Does an out-of-state video-game company create Texas sales-tax and franchise-tax nexus by sending employees to plan and host a one-time esports tournament in Texas?

Plain-English summary

A Delaware-based video-game company and several of its subsidiaries planned a one-time esports tournament in a Texas city. None of them had offices or employees in Texas, but the plan called for employees to visit Texas twice before the event (an initial venue-assessment trip six to twelve months out, then a detailed walk-through three to six months out) and then to staff the tournament itself. The company asked the Comptroller when — and for how long — these activities would create Texas tax nexus for both sales/use tax and franchise tax.

The Comptroller ruled that nexus attaches as soon as employees first set foot in Texas for planning purposes — for the parent company, nexus had actually already started earlier, from the date it first licensed its game (a taxable "computer program") to Texas users, because it retained property rights in a computer program present in the state. Two subsidiaries got nexus from their first planning visit; a third subsidiary that only showed up for the second visit got nexus from that later date. Each entity is responsible for collecting sales/use tax only on its own sales in Texas, and each keeps nexus (for both sales/use tax and franchise tax) until its employees leave and any leftover merchandise is shipped out of the state — there's no fixed "grace period," and simply not planning a return visit doesn't end nexus on its own.

This is a physical-presence-nexus ruling issued in September 2018, three months after South Dakota v. Wayfair (June 2018) but before Texas actually adopted its post-Wayfair economic-nexus rules. The ruling itself flags that the Comptroller intended to adopt new rules in early 2019 to implement Wayfair — which it did: Rule 3.286 (sales/use tax) was amended effective January 1, 2019, and Rule 3.586 (franchise tax) was amended effective December 29, 2019, both adding an economic-presence test. Today, an out-of-state business can owe Texas tax based on sales/revenue thresholds alone, with no employee visits or property in the state at all — so this ruling's "how much physical presence is enough" analysis is now only half the picture.

What this means for you

Out-of-state event organizers, esports/gaming companies, and their vendors

A single planning trip by even one employee can create Texas nexus starting that day — there's no minimum-visits or minimum-days threshold under the physical-presence test described here. If you're staging a one-off event in Texas, expect sales/use tax collection duties on your event sales and franchise-tax filing duties for that year, starting from your first foot-on-the-ground planning visit.

Corporate groups with subsidiaries operating separately in Texas

Nexus is tested entity-by-entity: a subsidiary that never sends anyone to Texas doesn't inherit nexus just because its parent or an affiliate does business there. But once several affiliated entities do have nexus, watch the franchise-tax combined-reporting rule — an affiliated group engaged in a unitary business must file one combined report that includes every eligible entity, even members that individually lack Texas nexus.

Anyone relying on this ruling for a "how much presence creates nexus" answer today

Read this ruling as history, not current law, for the "am I engaged in business in Texas" question. Since 2019, Texas also imposes economic-nexus thresholds under revised Rules 3.286 and 3.586 — a business with enough Texas sales or revenue can owe sales/use tax and franchise tax with zero physical presence. This ruling's physical-presence analysis still matters (it hasn't been repealed and can still create nexus on its own), but it no longer tells the whole nexus story.

Common questions

Q: If my company only sends employees to Texas for planning meetings, not sales, do we have nexus?
A: Under this ruling's physical-presence test, yes — engaging in business activities in Texas, including negotiating with a venue and assessing its capabilities, is enough to create nexus for sales/use tax and franchise tax, even with no sales made during those visits.

Q: How long does nexus last after a one-time event ends?
A: There's no fixed period. Nexus continues as long as the business has people or property (like leftover merchandise) in Texas, or, for franchise tax, until it no longer has sufficient contact with the state. Once employees leave and property is removed, nexus ends and the business may deregister.

Q: Does the parent company's nexus automatically extend to its subsidiaries?
A: No — this ruling specifically holds that a subsidiary is not considered engaged in business in Texas just because its parent is; each entity's own activities are tested separately.

Q: Is the physical-presence analysis in this ruling still the law today?
A: It still applies, but it's incomplete on its own. Since 2019, Texas also has an economic-nexus test (adopted after South Dakota v. Wayfair) that can create nexus based on sales/revenue alone, with no physical presence required — see the disclaimer above.

