Does using a Texas-based stockbroker to trade for an out-of-state limited partnership create Texas franchise-tax nexus for the partnership's foreign corporate general partner?

Plain-English summary

A foreign corporation was the general partner of a foreign limited partnership that does no business in Texas. The partnership wanted to trade its brokerage account through a stockbroker at a Texas branch of a national brokerage firm. The taxpayer asked: does that create Texas franchise-tax nexus; are the trading gains subject to franchise tax; and does it matter whether a broker is used or the trading is done online through a Texas-branch account?

The Comptroller explained the framework and gave a clear answer:

• Who is taxed. Texas franchise tax is imposed on each corporation and LLC that does business in Texas (Tex. Tax Code § 171.001). Partnerships and sole proprietorships are not subject to the tax.
• Corporate partners. A foreign corporation or LLC acting as the general partner of a partnership doing business in Texas is subject to the tax; a foreign corporation acting only as a limited partner is not, absent other Texas activity (Rule 3.546(c)(12)).
• Is the stockbroker "doing business" for the partnership? The phrase "does business in this state" is defined in Rules 3.546 (Taxable Capital: Nexus) and 3.554 (Earned Surplus: Nexus). The Comptroller held that the stockbroker's activity in Texas will not constitute "doing business" for the partnership as long as the stockbroker does not represent the limited partnership in dealing with the limited partnership's customers.
• Result. On these facts the partnership is not doing business in Texas, so the foreign corporate general partner is not subject to Texas franchise tax — and it makes no difference whether a broker is used or the trading is done online.

Important currency note: This 2000 letter reflects the franchise tax before the 2008 overhaul into the current margin tax; STAR marks it partially superseded on the taxation of partnerships (which are now generally taxable entities). Treat the entity-level conclusion as historical and confirm current nexus rules.

What this means for you

Out-of-state investors trading through Texas brokers

Merely routing trades through a Texas-located broker did not, by itself, drag an out-of-state partnership (or its corporate general partner) into Texas franchise tax. The dividing line the Comptroller drew was whether the broker represents the partnership with its customers — a pure investment/trading presence was not "doing business." The medium (human broker vs. online) did not matter.

Corporate general partners

The recurring pre-2008 rule appears again: a corporation acting as general partner of a Texas-active partnership is taxable, while a foreign limited partner with no other Texas activity is not. Here, because the partnership was found not to be doing business in Texas, even the general partner escaped.

Accountants and tax professionals

The holding turns on the narrow "does business in this state" definitions in Rules 3.546 and 3.554 and on the broker not acting as the partnership's customer-facing representative. This is a pre-2008 nexus conclusion; re-verify under the current margin tax and its nexus standards.

Common questions

Q: Does trading through a Texas-branch stockbroker create Texas franchise-tax nexus?
A: Not on these facts. The Comptroller said the broker's Texas activity is not "doing business" for the partnership as long as the broker does not represent the partnership in dealing with its customers.

Q: Were the trading gains subject to Texas franchise tax?
A: No — because the partnership was not doing business in Texas, its foreign corporate general partner was not subject to the tax on these facts.

Q: Does it matter whether a broker or online trading is used?
A: No. The Comptroller said it makes no difference on these facts.

Citations and references

Statutes and rules:

• Tex. Tax Code § 171.001 (franchise tax on corporations and LLCs doing business in Texas)
• Franchise Tax Rule 3.546 (Taxable Capital: Nexus); Rule 3.546(c)(12) (corporate partner nexus)
• Franchise Tax Rule 3.554 (Earned Surplus: Nexus)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200004345L

Original ruling text

STAR SUPERSED INFORMATION
Accession No. —
Supersede type - Partial
Document superseded on - 12/10/14
Issue(s) that caused the document to be superseded — Taxation of partnerships
Reason(s): The Franchise Tax Code was amended by House Bill 3 and House Bill 3928,
Acts 2007, 80th Legislative Session, effective January 1, 2008 and affected Franchise
tax reports due on or after January 1, 2008. One of the many changes to this Tax Code
subjected partnerships (previously not required to file) to the franchise tax reporting
requirement.

April 13, 2000

To: **

Dear **:

Thank you for your e-mail regarding the Texas franchise tax responsibility of a
foreign corporation.

You stated in your e-mail that a foreign corporation is a general partner in a
foreign limited partnership. . The partnership is not conducting business in
Texas. However, the partnership wants to use the services of a stockbroker who
is located in a Texas branch of a national brokerage firm to do trading in the
brokerage account for the limited partnership. You asked if this activity
constitutes doing business in Texas and if the gains made through the Texas
branch for the out-of-state limited partnership are subject to Texas franchise
tax? You also asked if it would make any difference whether a broker is used
or whether the trading is done online over the internet with an account number
from a Texas branch?

As you know, Texas Tax Code (TTC) Section 171.001 states that a franchise tax
is imposed on "each corporation that does business in this state or that is
chartered or authorized to do business in this state, and each limited
liability company that does business in this state or that is organized under
the laws of this state or is authorized to do business in this state."
Partnerships and sole proprietorships are not subject to the Texas franchise
tax.

However, a foreign corporation or limited liability company acting as the
general partner in a partnership, which is doing business in Texas, will be
subject to the tax. A foreign corporation acting as a limited partner in a
limited partnership is not subject to the franchise tax if it has no other
activities in Texas which would subject it to Texas franchise tax. See Rule
3.546(c)(12) [Taxable Capital: Nexus].

The phrase "does business in this state" is defined in franchise tax Rules
3.546, Taxable Capital: Nexus, and 3.554, Earned Surplus: Nexus. The activity
of the stockbroker in Texas will not constitute "doing business" as long as the
stockbroker does not represent the limited partnership in dealing with the
limited partnership's customers, if any. Therefore, the foreign corporation
will not be subject to the Texas franchise tax.

The statutory cite and rule mentioned above may be viewed via the Comptroller's
Window on State Government at . Click on the heading
"Texas Taxes" and you'll find a heading for "the Franchise Tax." Once you are
on "the Franchise Tax" page, you'll find links to "Chapter 171" and "Franchise
Tax Rules."

This response is based on current law and the facts presented. If there are
different or additional facts, the response may change.

If you have any questions about this or any other franchise tax matter, you may
call me at 1-800-531-5441, extension 3-4612, or e-mail me at the address below.

Sincerely,

Janet Spies
[email protected]
Comptroller of Public Accounts