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.
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[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 Texas Comptroller, Franchise Tax.