Citations and references

Statutes, rules, and cases:

• Tex. Tax Code § 151.051 (Sales Tax Imposed); § 151.107(a) (Retailer Engaged in Business in this State)
• 34 Tex. Admin. Code Rule 3.286 (Seller's and Purchaser's Responsibilities, incl. Nexus)
• Tex. Tax Code § 151.052, § 151.103 (Collection by Retailer)
• Tex. Tax Code § 151.009 ("Tangible Personal Property"); § 151.0031 ("Computer Program")
• 34 Tex. Admin. Code Rule 3.586 (Margin: Nexus); Rule 3.584 (Margin: Reports and Payments); Rule 3.590 (Margin: Combined Reporting)
• Tex. Tax Code § 171.0001 (General Definitions); § 171.0011 (Additional Tax); § 171.1014 (Combined Reporting)
• Quill Corp. v. North Dakota, 504 U.S. 298 (1992) (superseded physical-presence-only standard)
• South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018) (basis for the Comptroller's later economic-nexus rules)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201809025L

Original ruling text

Note: This document is also indexed as a franchise tax document as STAR 201809026L.

ALERT: Effective 12/29/2019, Rule 3.586 (relating to nexus for franchise tax purposes) was amended to include an economic presence test in this state in response to the United States Supreme Court decision in South Dakota v. Wayfair, Inc., 139 S. Ct. 2080 (2018).

ALERT: Effective 01/01/2019, Rule 3.286 (relating to Seller's and Purchaser's Responsibilities) was amended in response to the United States Supreme Court decision in South Dakota v. Wayfair, Inc., 139 S. Ct. 2080 (2018). See 3.286(a)(4)(J) and (b)(2)(A) concerning online sales.

September 7, 2018

RE: Private Letter Ruling No. 20180228152433

**, et al., EIN **

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[1] We are responding to your request dated Feb. 26, 2018, and your supplemental submission dated May 1, 2018. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You asked whether a group of out-of-state entities’ activities related to planning and hosting a multiplayer online game tournament in Texas creates nexus with this state for sales and use tax or franchise tax purposes.

Facts Presented

** (Taxpayer), is a Delaware corporation based in CITY A, California. Taxpayer owns and operates multiple subsidiary entities in the United States, including COMPANY A, COMPANY B, and COMPANY C (referred to collectively as “Subsidiaries”). Neither Taxpayer nor its subsidiaries have offices or employees currently located in Texas.

Taxpayer is a gaming company that develops and licenses to users a free-to-play multiplayer online game. Taxpayer sells **, a virtual currency used to purchase various artistic customizations for in-game characters. The virtual customizations take the form of “skins” and “boosts” for in-game characters. Taxpayer and COMPANY A host eSports tournaments featuring its game, which offer professional eSports players a chance to compete and win small monetary prizes. Taxpayer is contemplating hosting an eSports tournament and exposition in CITY B, Texas.

In preparation for the event, Taxpayer, COMPANY A, and COMPANY B will send employees to Texas for an initial planning visit. This first visit will occur approximately six to twelve months before the anticipated event and will include an initial meeting with venue staff and a technical and operational assessment of the venue to understand its capabilities. This visit is to confirm that the venue broadly meets Taxpayer’s needs.

If Taxpayer and Subsidiaries determine that the venue meets their needs, employees from Taxpayer, COMPANY A, and COMPANY B will return to Texas for a second visit. Employees from COMPANY C will also visit Texas on this trip, which will occur approximately three to six months before the event. During the trip, Taxpayer’s and Subsidiaries’ employees will test the detailed event plan, developed based on information gathered during the first visit, against the physical space at the venue.

While Taxpayer’s and Subsidiaries’ employees will not take orders for their products during either planning trip, the employees may introduce and discuss their products with venue representatives, event vendors, and sponsors. After the planning visits, but before the event, Taxpayer will also ship event merchandise to the venue for storage.

During the tournament, Taxpayer, COMPANY B, and COMPANY C will have employees in Texas to oversee the actual competition and related activities. Following the event, any unsold merchandise will remain at the venue until it is shipped to Taxpayer or Subsidiaries at a location outside Texas.

Taxpayer states that the tournament will be an isolated event in Texas facilitated by employees of Taxpayer, COMPANY B, COMPANY C, and COMPANY A. Taxpayer and Subsidiaries are not hosting other events or conducting any other business in Texas. Taxpayer and Subsidiaries have no plans to return systematically to Texas following the tournament.

Sales and Use Tax Questions, Rulings, and Analysis

Our restatement of your questions is shown below, followed by our responses and analysis.

Question One: Will Taxpayer and Subsidiaries be considered to be “engaged in business” in Texas when its employees first enter the State of Texas for pre-event planning activities?

