TITLE 34. PUBLIC FINANCE

PART 1. COMPTROLLER OF PUBLIC ACCOUNTS

CHAPTER 3. TAX ADMINISTRATION

SUBCHAPTER V. FRANCHISE TAX

The Comptroller of Public Accounts proposes amendments to §3.588, concerning margin: cost of goods sold. The comptroller amends the section to implement Senate Bill 263 and Senate Bill 1405, 89th Legislature, 2025; Senate Bill 1243, 88th Legislature, 2023; and House Bill 1195, 87th Legislature, 2021; to address the policy change to conform the franchise tax to the current-year federal income tax provisions; and to add definitions to the provision on costs allowed to movie theaters.

The comptroller also amends the section to add titles to statutory references and makes non-substantive changes to improve readability.

The comptroller amends subsection (b) to add new paragraph (5) and renumbers subsequent paragraphs accordingly. New paragraph (5) defines the term "Internal Revenue Code" based on the statutory definition in Tax Code, §171.0001(9) (General Definitions). Throughout the section, where the term "Internal Revenue Code" is used, the definition in new paragraph (5) applies.

The comptroller amends subsection (c) to add new paragraphs (2) and (4). Subsequent paragraphs, and any reference to the subsequent paragraphs, are renumbered.

The comptroller adds new paragraph (2) to implement Senate Bill 1243 and Senate Bill 1405 concerning expenses paid with qualifying grant proceeds received for broadband deployment in Texas. Senate Bill 1243 and Senate Bill 1405 enact Tax Code, §171.10132 (Provisions Related to Certain Grants Received for Broadband Deployment in Texas).

The comptroller adds new paragraph (4) to implement House Bill 1195 concerning expenses paid with qualifying loan or grant proceeds received for COVID-19 relief. House Bill 1195 enacts Tax Code, §171.10131 (Provisions Related to Certain Money Received for COVID-19 Relief).

The comptroller amends renumbered paragraph (5) to add the $1 million deduction method of calculating margin that was effective January 1, 2014.

The comptroller amends renumbered paragraph (7) to implement Senate Bill 263, clarifying that the cost of goods sold allowed under this paragraph applies to television or radio broadcasting and providing a definition for television or radio broadcasting. Senate Bill 263 enacts Tax Code, §171.1012(o) (Determination of Cost of Goods Sold).

The comptroller amends renumbered paragraph (10) regarding the cost of goods sold allowed for movie theaters to add two definitions. New subparagraph (A) provides the definition for "movie theater," derived from the membership definition of the National Association of Theatre Owners. New subparagraph (B) provides the definition for "motion picture," taken directly from the Copyright Law of the United States, 17 U.S. Code §101 (Definitions).

The comptroller amends paragraph (d)(6), and adds subparagraphs (A), (B), (C), and (D) regarding the federal tax law used when determining allowable depreciation amounts taken from a federal tax return. The comptroller deletes the reference to Internal Revenue Code, §179 (Election to expense certain depreciable assets) as Chapter 171 does not specifically reference §179. The comptroller adds language to make clear that when a taxable entity elects to expense certain depreciable assets, the amount may be included in cost of goods sold if otherwise qualified under Tax Code, §171.1012(c)(6).

New subparagraph (A) addresses which year's federal tax law is used for 2026 and later franchise tax reports. Beginning with the 2026 franchise tax report, utilize the then-current federal tax law instead of the 2007 Internal Revenue Code, except where the statute and rule specifically reference the Internal Revenue Code. For example, beginning with the 2026 franchise tax report, a taxable entity may include in its cost of goods sold the bonus depreciation claimed on its federal return, to the extent associated with and necessary for the production of the goods. However, recovery claimed under Internal Revenue Code §197 must be determined under the 2007 Internal Revenue Code, as the statutory provision authorizing such recovery specifically references the Internal Revenue Code.

New subparagraph (B) allows a taxable entity, on the 2026 franchise tax report, to also include a one-time net depreciation adjustment for each qualifying asset in its cost of goods sold. Qualifying assets are those placed in service prior to the accounting year begin date on the 2026 report, provided that the assets have not been disposed of prior to this date and are associated with and necessary for the production of the goods.

New subparagraph (C) provides the proper order of application when a one-time net depreciation adjustment is taken with other allowable costs and procedures addressing when said adjustment results in a taxable entity's margin being reduced below zero.

