Multistate Benefit Exemption

Taxable services performed for use in Texas are subject to tax. Because some services are performed for use both within and outside Texas, the Legislature created Section 151.330(f) to provide an exemption for that portion of the taxable services performed for use outside Texas. The exemption was specifically limited to those services that became taxable on or after Sept. 1, 1987. This exemption is commonly referred to as the “multistate benefit exemption.”

The services that became taxable after Sept. 1, 1987, include:

  • credit reporting services;
  • debt collection services;
  • insurance services;
  • information services;
  • real property services;
  • real property repair and remodeling services;
  • telephone answering services; and
  • Internet access services

Additionally, when the statutory definition of tangible personal property changed on Oct. 1, 1987, to include custom computer programs, the services to repair, remodel, maintain or restore custom computer programs also became taxable. These same taxable services performed on canned computer programs do not qualify for the multistate benefit exemption because they became taxable before Sept. 1, 1987 (i.e., Oct. 2, 1984).

When determining whether a taxable service qualifies for the multistate benefit exemption, two thresholds must be met.

First, the taxable service must be included in the list of services that became taxable on or after Sept. 1, 1987. If the service became taxable before that date (such as maintenance of canned software or the repair of construction equipment that may be used both inside and outside Texas), a customer is not entitled to assert a claim to the exemption.

Next, the customer must establish that the taxable service in question supports or benefits a separate, identifiable segment of the customer’s business and that the separate, identifiable segment is located both within and outside of Texas.

An “identifiable segment” is defined by the Comptroller as a part of a business that has its own identity apart from, and performs a function that is separate from, the general administration or operation of the company. The existence of a separate, identifiable segment must be demonstrated by evidence of the organizational and operational structure of the business. The location where the service is actually used, and any allocation of charges, must be supported by taxpayer books and records. The mere fact that a taxpayer operates in multiple states does not mean that services purchased by a taxpayer in Texas were partly used outside of Texas.

Once an identifiable segment is demonstrated, the taxpayer may use any reasonable method for allocation that is supported by business records. But, to the extent the use of the service cannot be assigned to a separate, identifiable segment, it is presumed to be used to support the taxpayer’s business generally at the principal place of business, which is deemed to be the place from which trade or business is directed or managed.

*Originally published in Tax Policy News a monthly newsletter about Texas tax policy at http://www.window.state.tx.us/taxinfo/taxpnw/tpn2012/tpn1207.html

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