Filing under the revised franchise tax
Filings under the revised franchise tax are due May 15th. With virtually every form of business offering limited liability protection covered by the tax there will be a significant number of new filers. Even those who paid under the old franchise tax will be faced with a wholly different tax structure.
The statute and rules governing the new tax give us a good framework for calculating our liability, but many questions remain open. Both taxpayers and the state comptroller’s office will be working through some murky waters for this first filing. The restaurant industry in particular has some challenges in computing the tax.
First the good news, our industry is covered by the lower ½ % rate applying the wholesale and retail segments. This rate is applied to your Texas receipts minus either costs of goods sold or compensation. As an alternative you may elect to use the EZ computation if you have revenue of $10 million or less by multiplying total revenue times 0.575%.
Cost of goods sold includes all direct costs of acquiring or producing the goods, including: labor costs; materials; renting or leasing equipment, repairing and maintaining equipment, taxes paid in relation to acquiring or producing any material. In addition the cost of goods sold includes: deterioration, spoilage and abandonment of the goods; the cost of insurance on facilities, machinery, equipment, or materials directly used in the production of the goods; the cost of utilities, including electricity, gas, and water, directly used in the production of the goods; licensing and franchise costs.
Compensation includes all wages and cash compensation paid to officers, directors, owners, partners, and employees; and the cost of all benefits, including workers' compensation benefits, health care, employer contributions made to employees' health savings accounts and retirement plans. The deduction for wages is capped at $300,000 for any single employee.
Businesses with revenues of $300,000 or less will owe no tax. Businesses with tax due of less than $1,000 will owe no tax. However, all taxable entities, including those that will owe no tax, must file a report.
A discount from tax liability is available for businesses with less than $900,000 in total revenue. The discount, which reduces the amount of tax due, is a percentage of the calculated tax due. The discount rates, based on total revenue, are:
- 80% of tax due for total revenue greater than $300,000 and less than $400,000;
- 60% of tax due for total revenue greater than or equal to $400,000 and less than $500,000;
- 40% of tax due for total revenue greater than or equal to $500,000 and less than $700,000;
- 20% of tax due for total revenue greater than or equal to $700,000 and less than $900,000.
There are some aspects relating to the new tax that have significant implications for restaurateurs in computing their tax liability. In calculating revenues you may exclude taxes collected, including sales and mixed beverage gross receipts taxes. You may also exclude bad debt and funds past through to a third party as required by law or fiduciary duty.
In calculating cost of goods sold you may deduct labor costs, including unemployment taxes, for that work which is directly related to the production of goods. In general your kitchen staff labor cost will be a cost of goods sold, but your front of house staff will not. The problem for many restaurant operators will be those staff that does both production and other tasks. A bartender is engaged in production when making a drink or cleaning the bar, but not when assisting a customer with advice on a choice of drink or handling the check. The comptroller’s office has not given any clear line you can use in determining what part of an employee’s labor cost to include in the calculation of cost of goods sold in these bifurcated positions. The best advice that can be offered is to make a reasonable division between time spent on production tasks and other tasks in apportioning the employees’ labor. In no case may you include officers’ compensation or compensation paid to an undocumented worker in the cost of goods sold.
Cost of goods sold also includes utilities used in the production of goods. In those instances where kitchen uses are separately metered or where a specific utility is only used in the kitchen it may be fairly easy to include these in the cost of goods sold. Otherwise we are in a similar situation as those involving dual tasked employees. Some may recall the old sales tax exemption for utilities used in the manufacturing process. Under that exemption you had to show that the predominate use of the utility was for manufacturing. Based on comments made by the comptroller’s staff it appears that we will not be trying to establish the predominate use, but rather attempting to reasonably allocate the utility cost between production and other uses such as lighting and HVAC for the front of the house.
Cost of goods sold also includes repairing and maintain equipment and facilities used in production and expenses related to pollution control like grease trap cleaning and BOG fees. Indirect or administrative overhead costs that are related to production can be included, subject to a cap of 4%.