Ruling One: Taxpayer is considered to be engaged in business in Texas from the date it first licensed the game to Texas users. COMPANY A, and COMPANY B will be considered to be engaged in business in Texas when the entities send employees to the state for the first planning visit. In addition, COMPANY C will be considered to be engaged in business in Texas when its employees enter the state for the second planning visit.

Question Two: Is it the responsibility of Taxpayer to collect Texas sales and use tax only on sales made at the event (e.g., admissions and merchandise) in CITY B?

Ruling Two: Taxpayer and each subsidiary that sells taxable items at the event or into Texas are responsible for collecting and remitting Texas sales and use tax on those sales made during the period they are engaged in business in Texas. For example, Taxpayer will be responsible for collecting and remitting the tax on items Taxpayer sells and COMPANY C will be responsible for collecting and remitting tax on items COMPANY C sells.

Question Three: Will Taxpayer have a registration and collection responsibility for a period of time following the event in CITY B or may it legally de-register for sales and use tax purposes?

Ruling Three: Following the event, Taxpayer’s registration and collection responsibilities continue as long as Taxpayer has merchandise or employees in Texas or as long as Taxpayer licenses the game for use in Texas. Subsidiaries’ registration and collection responsibilities continue as long as they have merchandise or employees in Texas. Subsidiaries may cancel their sales tax permits when they no longer have employees or property in Texas and cease to engage in business in this state.

Question Four: Will Subsidiaries be considered to be “engaged in business” in Texas as a result of Taxpayer’s event activities? If so, for how long?

Ruling Four: Subsidiaries will not be considered to be engaged in business in Texas based on Taxpayer’s activities. The in-state activities of Taxpayer are not attributable to a subsidiary entity for the purpose of determining whether the subsidiary is engaged in business in Texas.

Analysis:

Texas imposes a sales tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). The term “taxable item” includes tangible personal property and taxable services. Section 151.010 (“Taxable Item”). The term “tangible personal property” specifically includes a computer program. Section 151.009 (“Tangible Personal Property”). A computer program is a series of instructions that are coded for acceptance or use by a computer system and that are designed to permit the computer system to process data and provide results and information. Section 151.0031 (“Computer Program”).

Rule 3.286(b)(2) (Seller's and Purchaser's Responsibilities, including Nexus, Permits, Returns and Reporting Periods, and Collection and Exemption Rules) provides, in part, that an out-of-state seller who engages in business in Texas and has nexus with this state must collect and remit sales and use tax on all sales of taxable items in Texas until the seller ceases to have nexus with this state. See also, Sections 151.052 (Collection by Retailer) and 151.103 (Collection by Retailer; Purchaser’s Receipt).

Under Section 151.107(a) (Retailer Engaged in Business in this State) and Rule 3.286(a)(4), a seller is engaged in business in Texas if the seller:

maintains, occupies, or uses in this state an office, distribution center, sales or sample room or place, warehouse, storage place, or any other physical location where business is conducted;

promotes a flea market, arts and crafts show, trade day, festival, or other event in Texas that involves sales of taxable items;

derives receipts from the sale, lease, or rental of tangible personal property that is located in this state or owns or uses tangible personal property that is located in this state, including a computer server or software to solicit orders for taxable items, unless the seller uses the server or software as a purchaser of an Internet hosting service; or

otherwise conducts business in this state through employees, agents, or independent contractors.

Taxpayer is considered to be engaged in business in Texas from the date it first licensed the game to Texas users. Taxpayer’s game is a computer program and is considered tangible personal property. Taxpayer retains property rights in the game under its user licenses. These retained rights are rights in tangible personal property Taxpayer owns and that is located in this state. See Rule 3.286(a)(4)(E).

COMPANY A, and COMPANY B will be engaged in business in Texas when their employees enter the state for the first planning visit. These employees will meet with venue staff and confirm that the venue broadly meets Taxpayer’s needs. They will also assess the venue’s operational and technical capabilities. The employees’ presence in Texas to conduct business on behalf of their employers establish that they are engaged in business in this state.

COMPANY A, and COMPANY B continue to be engaged in business in Texas through the second planning visit, when they will test the detailed event plan against the physical space of the venue, and during the tournament itself. In addition, COMPANY C will be engaged in business in Texas when its employees enter the state for the second planning visit and continue to be engaged in business in this state through the tournament.

During the time that Taxpayer and Subsidiaries are engaged in business in this state, each entity is responsible for collecting sales or use tax on its sales of taxable items in this state or for use in this state.

