Texas Comptroller Finalizes Franchise Tax Cost of Goods Sold Rule Changes

The Texas Comptroller of Public Accounts has adopted amendments to 34 TAC §3.588 (Margin: Cost of Goods Sold) without changes from the version originally proposed in the April 3, 2026 issue of the Texas Register. The amendments update the franchise tax cost of goods sold (COGS) rules to reflect several recent legislative changes, align certain depreciation provisions with current federal tax law, and provide additional guidance for specific industries. [sos.texas.gov]

The final rule implements:

• Senate Bill 263 (89th Legislature, 2025);

• Senate Bill 1405 (89th Legislature, 2025);

• Senate Bill 1243 (88th Legislature, 2023); and

• House Bill 1195 (87th Legislature, 2021). [sos.texas.gov]

These statutory changes affect the determination of COGS under the Texas franchise tax and add provisions related to broadband deployment grants, COVID-19 relief funding, media broadcasting activities, and depreciation calculations. [sos.texas.gov], [law.justia.com]

Key Changes Taxpayers Should Know

New Definition of “Internal Revenue Code”

The rule adds a formal definition of the term“Internal Revenue Code” based on the existing definition in Texas Tax Code §171.0001(9). This definition will apply throughout §3.588 whenever the term is referenced. [sos.texas.gov]

Broadband Deployment Grant Expenses Now Addressed

To implement SB 1243 and SB 1405, the Comptroller added provisions addressing expenses paid with qualifying grant proceeds received for broadband deployment projects in Texas. The amendments incorporate Tax Code §171.10132, which governs the franchise tax treatment of certain broadband deployment grants. [sos.texas.gov], [law.justia.com]

COVID-19 Relief Funding Clarified

The amendments also implement HB 1195 by addressing expenses funded through qualifying COVID-19 relief loans or grants. These provisions are tied to Tax Code §171.10131 and provide guidance on the treatment of eligible expenses for franchise tax purposes. [sos.texas.gov], [law.justia.com]

Broadcasting Industry COGS Expansion

The Comptroller revised the rule to clarify that the COGS deduction available under the applicable provision extends to television and radio broadcasting activities. The rule also adds a definition of “television or radio broadcasting” to provide greater certainty for taxpayers in the media industry. [sos.texas.gov]

New Definitions for Movie Theaters

For movie theater operators, the amendments add definitions for:

• “Movie theater,” based on the membership definition used by the National Association of Theatre Owners; and

• “Motion picture,” using the definition found in 17 U.S.C. §101 of the U.S. Copyright Act. [sos.texas.gov]

These additions are intended to clarify eligibility for certain COGS deductions available to movie theater businesses. [sos.texas.gov]

Major Depreciation Changes Beginning with the 2026 Franchise Tax Report

One of the most significant updates involves the treatment of depreciation for COGS purposes.

Beginning with 2026 franchise tax reports, taxpayers generally must use current federal tax law when determining allowable depreciation amounts included in COGS, rather than relying on the 2007 version of the Internal Revenue Code that has historically applied in many franchise tax calculations. Exceptions remain where the Texas statute specifically references the Internal Revenue Code. [sos.texas.gov]

As a result, taxpayers may generally include federally claimed bonus depreciation in COGS when the depreciation is associated with and necessary for the production of goods. However, provisions specifically tied to Internal Revenue Code §197 continue to be determined under the 2007 Code because Texas law expressly references that version. [sos.texas.gov]

One-Time Net Depreciation Adjustment

The rule also introduces a one-time net depreciation adjustment available on the 2026 franchise tax report. The adjustment applies to qualifying assets:

• placed in service before the beginning of the taxpayer’s 2025 accounting period;

• still held by the taxpayer; and

• associated with and necessary for the production of goods. [sos.texas.gov]

According to the Comptroller, the purpose of this adjustment is to align the federal tax basis and Texas COGS basis for qualifying assets and prevent future distortions when those assets are sold. [sos.texas.gov]

Public Comments Rejected

The Comptroller received comments from representatives of the Texas Taxpayers and Research Association (TTARA) and Whitley Penn, LLP concerning the one-time depreciation adjustment. Both commenters argued that some taxpayers could remain disadvantaged under the proposed approach and requested broader relief mechanisms. [sos.texas.gov]

The Comptroller declined to adopt the suggested changes, stating that:

• assets placed in service during 2025 do not create the same basis differences the adjustment is intended to address;

• Texas franchise tax law does not currently provide a COGS carryforward mechanism; and

• broader relief would require legislative action rather than a regulatory change. [sos.texas.gov]

The agency further emphasized that the one-time adjustment is intended as an equity measure addressing historical basis differences, not as a mechanism to fully reimburse taxpayers for prior franchise tax impacts. [sos.texas.gov]

Effective Guidance for Taxpayers

The amendments provide important guidance for businesses that claim the COGS deduction, particularly manufacturers, broadcasters, broadband infrastructure providers, movie theater operators, and taxpayers with substantial depreciable assets. Businesses preparing their 2026 franchise tax reports should evaluate how the transition to current federal depreciation rules and the one-time net depreciation adjustment may affect their Texas franchise tax position. [sos.texas.gov]

References

• Texas Comptroller of Public Accounts, 34 TAC §3.588 – Margin: Cost of Goods Sold, adopted June 1, 2026, published in the Texas Register. [sos.texas.gov]

• Texas Tax Code §§171.1012, 171.10131, and 171.10132. [law.justia.com], [us.vlex.com]