Evaluating Whether a Modified Gross-Receipts Tax Is within the Scope of Income Tax Guidance Facts: In Texas, certain businesses must pay an annual franchise tax, a type of modified gross- receipts tax, of roughly 0.375% to 0.75%. The tax base (to which this rate is applied) is the entity's taxable margin and is computed in one of the following ways: (1) total revenue minus cost of goods sold, (2) total revenue minus compensation, (3) total revenue times 70%, or (4) total revenue minus $1 million. You must evaluate whether this is considered a tax based on income and thus within the scope of ASC 740. In addition to the guidance provided for the previous example, consider the following guid- ance from PwC's guide book, Income Taxes.? In jurisdictions in which a tax is calculated on modified gross receipts, consideration should be given as to whether it is a tax based on income. We believe that a tax based on gross receipts reduced for certain costs (e.g., inventory, depreciable and amortizable assets, materials and supplies, wages) is a tax based on income subject to ASC 740. Margin taxes are also generally within the scope of ASC 740. Questions: 1. Is Texas's franchise tax within the scope of ASC 7407 Explain. 2. Explain the significance (as further described in the text following this example) of a tax being within the scope of ASC 740 versus within the scope of other guidance