits established
[accrued] before the effective date of this Act under a provision
other than Subchapter O, P, or Q, Chapter 171, Tax Code, may claim
those unused credits on or with the tax report for the period in
which the credits were established [accrued], and the former law
under which the corporation established [accrued] the credits is
continued in effect for purposes of determining the amount of the
credits the corporation may claim and the manner in which the
corporation may claim the credits.
       (d)  A corporation that has any unused credits established
[accrued] before the effective date of this Act under Subchapter O,
Chapter 171, Tax Code, may claim those unused credits on or with the
tax report for the period in which the credit was established
[accrued]. However, if the corporation was allowed to carry
forward unused credits under that subchapter, the corporation may
continue to apply those credits on or with each consecutive report
until the earlier of the date the credit would have expired under
the terms of Subchapter O, Chapter 171, Tax Code, had it continued
in existence, or December 31, 2027, and the former law under which
the corporation established [accrued] the credits is continued in
effect for purposes of determining the amount of the credits the
corporation may claim and the manner in which the corporation may
claim the credits.
       (e)  A corporation that has any unused credits established
[accrued] before the effective date of this Act under Subchapter P,
Chapter 171, Tax Code, may claim those unused credits on or with the
tax report for the period in which the credit was established
[accrued]. However, if the corporation was allowed to carry
forward unused credits under that subchapter, the corporation may
continue to apply those credits on or with each consecutive report
until the earlier of the date the credit would have expired under
the terms of Subchapter P, Chapter 171, Tax Code, had it continued
in existence, or December 31, 2012, and the former law under which
the corporation established [accrued] the credits is continued in
effect for purposes of determining the amount of the credits the
corporation may claim and the manner in which the corporation may
claim the credits.
       (f)  A corporation that has any unused credits established
[accrued] before the effective date of this Act under Subchapter Q,
Chapter 171, Tax Code, may claim those unused credits on or with the
tax report for the period in which the credit was established
[accrued]. However, if the corporation was allowed to carry
forward unused credits under that subchapter, the corporation may
continue to apply those credits on or with each consecutive report
until the earlier of the date the credit would have expired under
the terms of Subchapter Q, Chapter 171, Tax Code, had it continued
in existence, or December 31, 2012, and the former law under which
the corporation established [accrued] the credits is continued in
effect for purposes of determining the amount of the credits the
corporation may claim and the manner in which the corporation may
claim the credits.
       SECTION 26.  (a)  Section 22, Chapter 1, Acts of the 79th
Legislature, 3rd Called Session, 2006, is amended by amending
Subsection (b) and adding Subsections (b-1), (b-2), and (g) to read
as follows:
       (b)  For an entity becoming subject to the franchise tax
under this Act:
             (1)  margin or gross receipts occurring before June 1,
2006, may not be considered for purposes of determining taxable
margin or for apportionment purposes; and
             (2)  an entity subject to the franchise tax on January
1, 2008, that was not previously subject to the tax and for which
January 1, 2008, is not the beginning date, shall file an annual
report due May 15, 2008, based on the period:
                   (A)  if the entity has an accounting period that
ends on or after January 1, 2007, and before June 1, 2007:
                         (i)  beginning on the later of:
                               (a)  June 1, 2006; or
                               (b)  the date the entity was organized
in this state or, if a foreign entity, the date it began doing
business in this state; and
                         (ii)  ending on the date that accounting
period ends in 2007;
                   (B)  if the entity has an accounting period that
ends on or after June 1, 2007, and before December 31, 2007:
                         (i)  beginning on the date that accounting
period begins; and
                         (ii)  ending on the date that accounting
period ends in 2007; and
                   (C)  if the entity has an accounting period that
ends on December 31, 2007, or if the entity does not have an
accounting period that ends in 2007:
                         (i)  beginning on the later of:
                               (a)  January 1, 2007; or
                               (b)  the date the entity was organized
in the state or, if a foreign entity, the date it began doing
business in this state; and
                         (ii)  ending on December 31, 2007[; and
             [(3)  an entity subject to the franchise tax as it
existed before the effective date of this Act at any time after
December 31, 2006, and before January 1, 2008, but not subject to
the franchise tax on January 1, 2008, shall file a final report for
the privilege of doing business at any time after June 30, 2007, and
before January 1, 2008, based on the period:
                   [(A)beginning on the later of:
                         [(i)January 1, 2007; or
                         [(ii)  the date the entity was organized in
this state or, if a foreign entity, the date it began doing business
in this state; and
                   [(B)  ending on the date the entity became no
longer subject to the franchise tax].
