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Ezel / Tax Rulings / TX
TX 200311234L Franchise Tax (PRIOR TO 01/01/2008) 2003-11-21

Does an out-of-state corporation create Texas franchise tax nexus merely by hiring legal counsel to defend itself in Texas litigation?

Short answer: No. It is the Comptroller's policy that a corporation hiring legal counsel to defend itself in litigation in Texas does not create nexus for Texas franchise tax purposes. Here, an out-of-state corporation had guaranteed a subsidiary's loan (the subsidiary did business in Texas) but had no other Texas contact, and might hire counsel to defend litigation over that guarantee obligation - that defense alone does not create nexus. However, if the corporation engages in any of the other activities listed in Comptroller's Rules 3.546 and 3.554, it will have nexus and be subject to the Texas franchise tax.

Apply this to your situation

This page answers the general question as of 2003. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 2003
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is an official Texas Comptroller of Public Accounts letter published on the State Tax Automated Research (STAR) system. Letters on STAR can be the basis of a detrimental reliance claim only for the taxpayer to whom the letter was directly issued (see 34 Tex. Admin. Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. It describes the pre-2008 franchise tax (based on taxable capital and earned surplus), which the 2007 legislation (House Bill 3 and House Bill 3928) replaced with the current margin tax effective January 1, 2008; treat the holding as historical. Taxpayer-identifying details are redacted. This summary is informational only and is not legal or tax advice. Consult a licensed Texas tax professional about your specific situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page) is the authoritative source for any reliance.

Plain-English summary

An out-of-state corporation had guaranteed a loan for a subsidiary that did business in Texas, but had no other contact with Texas. It might now need to hire legal counsel to defend itself in litigation over its obligation under that guarantee, and asked whether doing so would create Texas franchise tax nexus.

The Comptroller answered no. It is the agency's policy that a corporation hiring legal counsel to defend itself in litigation in Texas does not create nexus for Texas franchise tax purposes.

The letter added the standard caveat: if the corporation engages in any of the other activities listed in Comptroller's Rules 3.546 and 3.554, it will have nexus and be subject to the franchise tax. So defending a lawsuit is a protected, non-nexus-creating activity by itself, but layering on other business activity can cross the line.

Currency note: This applies the pre-2008 franchise tax, replaced by the current margin tax (House Bills 3 and 3928) effective January 1, 2008. Treat as historical.

What this means for you

Out-of-state corporations facing Texas lawsuits

Merely defending yourself in Texas litigation - including hiring Texas counsel - was not, by itself, a nexus-creating activity. A corporation dragged into Texas court over a guarantee or similar obligation did not become subject to the franchise tax just for mounting a defense.

Guarantors of Texas-active subsidiaries

Guaranteeing a subsidiary's loan and then defending litigation about that guarantee did not, on these facts, give the parent Texas nexus. But the protection is narrow: any of the additional activities in Rules 3.546 and 3.554 would establish nexus.

Accountants and tax professionals

Treat litigation defense as a discrete, non-nexus activity, but re-test nexus whenever the corporation does anything beyond defending itself - the Rule 3.546/3.554 list is the operative checklist.

Common questions

Q: Does hiring a lawyer to defend a Texas lawsuit create franchise tax nexus?
A: No. Comptroller policy is that hiring legal counsel to defend itself in Texas litigation does not create nexus.

Q: The corporation guaranteed a Texas subsidiary's loan - does that change the answer?
A: Not on these facts, where the guarantee and the litigation defense were its only Texas connections.

Q: When would this corporation get nexus?
A: If it engages in any of the other activities listed in Comptroller's Rules 3.546 and 3.554.

Citations and references

Rules:

  • 34 Tex. Admin. Code Secs. 3.546, 3.554 (list of activities that create franchise tax nexus; defending litigation is not among them)

Source

Original ruling text

November 21, 2003

To: **

Dear **:

Thank you for your Tax Help inquiry regarding nexus for a corporation that may
hire legal counsel to defend itself in litigation.

You have indicated that a corporation has guaranteed a loan of a subsidiary
that was doing business in Texas, but the corporation has no other contact with
this state. Now the corporation may hire legal counsel to defend itself in
litigation relating to the obligation under the guarantee.

It is the policy of this agency that a corporation hiring legal counsel to
defend itself in litigation in Texas does not create nexus for Texas franchise
tax purposes.

However, if the corporation engages in any of those further activities listed
in Comptroller's Rules Sec. 3.546 and Sec. 3.554, the corporation will have
nexus and be subject to Texas franchise tax.

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

The rules mentioned above, as well as other materials related to Texas
franchise tax, are available online at
http://www.window.state.tx.us/taxinfo/franchise/index.html.

Our goal is to provide you with prompt, professional service. Please take a
moment to complete our online survey at
http://aixtcp.cpa.state.tx.us/surveys/tpsurv/.

If you need any additional information, please feel free to call me at
1.800.531.5441, extension 34629.

Sincerely,

Lowell Olsen Dunn
Tax Policy Division

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