New subparagraph (D) clarifies that for franchise tax reports prior to the 2026 report, the 2007 Internal Revenue Code is used when determining allowable depreciation amounts.

Brad Reynolds, Chief Revenue Estimator, has determined that during the first five years that the proposed amendments are in effect, the amended rule: will not create or eliminate a government program; will not require the creation or elimination of employee positions; will not require an increase or decrease in future legislative appropriations to the agency; will not require an increase or decrease in fees paid to the agency; will not increase or decrease the number of individuals subject to the rule's applicability; and will not positively or adversely affect this state's economy.

Mr. Reynolds also has determined that the proposed amendments would benefit the public by conforming the rule to current statute. This rule is proposed under Tax Code, Title 2, and does not require a statement of fiscal implications for small businesses or rural communities The proposed amended rule would have no significant net long term fiscal impact on the state government, units of local government, or individuals. The amendments regarding the inclusion of bonus depreciation in cost of goods sold, and the one-time net depreciation adjustment allowable for report year 2026, may affect the state's cash flow, reducing net franchise tax revenue for years when bonus depreciation amounts are significant and in 2026 when one-time depreciation adjustments are made, with offsetting increases in net franchise tax revenue in subsequent years; the amount of such cash flow effects cannot be estimated. There would be no anticipated significant economic cost to the public.

You may submit comments on the proposal or information related to the cost, benefit, or effect of the proposal, including any applicable data, research or analysis, to Jenny Burleson, Director, Tax Policy Division, P.O. Box 13528, Austin, Texas 78711-3528 or to the email address: tp.rule.comments@cpa.texas.gov. The comptroller must receive your comments or other information no later than 30 days from the date of publication of the proposal in the Texas Register.

These amendments are proposed under Tax Code, §111.002 (Comptroller's Rules; Compliance; Forfeiture), which provides the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of the provisions of Tax Code, Title 2.

The amendments implement Tax Code, §§171.1012 (Determination of Cost of Goods Sold), 171.10131 (Provisions Related to Certain Money Received for COVID-19 Relief), and 171.10132 (Provisions Related to Certain Grants Received for Broadband Deployment in Texas).

§3.588. Margin: Cost of Goods Sold.

(a) Effective Date. The provisions of this section apply to franchise tax reports originally due on or after January 1, 2008, except as otherwise noted.

(b) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Arm's length--The standard of conduct under which entities that are not related parties and that have substantially equal bargaining power, each acting in its own interest, would negotiate or carry out a particular transaction.

(2) Computer program--A series of instructions that are coded for acceptance or use by a computer system and that are designed to permit the computer system to process data and provide results and information. The series of instructions may be contained in or on magnetic tapes, printed instructions, or other tangible or electronic media.

(3) Goods--Real or tangible personal property sold in the ordinary course of business of a taxable entity.

(4) Heavy construction equipment--Self-propelled, self-powered, or pull-type equipment that weighs at least 3,000 pounds and is intended to be used for construction. The term does not include a motor vehicle required to be titled and registered.

(6) [(5)] Lending institution--An entity that makes loans and:

(A) is regulated by the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, the Office of Thrift Supervision, the Texas Department of Banking, the Office of Consumer Credit Commissioner, the Credit Union Department, or any comparable regulatory body;

(B) is licensed by, registered with, or otherwise regulated by the Department of Savings and Mortgage Lending;

(C) is a "broker" or "dealer" as defined by the Securities Exchange Act of 1934 at 15 U.S.C. §78c (Definitions and application); or

(D) provides financing to unrelated parties solely for agricultural production.

(7) [(6)] Principal business activity--The activity in which a taxable entity derives the largest percentage of its "total revenue".

(8) [(7)] Production--Construction, manufacture, installation occurring during the manufacturing or construction process, development, mining, extraction, improvement, creation, raising, or growth.

(9) [(8)] Related party--A person, corporation, or other entity, including an entity that is treated as a pass-through or disregarded entity for purposes of federal taxation, whether the person, corporation, or entity is subject to the tax under this chapter or not, in which one person, corporation, or entity, or set of related persons, corporations, or entities, directly or indirectly owns or controls a controlling interest in another entity.

(10) [(9)] Service costs--Indirect costs and administrative overhead costs that can be identified specifically with a service department or function, or that directly benefit or are incurred by reason of a service department or function. For purposes of this section, a service department includes personnel (including costs of recruiting, hiring, relocating, assigning, and maintaining personnel records or employees); accounting (including accounts payable, disbursements, and payroll functions); data processing; security; legal; general financial planning and management; and other similar departments or functions.