       (b-1)  This subsection applies to an entity that:
             (1)  is not doing business in this state on January 1,
2008;
             (2)  would be subject to the franchise tax as amended by
this Act if it were doing business in this state on or after January
1, 2008, but would not have been subject to the franchise tax as it
existed before being amended by this Act; and
             (3)  was doing business in this state at any time after
June 30, 2007, and before January 1, 2008.
       (b-2)  An entity to which Subsection (b-1) applies shall, for
the privilege of doing business in this state at any time after June
30, 2007, and before January 1, 2008, file a final report and pay an
additional tax equal to the appropriate rate under Section 171.002,
Tax Code, as amended by this Act, of the entity's taxable margin
based on the period:
             (1)  beginning on the later of:
                   (A)  January 1, 2007; or
                   (B)  the date the entity was organized in this
state or, if a foreign entity, the date it began doing business in
this state; and
             (2)  ending on the date the entity became no longer
subject to the tax.
       (g)  Except as provided by Subsection (b)(1) of this section,
an entity becoming subject to the franchise tax under this Act that
is part of a combined group report shall, for purposes of
determining margin and apportionment, include its activity for the
same period used by the combined group.
       (b)  This section takes effect immediately if this Act
receives a vote of two-thirds of all the members elected to each
house, as provided by Section 39, Article III, Texas Constitution.  
If this Act does not receive the vote necessary for immediate
effect, this section takes effect September 1, 2007.
       SECTION 27.  Sections 23(b) and (f), Chapter 1, Acts of the
79th Legislature, 3rd Called Session, 2006, are amended to read as
follows:
       (b)  The information report required under this section must
contain the same information that an entity required to file the
report would have submitted in its report due to the comptroller in
2006 under Chapter 171, Tax Code, if the changes made by this Act to
Chapter 171, Tax Code, had been in effect January 1, 2006. The
information report shall also contain the total of maintenance and
operations school property taxes paid by the entity to school
districts in Texas in the 2005 [, 2006, and 2007] tax year [years].
The comptroller shall provide the forms and instructions to the
entities required to file a report under this section.
       (f)  The comptroller:
             (1)  shall identify the entities described by
Subsection (d) of this section;
             (2)  shall prepare all forms and instructions required
for those entities to file their information reports as required by
this section;
             (3)  shall provide those forms and instructions to
those entities on or after November 15, 2006, but before December 2,
2006;
             (4)  shall require the entities to submit their
information reports on or before February 15, 2007[, and February
15, 2008];
             (5)  may not grant any extensions for filing the
information reports; and
             (6)  shall report to the governor, the lieutenant
governor, and the members of the legislature, on or before April 1,
2007, [and April 1, 2008,] the results of the information reports,
stating the amount of revenue generated by the tax under Chapter
171, Tax Code, [in each year,] the amount that would have been
generated from the entities submitting information reports under
this section if the changes made by this Act to Chapter 171, Tax
Code, had been in effect January 1, 2006, and the school maintenance
and operations property taxes paid by the entities in the 2005 [,
2006, and 2007] tax year [years].
       SECTION 28.  The following provisions of the Tax Code are
repealed:
             (1)  Section 171.0003(a-1), as effective January 1,
2008; and
             (2)  Section 171.0011(e), as effective January 1, 2008.
       SECTION 29.  This Act applies only to a report originally due
on or after the effective date of this Act.
       SECTION 30.  Except as otherwise provided by this Act, this
Act takes effect January 1, 2008.