Clarification by Texas Comptroller of Public Accounts
The Texas Comptroller of Public Accounts has clarified its policy on the Texas franchise tax treatment of commercial printing activities.
Ownership and Production of Goods
Printers own and produce goods when they custom manufacture and sell tangible personal property to their customers.
Cost of Goods Sold (COGS)
COGS includes handling costs such as:
- Assembling products for sale (e.g., kitting, folding, inserting, addressing, affixing postage, sorting, and delivering to a third-party carrier)
- Storage of raw materials, work-in-process inventory, and goods waiting for shipment
Additional guidelines on handling costs and storage:
- Handling costs for delivery of printed material to customers or third parties without delay
- Handling costs before delivery of printed material to the printer’s storage facility
These costs may be included in COGS.
Excluded from COGS
- Storage costs for more than a necessary delay in transit
- Handling costs after this storage are considered post-production and should be excluded from COGS
- Handling costs for printed material not produced and sold to the customer should also be excluded from COGS
Apportionment of Gross Receipts
Rules on sourcing gross receipts:
- Gross receipts from the sale of printed material for delivery without delay (including sales-related handling fees)
- Sourced to the location where the purchaser takes possession
- Gross receipts from the sale of printed material stored for more than a necessary delay in transit
- Includes delivery-related storage and subsequent handling fees
- Sourced to the storage location
- Gross receipts from handling printed material not sold by the printer
- Considered receipts from the sale of a service
- Sourced to the location where the service is performed (i.e., the handling activities’ location)
Reference: Texas Policy Letter Ruling No. 202204004L, 04/21/2022
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Frequently Asked Questions
What is the Texas Comptroller’s updated stance on commercial printing for franchise tax purposes?
The Texas Comptroller clarified that commercial printers who custom manufacture and sell tangible personal property are considered to own and produce goods. This classification affects how they may calculate Cost of Goods Sold (COGS) for franchise tax purposes.
Which handling and storage costs can be included in COGS?
Handling costs like kitting, folding, inserting, and delivering to a third-party carrier, as well as storage of raw materials and work-in-process inventory, may be included in COGS, provided they occur before or at the time of delivery without unnecessary delays.
What costs are excluded from COGS under the updated guidance?
Storage costs incurred after a necessary delay in transit and handling costs after such storage are excluded. Additionally, handling costs for printed materials not sold to the customer are also excluded from COGS.
How are gross receipts from printing sales sourced for Texas franchise tax?
Gross receipts from printed materials delivered without delay are sourced to the purchaser’s location. If the materials are stored before delivery, the receipts are sourced to the storage location.
What if the printer only handles printed material and doesn’t sell it?
If the printer provides handling services for printed materials they didn’t sell, the income is treated as service revenue. The gross receipts are sourced to the location where the handling takes place.