Does a Georgia LLC owe Texas franchise tax if it only monitors Texas residents' health by phone from Georgia, and does needing a certificate of authority decide the question?

Plain-English summary

A Georgia LLC served the viatical / life-settlement industry by (1) preparing life-expectancy evaluations for people selling their own life insurance policies and (2) monitoring the health status of people who had sold their policies. It had no Texas property and no certificate of authority (COA), and asked: if its only Texas activity were monitoring Texas residents by phone from Georgia, would it need a COA and owe franchise tax?

• No COA means the test is "doing business." Under Sec. 171.001(a)(2), a foreign LLC is taxed if it does business in, is organized under, or is authorized (has a COA) to do business in Texas. Because this LLC had no COA, it owes franchise tax only if it is "doing business" in Texas.
• The COA question is a different agency's, and a different test. Whether the LLC must get a COA turns on "transacting business" under the Texas Limited Liability Company Act - a Secretary of State matter outside the Comptroller's province. And "transacting business" (for the COA) is not the same as "doing business" (for franchise tax); an LLC can be doing business for tax without transacting business for COA purposes.
• Applying the facts.
  • Employees/representatives in Texas working on the evaluations → the LLC is subject to the tax and must file the appropriate reports whether or not any tax is owed (Rules 3.546, 3.554).
  • No employees or representatives in Texas → not subject to franchise tax.
  • Future activity solely telephone monitoring of Texas residents from Georgia → that activity by itself is insufficient to subject the LLC to the franchise tax.
• Fact-based. The response rests on the information provided and current law; different facts could change it.

Currency note: This 2001 letter applies the pre-2008 franchise tax and its nexus rules (replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928). Texas has since adopted economic-nexus standards for the margin tax, so an out-of-state service provider's obligations may now differ; confirm current law.

What this means for you

Out-of-state service providers with only remote contact with Texas

Two lessons: first, needing (or not needing) a certificate of authority does not decide franchise tax - the COA is a separate Secretary of State question under a different ("transacting business") standard. Second, on these facts, purely telephone service to Texas residents from another state was not enough to create franchise-tax nexus under the old law - but putting employees or representatives on the ground in Texas would flip that and trigger a filing duty even with no tax due.

Tax professionals

The letter cleanly separates TLLCA "transacting business" (SOS/COA) from franchise "doing business" (Comptroller), and makes nexus turn on in-state people/activities rather than the mere presence of Texas customers. Note the strong caveat for the modern era: the margin tax's economic-nexus rules can now reach remote providers that this 2001 letter would not, so do not rely on the phone-only conclusion without checking current law.

Common questions

Q: If a Georgia LLC only monitors Texas residents by phone from Georgia, does it owe Texas franchise tax?
A: Under this 2001 letter, that activity by itself is insufficient to subject it to the franchise tax. (Modern economic-nexus rules may differ - confirm current law.)

Q: Does needing a certificate of authority determine franchise-tax liability?
A: No. The COA (a Secretary of State matter under the "transacting business" standard) is separate from and not the same as "doing business" for franchise tax.

Q: What would create franchise-tax nexus here?
A: Having employees or representatives in Texas carrying on activities related to the services - that makes the LLC subject to the tax and requires filing reports whether or not tax is owed.

Citations and references

Statutes and rules:

• Texas Tax Code Sec. 171.001(a)(2) - franchise tax on each LLC doing business in, organized under, or authorized to do business in Texas
• Texas Tax Code Sec. 171.151, Sec. 171.201, Sec. 171.202 - franchise tax reporting obligations
• 34 Tex. Admin. Code Sec. 3.546 (Rule 3.546, Taxable Capital: Nexus) and Sec. 3.554 (Rule 3.554, Earned Surplus: Nexus) - activities that constitute doing business
• 34 Tex. Admin. Code Sec. 3.544 (Rule 3.544) - franchise tax reports

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200102048L

Original ruling text

February 15, 2001

Dear **:

We respond to your letter concerning certain circumstances that you describe
which we restate, in relevant part, below.

You relate that ** (COMPANY) provides two kinds of services to the
viatical and life settlement industries. First, it provides life expectancy
evaluations for individuals selling their own life insurance policies. Second,
COMPANY provides monitoring services for individuals who have sold their life
insurance policies.

You also disclose that, during the last year, COMPANY provided two evaluations
to a Texas company concerning two individuals who are not Texas residents.
COMPANY also provided periodic monitoring services for non-Texas client
companies ascertaining the health status of 26 individuals who are Texas
residents. The foregoing monitoring services were done entirely through
periodic phone calls from its facility in Georgia.

Specifically, you ask: "If our sole service provided in . . . Texas was the
periodic monitoring of Texas residents from our facility in Georgia, would
[COMPANY] be required to obtain a certificate of authority and file franchise
taxes?"

For purposes of the remainder of this letter, we assume COMPANY has no property
in Texas.

We understand that COMPANY is a limited liability company (LLC) organized under
Georgia law. Texas Tax Code (TTC) Section 171.001(a)(2) provides: "A franchise
tax is imposed on 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." Therefore, since COMPANY presently does not have a
certificate of authority (COA), it is subject to franchise tax only if it is
"doing business" in Texas.

Before considering whether the above-described activities subject COMPANY to
franchise tax, we address the matter of a COA.

The Texas Limited Liability Company Act (TLLCA) requires a foreign LLC to
obtain a COA from the Secretary of State (SOS) before "transacting business" in
Texas. The SOS is a state agency separate and distinct from this agency.
Section VII of the SOS "Filing Guide for Business Organizations and Nonprofit
Associations" discusses the meaning of the term "transacting business" as used
in the TLLCA. You may access the Filing Guide through the SOS website at
www.sos.state.tx.us/corp/.

Clearly, whether a foreign LLC is "transacting business" in Texas within the
meaning of the TLLCA and, therefore, must obtain a COA from the SOS, is a
matter that is outside this agency's province.

More important, the term "transacting business" as used in the TLLCA and the
term "doing business" for franchise tax are not identical in meaning. An LLC
may be "doing business" in Texas for purposes of taxation, but not considered
"transacting business" for purposes of qualification under the TLLCA.

If the two activities that you describe are COMPANY'S only activities, it
apparently is solely a service provider. As Franchise Tax Rules 3.546 and
3.554 reveal, if COMPANY had employees or representatives in Texas carrying on
activities relative to preparing or providing the life expectancy evaluations,
it is subject to the tax. In that event, COMPANY must file the appropriate
franchise tax reports regardless of whether it owes any tax. TTC Sections
171.151, 171.201 and 171.202; Franchise Tax Rule 3.544.

Conversely, if COMPANY had no employees or representatives in Texas, it is not
subject to franchise tax.

If COMPANY'S future activities consist solely of monitoring the health status
of Texas residents exclusively by telephone from its facility in Georgia, that
activity is, in itself, insufficient to subject it to the franchise tax.

The information provided by you and current franchise tax law form the basis
for this response. Different or additional information may result in a
different response.

If you have any questions, please call me toll free at 1-800-531-5441,
extension 3-4931, or directly at 512/463-4931.

Sincerely yours,

William E. York
Tax Policy Division

cc: Edna Hunter - Account Maintenance