(11) [(10)] Tangible personal property--

(A) includes:

(i) personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any other manner;

(ii) films, sound recordings, videotapes, live and prerecorded television and radio programs, books, and other similar property embodying words, ideas, concepts, images, or sound, without regard to the means or methods of distribution or the medium in which the property is embodied, for which, as costs are incurred in producing the property, it is intended or is reasonably likely that any medium in which the property is embodied will be mass-distributed by the creator or any one or more third parties in a form that is not substantially altered; and

(iii) a computer program, as defined in paragraph (2) of this subsection.

(B) does not include:

(i) intangible property; or

(ii) services.

(c) General rules for determining cost of goods sold.

(1) Affiliated entities. Notwithstanding any other provision of this section, a payment made by one member of an affiliated group to another member of that affiliated group not included in the combined group may be subtracted as a cost of goods sold only if it is a transaction made at arm's length.

(3) [(2)] Capitalization or expensing of certain costs. The election to capitalize or expense allowable costs is made by filing the franchise tax report using one method or the other. The election is for the entire period on which the report is based and may not be changed after the due date or the date the report is filed, whichever is later. A taxable entity that is allowed a subtraction by this section for a cost of goods sold and that is subject to Internal Revenue Code, §§263A (Capitalization and inclusion in inventory costs of certain expenses), 460 (Special rules for long-term contracts), or 471 (General rule for inventories) (including a taxable entity subject to §471 that elects to use LIFO under §472 (Last-in, first-out inventories)), may elect to:

(A) Capitalize those costs in the same manner and to the same extent that the taxable entity capitalized those costs on its federal income tax return, except for those costs excluded under subsection (g) of this section, or in accordance with subsections (d), (e), and (f) of this section. A taxable entity that elects to capitalize costs on its first report due on or after January 1, 2008, may include, in beginning inventory, costs allowable for franchise tax purposes that would be in beginning inventory for federal income tax purposes.

(i) If the taxable entity elects to capitalize those costs allowed under this section as a cost of goods sold, it must capitalize each cost allowed under this section that it capitalized on its federal income tax return.

(ii) If the taxable entity later elects to begin expensing those costs allowed under this section as a cost of goods sold, the entity may not deduct any cost incurred before the first day of the period on which the report is based, including any ending inventory from a previous report.

(B) Expense those costs, except for those costs excluded under subsection (g) of this section, or in accordance with subsections (d), (e), and (f) of this section.

(i) If the taxable entity elects to expense those costs allowed under this section as a cost of goods sold, costs incurred before the first day of the period on which the report is based may not be subtracted as a cost of goods sold.

(ii) If the taxable entity later elects to begin capitalizing those costs allowed under this section as a cost of goods sold, costs incurred prior to the accounting period on which the report is based may not be capitalized.

(5) [(3)] Election to subtract cost of goods sold. A taxable entity, if eligible, must make an annual election to subtract cost of goods sold in computing margin by the due date, or at the time the report is filed, whichever is later. The election to subtract cost of goods sold is made by filing the franchise tax report using the cost of goods sold method. An amended report may be filed within the time allowed by Tax Code, §111.107 (When Refund or Credit is Permitted) to change the method of computing margin to the cost of goods sold deduction method or from the cost of goods sold deduction method to the compensation deduction method, total revenue minus $1 million (effective for reports originally due on or after January 1, 2014), 70% of total revenue, or, if otherwise qualified, the E-Z computation method. An election may also be changed as part of an audit. See §3.584 of this title (relating to Margin: Reports and Payments).

(6) [(4)] Exclusions from total revenue. Except as otherwise noted in this section, any [Any] expense excluded from total revenue (see §3.587 of this title) may not be included in the determination of cost of goods sold.

(7) [(5)] Film and broadcasting. For purposes of this paragraph, "television or radio broadcasting" means television or radio broadcasting under a television or radio broadcast license issued by the Federal Communications Commission and regulated under 47 C.F.R. Part 73 or 74. A taxable entity whose principal business activity is film or television production, television or radio broadcasting, [or] the sale of broadcast rights, or the distribution of tangible personal property described by subsection (b)(11)(A)(ii) [(b)(10)(A)(ii)] of this section, or any combination of these activities, and who elects to use cost of goods sold to determine margin, may include as cost of goods sold:

(A) the costs described in this section in relation to the property;

(B) depreciation, amortization, and other expenses directly related to the acquisition, production, or use of the property, including

(C) expenses for the right to broadcast or use the property.

