For the franchise-tax throwback rule on partnership sales, do you look at whether the corporation or the partnership is taxable in the destination state, and does general- versus limited-partner status matter?

Plain-English summary

A corporation with partnership investments asked how the throwback rule applies to gross receipts from partnership sales - specifically, whether you test the corporation or the partnership for taxability in the destination state.

• Test the corporation, not the partnership. In deciding whether the seller is subject to taxation in another state, the Comptroller looks at whether the corporation (not the partnership) is subject to tax in the state of delivery.
• Taxable capital: no nexus -> thrown back. If the corporation has no nexus in the delivery state, the sales are thrown back as Texas receipts.
• Earned surplus: no net-income tax -> thrown back. If the corporation is not subject to any tax on or measured by net income (regardless of whether such a tax exists in the delivery state), the sales are thrown back as Texas receipts for earned-surplus reporting.
• General vs. limited partner matters. A corporation acting as a general partner in a partnership with nexus in the delivery state is considered subject to tax there (so no throwback). But a corporation acting as a limited partner in a limited partnership with nexus in the delivery state is not considered subject to tax there (so throwback can apply).
• Rules. See Franchise Tax Rules 3.549(e)(41)(I) (taxable capital) and 3.557(e)(37)(I) (earned surplus).

Currency note: This 2000 letter applies the pre-2008 franchise tax's two-component throwback rules (replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928). The margin tax apportions receipts differently; confirm current law.

What this means for you

Corporations investing through partnerships

Whether your out-of-state partnership sales got thrown back to Texas turned on your (the corporation's) taxability in the destination state, not the partnership's - and your role in the partnership was decisive. As a general partner you inherited the partnership's nexus (avoiding throwback); as a limited partner you did not, so those sales could be thrown back to Texas and increase your Texas receipts.

Tax professionals

Two-track test: taxable capital keys on nexus, earned surplus on a net-income tax. And the GP/LP distinction is the operative lever - a corporate LP does not pick up the LP's destination-state taxability, so partnership sales can be thrown back. Cite Rules 3.549(e)(41)(I) / 3.557(e)(37)(I). All pre-2008; re-verify under the margin tax.

Common questions

Q: For partnership sales, do I test the corporation or the partnership for destination-state taxability?
A: The corporation. Texas looks at whether the corporate partner - not the partnership - is subject to tax in the state of delivery.

Q: Does it matter if I'm a general or limited partner?
A: Yes. A corporate general partner in a partnership with nexus in the delivery state is subject to tax there; a corporate limited partner in a limited partnership with nexus there is not.

Q: When are the sales thrown back to Texas?
A: For taxable capital, when the corporation has no nexus in the delivery state; for earned surplus, when the corporation is not subject to any net-income-based tax.

Citations and references

Rules:

• 34 Tex. Admin. Code Sec. 3.549(e)(41)(I) (Franchise Tax Rule 3.549) - throwback provision for taxable capital
• 34 Tex. Admin. Code Sec. 3.557(e)(37)(I) (Franchise Tax Rule 3.557) - throwback provision for earned surplus

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200005299L

Original ruling text

May 12, 2000

Email:

Dear **:

Thank you for the follow-up inquiry concerning the throwback rule in the
computation of gross receipts from partnership sales. In determining whether
the seller is subject to taxation in another state for taxable capital
purposes, we look at whether the corporation (rather than the partnership) is
subject to taxation in the state of delivery. If the corporation does not have
nexus in that state, the sales will be thrown back as Texas receipts. If the
corporation (rather than the partnership) is not subject to any tax on or
measured by, net income, without regard to whether the tax is imposed in the
state of delivery, the sales would be thrown back as Texas receipts for earned
surplus reporting.

Please keep in mind that a corporation that acts as a general partner, in a
partnership that has nexus in the state of delivery, will be considered to be
subject to taxation in that state. However, a corporation acting as a limited
partner, in a limited partnership that has nexus in the state of delivery, is
not considered to be subject to taxation in that state.

For more information about the application of the throwback provision, please
see Franchise Tax Rules 3.549(e)(41)(I) and 3.557(e)(37)(I).

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

If you have any questions, my internet address is
[email protected], or you may call toll free at 1-800-531-5441,
extension 3-4496.

Sincerely,

Jerry Bobbitt
Tax Policy Division

Dear Mr. Bobbitt:

As for our understanding, when we calculate Franchise Tax, there are two
methods we can choose, Net Profit method and Gross receipts method. For Income
tax, only gross receipts profit method is allowed. Our company have several
partnership investments and when we try to apply throw back rule in calculating
gross receipts we got two questions:

Q1. For Franchise tax ,when we calculate gross receipts for the partnership
sales, should we throw back those sales in states where our company did not
have salesmen visited or throw back those sales in states where our partnership
did not have salesmen visited?

Q2. For Income tax , when we calculate gross receipts for the partnership
sales, should we throw back those sales in states where our company did not pay
income tax or throw back those sales in states where our partnership did not
pay income tax?

Please email me the relevant regulations for the answers to back up our state
return calculation. Your prompt reply will be appreciated.