Can a Texas manufacturer amend its franchise-tax reports to remove throwback based on the Home Interiors decision, and how will the refund be handled?

Plain-English summary

A Texas manufacturer of heavy-equipment trailers wholesaled and shipped trailers to equipment dealers nationwide. Washington asserted its Business & Occupation tax on the company because of consigned inventory there. For four years the company had apportioned 100% of its gross receipts to Texas under the earned-surplus throwback rule. It asked about amending those reports after a recent court case.

The Comptroller advised:

• All the company's sales were subject to throwback. Title transferred to the dealer on or before delivery outside Texas, and the company had no inventory in another state that would create nexus there. So under the throwback provision (Rule 3.557(e)(37)(I)), all sales not delivered in Texas were thrown back to Texas.
• Amending based on Home Interiors. If the company amends its reports based on the Home Interiors decision (which challenged the constitutionality of throwback in that situation), it should attach all supporting documentation. The refund request will be denied, and the company must then request a refund hearing. That request will be held in hearings, with similar requests from other entities, until the final appeal in Home Interiors is completed.

Important currency note: This letter reflects the pre-2008 franchise tax and a refund posture that was pending the Home Interiors & Gifts v. Strayhorn appeal (later resolved by the Texas Supreme Court, which changed the earned-surplus throwback treatment of PL 86-272-protected sales). The 2007 legislation (House Bills 3 and 3928) then replaced the tax with the current margin tax. Treat both the mechanics and the procedure as historical.

What this means for you

Manufacturers and wholesalers that threw sales back to Texas

If, for open pre-2008 years, you apportioned everything to Texas under throwback, a Home Interiors-based amendment was possible — but the Comptroller told taxpayers up front the refund would be denied and parked in hearings until the case's final appeal. Preserve documentation and expect a wait.

Accountants and tax professionals

Note the procedure: amend, expect denial, request a refund hearing, and be held pending the lead case. For the substantive change the case ultimately produced, see the Comptroller's later earned-surplus throwback audit-policy guidance. Re-verify under current law.

Common questions

Q: Were all of the manufacturer's sales thrown back to Texas?
A: Yes — title passed to dealers on or before out-of-state delivery and it had no nexus-creating inventory elsewhere, so all non-Texas-delivered sales were thrown back under Rule 3.557(e)(37)(I).

Q: What happens to a Home Interiors-based refund claim?
A: The refund is denied; the taxpayer must request a refund hearing, which is held with similar claims until the final appeal in Home Interiors is completed.

Citations and references

Statutes and rules:

• Franchise Tax Rule 3.557(e)(37)(I) (earned-surplus throwback of sales not delivered in Texas)

Case: Home Interiors & Gifts, Inc. v. Strayhorn (throwback constitutionality).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200509289L

Original ruling text

September 28, 2005

To: **

Dear **:

Thank you for your Tax Help inquiry concerning Texas franchise tax. You state
that C, a manufacturer of heavy equipment trailers, is located in Texas.
Trailers are wholesaled and shipped to equipment dealers throughout the country
where they are sold to end users. The state of Washington has asserted that C
is subject to the Business and Occupation tax since it has consigned inventory
in the state. For four years, C has paid Texas franchise tax and has
apportioned 100% of its gross receipts to Texas due to the throwback rule. A
representative of the Comptroller’s Office indicated that, based upon a recent
court case, C may have overpaid its franchise tax liability. Consequently, you
are considering amendment of C’s franchise tax reports.

During our telephone conversation of September 16, 2005, it was determined that
all of C’s sales are subject to throwback. Each sale occurs between C and an
equipment dealer. Title transfers to the equipment dealer on or before
delivery of the equipment outside of Texas. Consequently, C does not have
inventory in any state other than Texas that would create nexus in another
state. Under the current throwback provision, all of C’s sales not delivered
in Texas are to be thrown back to Texas. See Franchise Tax Rule
3.557(e)(37)(I).

If you decide to file amended franchise tax reports for C based upon the recent
Home Interiors decision concerning the unconstitutionality of throwback in that
situation, all supporting documentation should be attached to your request.
The refund request will be denied. C will then need to properly request a
refund hearing. C’s request will be held in hearings, along with similar
requests from other entities, until the final appeal on the Home Interiors case
is completed.

The rule mentioned above is 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 email address is
[email protected], or you may call toll free at 1-800-531-5441,
extension 31374.

Sincerely,

Laurie Massengale
Tax Policy Division