Under the revised franchise tax based on margin, entities that qualify as “management companies” are permitted to exclude certain reimbursements that it receives from its clients from its Total Revenue. The term “management company” is defined in Texas Tax Code § 171.0001(11) as “a corporation, limited liability company, or other limited liability entity that conducts all or part of the active trade or business of another entity (the ‘managed entity’) in exchange for: (A) a management fee; and (B) reimbursement of specified costs incurred in the conduct of the active trade or business of the managed entity, including ‘wages and cash compensation’ as determined under Sections 171.1013(a) and (b).” There has been some confusion over what types of entities can qualify as management companies under this statutory provision.
The Comptroller’s August Tax Policy News provides that “an entity must perform active and substantial management and operational functions; control and direct the daily operations; and provide services such as accounting, general administration, legal, financial and other similar services” in order to qualify as a management company. The newsletter as states, “If the entity does not conduct all of the active trade or business of the managed entity, the entity must conduct all operations for a distinct, revenue-producing component.”
The newsletter offers hotel management and property management companies as common examples of management companies. The newsletter also opines that neither providing services in the regular course of business, providing services under a cost-plus contract, nor providing shipping or accounting services to another company qualify an entity as a management company.
The newsletter can be reviewed on the Comptroller’s website. http://www.cpa.state.tx.us/taxinfo/taxpnw/tpn2009/tpn908.html