RECENT IMPLEMENTATION OF ECONOMIC NEXUS THRESHOLD FOR TEXAS FRANCHISE TAXES IN THE WAKE OF WAYFAIR, INC.

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Jason B. Freeman

Jason B. Freeman

Managing Member

214.984.3410
jason@freemanlaw.com

Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine , a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

Recent Implementation of Economic Nexus Threshold for Texas Franchise Taxes in the Wake of Warefare, INC.

In the December 20, 2019, issue of the Texas Register (44 TexReg 8021), the Texas Comptroller of Public Accounts (“Comptroller”) announced that it was adopting proposed amendments[1] to the “nexus” section of 34 TAC §3.586.  The proposed amendments establish rules in which a non-Texas entity can create “nexus” with Texas without having a physical presence in the state.  The effective date of the proposed “nexus” amendments was December 29, 2019.

Under Texas Tax Code §171.001(b), Texas’ ability to impose franchise tax extends to the limits of the United States’ Constitution and the federal law adopted under the United States Constitution.    The Supreme Court overturned the physical presence requirement for “nexus” with its ruling in South Dakota v. Wayfair, Inc., 138 S.Ct. 2080 (2018).  As such, Texas has amended its franchise tax rules to adopt an economic “nexus” provision in furtherance of Texas Tax Code §171.001(b).

Under these rule changes, for each federal income tax accounting period ending in 2019 or later, a “foreign taxable entity” has “nexus” in Texas and is subject to Texas franchise tax, even if it has no physical presence in Texas, if during that federal income tax accounting period, it had gross receipts from business done in Texas of $500,000.00 or more, as determined using the Texas apportionment sourcing rules found in 34 TAC §3.591.[2]  Under the new rule, a “foreign taxable entity” is a taxable entity that is not chartered or organized in Texas.[3]

Further, per 34 TAC §3.586(e), a “foreign taxable entity” with a Texas use tax permit is presumed to have “nexus” in Texas and is subject to Texas franchise tax.  During the comments period after the proposed rules were announced, one public commentator noted that the proposed 34 TAC §3.586(e) could be a potential constitutional violation if the Comptroller presumes that a foreign entity has “nexus” solely because it obtains a use tax permit.  In response, the Comptroller stated that the presumption codifies an existing Comptroller practice and that the presumption could be rebutted by the entity.

With the newly implemented 34 TAC §3.586, there are now three ways a “foreign taxable entity” can establish “nexus” with Texas for franchise tax purposes: (1) the date the entity establishes a physical presence in Texas[4]; (2) the date it acquires a Texas use tax permit[5]; or (3) the first day of the federal accounting period where it has over $500,000.00 in Texas gross receipts.[6]

It is worth remembering that while the new 34 TAC §3.586 sets an economic “nexus” threshold of $500,000.00, under Tex. Tax Code §171.002(d)(2) the no tax due threshold for franchise tax is $1,180,000.00 of gross receipts for 2020 and 2021.[7]  Therefore, it is possible that a taxable entity may be determined to have “nexus” with Texas because it has reached the $500,000.00 threshold, it won’t have any franchise tax liability because it has not passed the no tax threshold of $1,810,000.00.

 

 

For a consultation with Freeman Law, contact us at (214) 984-3410 or email us at info@freemanlaw.com.

 

[1] The proposed amendments were published in the September 27, 2019 issue of the Texas Register (44 TexReg 5478).

[2] See 34 TAC §3.586(f).

[3] See 34 TAC §3.586(b).

[4] See 34 TAC §3.586(d).

[5] See 34 TAC §3.586(e).

[6] See 34 TAC §3.586(f).

[7]  Tex. Tax Code §171.002(d)(2) references Tex. Tax Code §171.006(b) which discusses adjustments to the no tax threshold based on fluctuations in the consumer price index.  The Comptroller has provided guidance on the no tax threshold, setting the threshold for 2020 and 2021 at $1,810,000.00.  See https://comptroller.texas.gov/taxes/franchise/ .

 

State and Local Tax Services

Freeman Law works with tax clients across all industries, including manufacturing, services, technology, oil and gas, financial services, and real estate. State and local tax laws and rules are complex and vary from state to state. As states confront budgetary deficits due to declining tax revenues and increased government spending, tax authorities aggressively enforce state tax laws to recapture lost revenues.

At Freeman Law, our experienced attorneys regularly guide our clients through complex state and local tax issues—issues that are frequently changing as states seek to keep pace with technology and the evolution of business. Staying ahead requires sophisticated legal counsel dedicated to understanding the complex state tax issues that confront businesses and individuals. Schedule a consultation or call (214) 984-3410 to discuss your Local & State tax concerns and questions.

 

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