(8) [(6)] Lending institutions. Notwithstanding any other provision of this section, if the taxable entity is a lending institution that offers loans to the public and elects to subtract cost of goods sold, the entity may subtract as a cost of goods sold an amount equal to interest expense.

(A) This paragraph does not apply to entities primarily engaged in an activity described by category 5932 of the 1987 Standard Industrial Classification Manual published by the federal Office of Management and Budget.

(B) For purposes of this subsection, an entity engaged in lending to unrelated parties solely for agricultural production offers loans to the public.

(9) [(7)] Mixed transactions. If a transaction contains elements of both a sale of tangible personal property and a service, a taxable entity may only subtract as cost of goods sold the costs otherwise allowed by this section in relation to the tangible personal property sold.

(10) [(8)] Movie theaters. Effective for reports originally due on or after September 1, 2013, if a taxable entity that is a movie theater elects to subtract cost of goods sold, the cost of goods sold for the taxable entity are [shall be] the costs described by this section in relation to the acquisition, production, exhibition, or use of a film or motion picture, including expenses for the right to use the film or motion picture, and the costs otherwise allowed by this section in relation to concessions sold.

(11) [(9)] Owner of goods. A taxable entity may make a subtraction under this section in relation to the cost of goods sold only if that entity owns the goods.

(A) A taxable entity that holds the legal title to the goods is presumed to be the owner of the goods for purposes of this section. A taxable entity may rebut this presumption by proving an ownership right superior to the legal title holder based on all of the facts and circumstances, including the various benefits and burdens of ownership vested with the taxable entity.

(B) A taxable entity furnishing labor or materials to a project for the construction, improvement, remodeling, repair, or industrial maintenance (as the term "maintenance" is defined in §3.357 of this title (relating to Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance)) of real property is considered to be an owner of the labor or materials and may include the costs, as allowed by this section, in the computation of the cost of goods sold. For purposes of determining whether a taxable entity is considered an owner of the labor or materials under this paragraph, and eligible to deduct costs as described in subsections (d), (e), and (f) of this section, the following terms mean:

(i) Labor--Labor used in the direct prosecution of the project.

(ii) Material--All or part of:

(I) the material, machinery, fixtures, or tools incorporated into the project, consumed in the direct prosecution of the project, or ordered and delivered for incorporation or consumption;

(II) rent at a reasonable rate and actual running repairs at a reasonable cost for construction equipment used or reasonably required and delivered for use in the direct prosecution of the project at the site of the project; or

(III) power, water, fuel, and lubricants consumed or ordered and delivered for consumption in the direct prosecution of the project.

(C) Solely for the purposes of this section, a taxable entity shall be treated as the owner of the goods being manufactured or produced by the entity under a contract with the federal government, including any subcontracts that support a contract with the federal government, notwithstanding that the Federal Acquisition Regulations may require that title or risk of loss with respect to those goods be transferred to the federal government before the manufacture or production of those goods is complete.

(12) [(10)] Pipeline entities. Effective for reports originally due on or after January 1, 2014, and notwithstanding paragraph (11) [(9)] of this subsection and subsection (g)(3) of this section, a pipeline entity that provides services for others related to the product that the pipeline does not own and to which this paragraph applies may subtract as a cost of goods sold its depreciation, operations, and maintenance costs allowed by this section related to the services provided.

(A) For purposes of this paragraph, "pipeline entity" means an entity:

(i) that owns or leases and operates the pipeline by which the product is transported for others and only to that portion of the product to which the entity does not own title; and

(ii) that is primarily engaged in gathering, storing, transporting, or processing crude oil, including finished petroleum products, natural gas, condensate, and natural gas liquids, except for a refinery installation that manufactures finished petroleum products from crude oil.

(B) For purposes of this paragraph, "processing" means the physical or mechanical removal, separation, or treatment of crude oil, including finished petroleum products, natural gas, condensate, and natural gas liquids after those materials are produced from the earth. The term does not include the chemical or biological transformation of those materials.

