Tax Research Memorandum
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Date: February 23, 2016
Author: Anonymous
Subject: Freight Service Revenue Exclusion of Subcontractor Services for Freight Forwarding
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Issue #1
Does the Company meet the criteria to be considered a Qualified Courier and Logistics Company (“Qualified Courier”) under Texas Statute §171.1011, Subsection g-7?
Issue #2
Currently, the Company uses an apportionment method based on mileage within and without the State of Texas (“Mileage Method”). This method is prescribed by the Texas State Comptroller as option for “Transportation Companies” to apportion its Gross Margin for purposes of calculating its Texas Taxable Margin. Is the Company considered a Transportation Company qualifying to use the mileage ratio for calculating its Texas Franchise Tax apportioned Margin?
Conclusion
Revenue Exclusion:
Based on information obtained from inquiry of the Company’s personnel and internet searches, the Company appears to meet all 8 criteria to be considered a Qualified Courier and Logistics Company under the Texas Franchise Tax Code. This conclusion entitles the Company to exclude from Total Revenue, payments to subcontractor drivers and/or agents.
Apportionment:
The business is a freight-forwarding/logistics company and not a transportation company due to the fact that it does not directly transport goods or passengers. Rather, the business provides a service in

arranging for the transportation logistics. Therefore, the taxpayer is a service company and should be apportioning its Taxable Margin based on where the service has been performed.
Discussion and Analysis
Revenue Exclusion:
The 82nd state legislator amended section 171.1011 to include subsection (g-7) which defines a Qualified Courier based on eight (8) factors listed below. If all 8 factors are satisfied, payments to subcontractor drivers may be excluded from Total Revenue for Texas Franchise Tax purposes. Payments to subcontractor drivers, that are to be excluded are those payments made to nonemployee agents for the performance of delivery services on behalf of the courier. All eight factors below must be satisfied for a courier to be considered a Qualified Courier as follows:
1) Receives at least 80 percent of the taxable entity's annual total revenue from its entire business from a combination of at least two of the following courier and logistics services:
a. Expedited same-day delivery of an envelope, package, parcel, roll of architectural drawings, box, or pallet
b. Temporary storage and delivery of the property of another entity, including an envelope, package, parcel, roll of architectural drawings, box, or pallet and
c. Brokerage of same-day or expedited courier and logistics services to be completed by a person or entity under a contract that includes a contractual obligation by the taxable entity to make payments to the person or entity for those services
2) During the period on which margin is based, is registered as a motor carrier under Chapter 643, Transportation Code, and if the taxable entity operates on an interstate basis, is registered as a motor carrier or broker under the unified carrier registration system, as defined by Section 643.001, Transportation Code, during that period
3) Maintains an automobile liability insurance policy covering individuals operating vehicles owned, hired, or otherwise used in the taxable entity's business, with a combined single limit for each occurrence of at least $1 million
4) Maintains at least $25,000 of cargo insurance
5) Maintains a permanent nonresidential office from which the courier and logistics services are provided or arranged
6) Has at least five full-time employees during the period on which margin is based
7) Is not doing business as a livery service, floral delivery service, motor coach service, taxicab service, building supply delivery service, water supply service, fuel or energy supply service, restaurant supply service, commercial moving and storage company, or overnight delivery service and
8) Is not delivering items that the taxable entity or an affiliated entity sold

Apportionment:
Neither the rules nor the statute provide a definition of a transportation company. The term “transport” embraces the ‘conveyance from one place, locality or country to another’”. Benson v State, 254 SW793 (Tx. Crim. App.,1923).
A taxpayer qualifying as a transportation company can report its Texas receipts based on the revenue derived from the transportation of goods or passengers in intrastate commerce within Texas or on the multiplication of total transportation receipts by total mileage in the transportation of goods and passengers that move in the intrastate commerce within Texas divided by total mileage everywhere.

The Company is not considered a Transportation Company for purposes of apportioning Texas Franchise taxable margin, but rather a “Freight Forwarding Company”.

The Comptroller has addressed the treatment of freight forwarders, distinguishing between entities that directly transport goods or passengers (transporters) and those that provide a service arranging for the transportation logistics (freight forwarders).
Per the Texas Comptroller’s Decision No. 105, 484, 03/25/2012, activities of packaging and forwarding goods (logistics) constitute a service. The Comptroller noted that although the taxpayer may be responsible for ensuring that the goods are transported, it does not actually transport the goods, which is the responsibility of the carrier. Therefore, the receipts attributable to freight forwarding services are apportioned based on where the service is performed. This holding was followed in Letter Ruling STAR Accession No. 9510L1394D04 (October 27, 1995). In the Letter Ruling the Tax Policy Division ruled that the arranging for the shipment of freight by the freight forwarding division is the performance of a service, and the receipts attributable to freight forwarding services are apportioned based on where the service is performed. It was concluded that if the arranging is done in Texas, the receipts are treated as Texas receipts for apportionment purposes.