For Texas franchise tax, are receipts from goods shipped from Texas to the U.S. government thrown back to Texas, and does it matter that the buyer is the federal government?

Plain-English summary

A seller asked whether gross receipts from goods shipped from Texas to the U.S. government are "thrown back" to Texas for the (pre-2008) Texas franchise tax. The Comptroller explained that the throwback rule looks at the state where the goods are delivered - and the fact that the buyer is the federal government does not change the analysis.

• The core rule. Sales of tangible personal property (TPP) shipped from Texas to a purchaser in another state are thrown back to Texas - and treated as Texas gross receipts - only if the seller is not subject to taxation in that other (destination) state (Rules 3.549(e)(41)(I) and 3.557(e)(37)(I)).
• "Subject to taxation" is a nexus test, not a payment test. The seller does not have to actually pay tax in the other state. It only needs enough contact that the other state could tax it. For taxable capital, that means constitutional nexus (e.g., doing business or incorporated there). For earned surplus, it means the corporation is chartered there or has enough contact that a net-income tax could be imposed without violating Public Law 86-272.
• "Another state" includes a U.S. state, the District of Columbia, Puerto Rico, or any U.S. territory or possession.
• Federal enclaves in Texas. Receipts from sales, services, leases, or other business activities transacted on a federal enclave located in Texas are Texas receipts unless otherwise excepted (Rules 3.549(e)(17) and 3.557(e)(15)).

So the identity of the buyer (here, the U.S. government) is not what matters; what matters is the delivery state and whether the seller is taxable there.

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

What this means for you

Texas manufacturers and distributors shipping out of state

Whether an out-of-state sale got thrown back to Texas depended on your own tax footprint in the destination state, not on who the customer was. If you had enough presence in the destination state that it could tax you, the sale stayed out of Texas receipts; if you had no such presence, the receipt was thrown back and counted as a Texas receipt.

Sellers to the federal government

Selling to the U.S. government did not give you a throwback exemption. The rule tracks the delivery state. And if the transaction happened on a federal enclave inside Texas, the receipts were Texas receipts.

Accountants and tax professionals

Apply the throwback test destination-state by destination-state, using the correct nexus standard for each component: constitutional nexus for taxable capital, P.L. 86-272-consistent net-income nexus for earned surplus. Actual tax paid elsewhere is not the test - taxability is.

Common questions

Q: Are sales to the U.S. government exempt from Texas throwback?
A: No. The throwback rule applies to the state the goods are delivered to; the buyer being the federal government does not matter.

Q: When is a Texas-origin sale thrown back to Texas?
A: When the seller is not subject to taxation in the state the goods are delivered to - meaning the seller lacks enough contact there for that state to tax it.

Q: Do I have to actually pay tax in the other state to avoid throwback?
A: No. You only need enough contact (nexus) that the other state could tax you.

Q: What about business done on a federal enclave in Texas?
A: Those receipts are Texas receipts under Rules 3.549(e)(17) and 3.557(e)(15).

Citations and references

Rules and authorities:

• 34 Tex. Admin. Code Secs. 3.549(e)(41)(I), 3.557(e)(37)(I) (throwback rule for taxable capital and earned surplus)
• 34 Tex. Admin. Code Secs. 3.549(e)(17), 3.557(e)(15) (receipts transacted on a federal enclave in Texas are Texas receipts)
• Public Law 86-272 (net-income tax nexus threshold applied to 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/200312302L

Original ruling text

December 12, 2003

To: **

Dear **:

Thank you for your Tax Help inquiry concerning apportionment of gross receipts
for Texas franchise tax. You asked if gross receipts from the sale of goods
shipped from Texas to the U.S. government are thrown back to Texas.

Franchise Tax Rules 3.549(e)(41)(I) and 3.557(e)(37)(I) state that the
throwback rules for taxable capital and earned surplus apply only to sales of
tangible personal property (TPP) shipped from Texas to a purchaser in another
state in which the seller is not subject to taxation. If the receipt from a
sale is thrown back to Texas it will be treated as a Texas gross receipt.

For taxable capital, subject to taxation means constitutional nexus. The
seller does not need to pay tax to the other state. The seller only has to
have enough contact with the other state so that the other state could tax the
seller. If the seller is doing business or is incorporated in the other state,
the seller is subject to taxation in that state. Sales of TPP shipped from
Texas to a purchaser in a state in which the seller is subject to taxation will
not be thrown back to Texas.

For earned surplus, a corporation is subject to taxation in another state if
the corporation is chartered in that state or has sufficient contact with that
state so that a tax on net income could be imposed on the corporation without
violating Public Law (PL) 86-272.

Another state, for both taxable capital and earned surplus, means a state of
the United States, the District of Columbia, Puerto Rico, or any territory or
possession of the United States. The throwback rule applies to the state that
the TPP is delivered to. It does not matter that the purchaser is the U.S.
government.

Rules 3.549(e)(17) and 3.557(e)(15) state that all receipts from a
corporation's sales, services, leases, or other business activities that are
transacted on a federal enclave located in Texas are Texas receipts unless
otherwise excepted.

The rules mentioned above are available via the Comptroller's website at
www.window.state.tx.us. From the home page, click on the link to "Texas
Taxes," then on the link to "Taxes and Fees - Franchise." Click on the link
for "Rules."

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

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

If you have questions about this, my Internet address is
[email protected], or you may call toll free at 1-800-531-5441,
extension 31374.

Sincerely,

Laurie Massengale
Tax Policy Division