(13) [(11)] Rental or leasing companies. Notwithstanding any other provision of this section:

(A) a motor vehicle rental company that remits a tax on gross receipts imposed under Tax Code, §152.026 (Tax on Gross Rental Receipts), or a motor vehicle leasing company, may subtract as costs of goods sold the costs otherwise allowed by this section in relation to motor vehicles that the company rents or leases in the ordinary course of its business;

(B) a heavy construction equipment rental or leasing company may subtract as costs of goods sold the costs otherwise allowed by this section in relation to heavy construction equipment that the company rents or leases in the ordinary course of its business; and

(C) a railcar rolling stock rental or leasing company may subtract as costs of goods sold the costs otherwise allowed by this section in relation to railcar rolling stock that the company rents or leases in the ordinary course of its business.

(14) [(12)] Reporting methods. A taxable entity shall determine its cost of goods sold, except as otherwise provided by this section, in accordance with the methods used on the federal income tax return on which the report under this chapter is based. This subsection does not affect the type or category of cost of goods sold that may be subtracted under this section.

(15) [(13)] Restaurants and bars. Entities engaged in activities described in Major Group 58 (Eating and Drinking Places) of the Standard Industrial Classification Manual may deduct for cost of goods sold only those expenses allowed under subsections (d), (e) and (f) of this section, that relate to the acquisition and production of food and beverages. Any costs related to both the production of food and beverages and to other activities must be allocated to production on a reasonable basis.

(d) Direct costs. The cost of goods sold includes all direct costs of acquiring or producing the goods. Direct costs include:

(1) Labor costs. A taxable entity may include in its cost of goods sold calculation labor costs, other than service costs, that are properly allocable to the acquisition or production of the goods and are of the type subject to capitalization or allocation under Treasury Regulation Sections 1.263A-1(e) or 1.460-5 as direct labor costs, indirect labor costs, employee benefit expenses, or pension and other related costs, without regard to whether the taxable entity is required to or actually capitalizes such costs for federal income tax purposes.

(A) For purposes of this section, labor costs include W-2 wages, IRS Form 1099 payments for labor, temporary labor expenses, payroll taxes, pension contributions, and employee benefits expenses, including, but not limited to, health insurance and per diem reimbursements for travel expenses, to the extent deductible for federal tax purposes.

(B) Labor costs under this paragraph do [shall] not include any type of costs includable in subsection (f) or excluded in subsection (g) of this section. Costs for labor that do not meet the requirements set forth in this paragraph may still be subtracted as a cost of goods sold if the cost is allowed under another provision of this section. For example, service costs may be included in a taxable entity's cost of goods sold calculation to the extent provided by subsection (f) of this section.

(2) Incorporated materials. A taxable entity may include in its cost of goods sold calculation the cost of materials that are an integral part of specific property produced.

(3) Consumable materials. A taxable entity may include in its cost of goods sold calculation the cost of materials that are consumed in the ordinary course of performing production activities.

(4) Handling costs. A taxable entity may include in its cost of goods sold calculation handling costs, including costs attributable to processing, assembling, repackaging, and inbound transportation.

(5) Storage costs. A taxable entity may include in its cost of goods sold calculation storage costs, including the costs of carrying, storing, or warehousing property, subject to subsection (g) of this section, concerning excluded costs.

(6) Depreciation, depletion, and amortization. A taxable entity may include in its cost of goods sold calculation depreciation, depletion, and amortization, reported on the federal income tax return on which the report under this chapter is based, to the extent associated with and necessary for the production of the goods. A taxable entity may also include [, including] recovery described by Internal Revenue Code, §197 (Amortization of goodwill and certain other intangibles), to the extent associated with and necessary for the production of the goods[, and property described in Internal Revenue Code, §179].

(7) Rentals and leases. A taxable entity may include in its cost of goods sold calculation the cost of renting or leasing equipment, facilities, or real property directly used for the production of the goods, including pollution control equipment and intangible drilling and dry hole costs.

(8) Repair and maintenance. A taxable entity may include in its cost of goods sold calculation the cost of repairing and maintaining equipment, facilities, or real property directly used for the production of the goods, including pollution control devices.

(9) Research and development. A taxable entity may include in its cost of goods sold calculation the costs attributable to research, experimental, engineering, and design activities directly related to the production of the goods, including all research or experimental expenditures described by Internal Revenue Code, §174 (Amortization of research and experimental expenditures), regardless of whether the taxable entity is the producer of the good it sells.

