After the Bandag decision, does a foreign corporation's Certificate of Authority to do business in Texas, by itself, create franchise-tax nexus?

Plain-English summary

A representative asked whether an out-of-state client had franchise-tax nexus in Texas. The answer changed because of a court decision.

• The facts. The client was incorporated in North Carolina, commercially domiciled in Georgia, and sold prepaid calling cards to retailers nationwide, shipped by common carrier. Some retailers were in Texas, but they were independent - not franchisees, joint-venturers, employees, or agents, and had no authority to bind the client. The client had no Texas offices, property, employees, or salespeople - but it did hold a Certificate of Authority (COA) to transact business in Texas.
• The old rule. The Comptroller had historically read Tax Code Sec. 171.001(a) to make holding a COA by itself sufficient nexus for the franchise tax.
• Bandag changed it. In Rylander v. Bandag Licensing Corp., 18 S.W.3d 296 (Tex. App. - Austin 2001, pet. denied), the courts invalidated that statutory basis; the State exhausted its appeals and the decision is final.
• The result. Applying Bandag, the client does not have nexus in Texas and is not responsible for filing Texas franchise-tax reports.

Currency note: This applies the pre-2008 franchise tax and the law as of 2001. The franchise tax was replaced by the margin tax effective January 1, 2008 (House Bills 3 and 3928), and later legislation and cases (including economic-nexus rules) have reshaped when an out-of-state entity must file; confirm current nexus law.

What this means for you

Out-of-state companies with only a Texas registration

After Bandag, simply registering to do business in Texas (holding a COA) no longer, by itself, forced you to pay the franchise tax. Nexus turned on actual contacts - offices, property, employees, agents - not the registration alone. A company like this one, with only independent Texas retailers and no physical presence, was outside the tax at the time.

Tax professionals

This letter is a useful marker of the post-Bandag nexus position: the COA-as-nexus theory under Sec. 171.001(a) was struck down, so evaluate franchise nexus on physical/agency contacts as of that era. Do not carry this forward uncritically - the margin tax and modern economic-nexus standards have since expanded filing obligations, so a present-day client with the same facts could reach a different result.

Common questions

Q: Does holding a Texas Certificate of Authority create franchise-tax nexus?
A: Not after Bandag. The court invalidated the COA-as-nexus basis, so a COA alone no longer established nexus.

Q: Why did the client have no nexus?
A: It had no Texas offices, property, employees, or salespeople, and its Texas retailers were independent - not agents - so, post-Bandag, there was no nexus.

Q: Can I rely on this today?
A: Treat it as historical. The margin tax and later economic-nexus rules have changed franchise-tax filing obligations; confirm current law.

Citations and references

Statute and case:

• Texas Tax Code Sec. 171.001(a) - franchise tax on corporations; the provision that had treated a Certificate of Authority as sufficient nexus
• Rylander v. Bandag Licensing Corp., 18 S.W.3d 296 (Tex. App. - Austin 2001, pet. denied) - invalidated the Certificate-of-Authority basis for franchise-tax 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/200106294L

Original ruling text

June 15, 2001

RE: **

Dear Mr. **:

Thank you for your letter regarding the nexus of your client. I apologize for
the delay in responding to your inquiry, however, we were waiting on a final
decision in the court case discussed below.

You stated in your letter that your client, incorporated in North Carolina and
commercially domiciled in Georgia, provides telecommunication services with
relation to prepaid calling cards. The client sells the prepaid cards to
retailers throughout the country. The cards are delivered to out of state
retailers via common carrier. The retailers, some of whom are located in
Texas, then sell the cards to other retailers, who in turn sell them to the
general public. The retailers are not franchisees, joint venture partners,
employees, or agents of the client, but rather operate independent of the
client. They do not exclusively market the client's calling cards, nor do they
have nay authority to bind the client to any obligation. The client maintains
no offices, does not own any property in Texas, has no employees in Texas, nor
does it have any salespeople visit Texas. The client does, however, have a
Certificate of Authority to transact business in Texas.

Until a recent decision, this office followed Texas Tax Code Section 171.001(a)
and considered the holding of a Certificate of Authority (COA) to be sufficient
nexus to subject a foreign corporation to the franchise tax. However, in
Rylander v. Bandag Licensing Corp., 18 S. W. 3d 296 (Tex. App. - Austin, 2001,
pet. denied), the Texas courts invalidated this statutory provision. The state
has exhausted the appeals process and the decision is now final.

Based on the information you provided concerning the corporation's activities
and the recent decision in Bandag, your client does not have nexus in Texas and
is not responsible for filing Texas franchise tax reports.

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

If you have questions about this, my internet address is
, or you may call toll-free at 1-800-531-5441,
extension 3-4612.

Sincerely,

Janet Spies
Tax Policy Division
Texas State Comptroller