(10) Mineral production. A taxable entity may include in its cost of goods sold calculation geological and geophysical costs incurred to identify and locate property that has the potential to produce minerals.

(11) Taxes. A taxable entity may include in its cost of goods sold calculation taxes paid in relation to acquiring or producing any material, including property taxes paid on buildings and equipment, and taxes paid in relation to services that are a direct cost of production.

(12) Electricity. A taxable entity may include in its cost of goods sold calculation the cost of producing or acquiring electricity sold.

(13) A taxable entity may include in its cost of goods sold calculation a contribution to a partnership in which the taxable entity owns an interest that is used to fund activities, the costs of which would otherwise be treated as cost of goods sold of the partnership, but only to the extent that those costs are related to the goods distributed to the contributing taxable entity as goods-in-kind in the ordinary course of production activities rather than being sold by the partnership.

(e) Additional costs. In addition to the amounts includable under subsection (d) of this section, the cost of goods sold includes the following costs in relation to the taxable entity's goods:

(1) deterioration of the goods;

(2) obsolescence of the goods;

(3) spoilage and abandonment, including the costs of rework, reclamation, and scrap;

(4) if the property is held for future production, preproduction direct costs allocable to the property, including storage and handling costs, as provided by subsection (d)(4) and (5) of this section;

(5) postproduction direct costs allocable to the property, including storage and handling costs, as provided by subsection (d)(4) and (5) of this section;

(6) the cost of insurance on a plant or a facility, machinery, equipment, or materials directly used in the production of the goods;

(7) the cost of insurance on the produced goods;

(8) the cost of utilities, including electricity, gas, and water, directly used in the production of the goods;

(9) the costs of quality control, including replacement of defective components pursuant to standard warranty policies, inspection directly allocable to the production of the goods, and repairs and maintenance of the goods; and

(10) licensing or franchise costs, including fees incurred in securing the contractual right to use a trademark, corporate plan, manufacturing procedure, special recipe, or other similar right directly associated with the goods produced.

(f) Indirect or administrative overhead costs. A taxable entity may subtract as a cost of goods sold service costs, as defined in subsection (b)(10) [(b)(9)] of this section, that it can demonstrate are reasonably allocable to the acquisition or production of the goods. The amount subtracted may not exceed 4.0% of total indirect and administrative overhead costs.

(1) Any costs already subtracted under subsections (d) or (e) of this section may not be subtracted under this subsection.

(2) Any costs excluded under subsection (g) of this section may not be subtracted under this subsection.

(g) Costs not included. The cost of goods sold does not include the following costs in relation to the taxable entity's goods:

(1) the cost of renting or leasing equipment, facilities, or real property that is not used for the production of the goods;

(2) selling costs, including employee expenses related to sales;

(3) distribution costs, including outbound transportation costs;

(4) advertising costs;

(5) idle facility expenses;

(6) rehandling costs;

(7) bidding costs, which are the costs incurred in the solicitation of contracts ultimately awarded to the taxable entity;

(8) unsuccessful bidding costs, which are the costs incurred in the solicitation of contracts not awarded to the taxable entity;

(9) interest, including interest on debt incurred or continued during the production period to finance the production of the goods;

(10) income taxes, including local, state, federal, and foreign income taxes, and franchise taxes that are assessed on the taxable entity based on income;

(11) strike expenses, including costs associated with hiring employees to replace striking personnel, but not including the wages of the replacement personnel, costs of security, and legal fees associated with settling strikes;

(12) officers' compensation;

(13) costs of operation of a facility that is:

(A) located on property owned or leased by the federal government; and

(B) managed or operated primarily to house members of the armed forces of the United States;

(14) any compensation paid to an undocumented worker used for the production of the goods, provided that, as used in this paragraph only, the following terms [shall] have the following meanings:

(A) "undocumented worker" means a person who is not lawfully entitled to be present and employed in the United States; and

(B) "goods" includes the husbandry of animals, the growing and harvesting of crops, and the severance of timber from realty; and

(15) costs funded by a partnership contribution, to the extent that the contributing taxable entity made the cost of goods sold deduction under subsection (d)(13) of this section.

The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.

Filed with the Office of the Secretary of State on March 23, 2026.

TRD-202601347

Jenny Burleson

Director, Tax Policy

Comptroller of Public Accounts

Earliest possible date of adoption: May 3, 2026

For further information, please call: (512) 475-2220