Taxpayer and Subsidiaries will also have nexus with Texas for a period of time after the tournament. There is no set time period for which a person will continue to have nexus with Texas after the person’s last contact with the state. Under Rule 3.286(b)(2), an out- of-state seller ceases to have nexus with this state when the seller no longer has, and no longer intends to engage in activities that would create, nexus with this state. For example, an out-of-state seller who enters the state each year to participate in an annual trade show does not cease to have nexus with this state between one trade show and the next. Accordingly, any Taxpayer- or subsidiary-owned property that remains in Texas after the event will preserve the owner entity’s nexus with the state under Quill. That physical presence nexus will continue until all employees have left and the property is removed from the state. See Rule 3.286(b)(2).

When Taxpayer or a subsidiary ceases to have nexus with this state and no longer engages in business in the state, the entity may stop collecting and remitting Texas sales and use tax.

Note, on June 21, 2018, the U.S. Supreme Court issued a decision allowing states to require remote sellers that have an economic presence in the state to collect sales tax. See South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (June 21, 2018). We intend to adopt new rules under our current legal authority in early 2019 to implement this decision.

Franchise Tax Questions, Rulings, and Analysis

Question Five: Will Taxpayer and Subsidiaries be considered to be “doing business” in Texas for franchise tax purposes when its employees first enter the State of Texas for pre- event planning activities?

Ruling Five: Yes. The employees of Taxpayer and Subsidiaries will be considered to be doing business in Texas because they are conducting the business of their employer when they enter Texas for pre-event planning activities. The date the employees first enter Texas will be the date Taxpayer and Subsidiaries first start doing business in Texas for franchise tax purposes.

Question Six: What accounting period will Taxpayer’s first annual Texas franchise tax report cover?

Ruling Six: The first annual Texas franchise tax report will cover the period beginning on the date Taxpayer first starts doing business in Texas (beginning date) and ending on the last date of the accounting period used for federal income tax purposes that is in the same calendar year as the beginning date. If Taxpayer ceases to have sufficient nexus with Texas to be subject to the franchise tax before the ending date of the federal income tax accounting period, then the first annual Texas franchise tax report will end on the last day Taxpayer does business in Texas and will be the final tax report as well.

Analysis:

Texas imposes a franchise tax on each taxable entity that does business in Texas. Section (Tax Imposed). Rule 3.586(b) (Margin: Nexus) states, “A taxable entity is subject to franchise tax in this state when it has sufficient contact with this state to be taxed without violating the United States Constitution.”

Rule 3.586(c) provides examples of specific activities that subject a taxable entity to Texas franchise tax, including:

performing a contract in Texas regardless of whether the taxable entity brings its own employees into the state, hires local labor, or subcontracts with another;

having employees or representatives in Texas doing the business of the taxable entity;

having an inventory or having spot inventory for the convenient delivery to customers, even if the bulk or orders are filled from out of state;

staging or participating in shows, theatrical performances, sporting events, or other events within Texas; and

having employees, independent contractors, agents, or other representatives in Texas, regardless of whether they reside in Texas, to promote or induce sales of the foreign taxable entity’s goods or services.

Taxpayer and Subsidiaries will have nexus for franchise tax purposes when their employees are first physically present in Texas to conduct business, including negotiating an agreement with the venue and planning how to set up the event. See Rule 3.586(c)(3) and (5).

Taxable entities that are part of an affiliated group engaged in a unitary business must file a combined group report. See Section 171.1014 (Combined Reporting; Affiliated Group Engaged in Unitary Business) and Section 171.0001(7) (General Definitions). If Taxpayer is required to file as a combined group with Subsidiaries, the combined group must include all eligible entities even if those entities do not have nexus with Texas. See Rule 3.590(b)(2)(C).

The first annual report covers the business done during the period beginning on the beginning date and ending on the last date of the accounting period used for federal income tax purposes that is in the same calendar year as the beginning date. Rule 3.584(c)(2) (Margin: Reports and Payments). If the federal accounting year end date is before the date the entity became subject to the tax, the ending date is the same as the beginning date and the entity will file a zero report.

The definition of beginning date is the date on which the taxable entity begins doing business in Texas. Section 171.0001; Rule 3.584(b)(1)(A)(ii). In this case, if each entity files a separate franchise report, Taxpayer, COMPANY A, and COMPANY B will each have a beginning date that is the date of the first planning visit. COMPANY C will have a beginning date that is the date of the second planning visit. If filing a combined group report, the beginning date is the date of the first planning visit.

A taxable entity must file an annual franchise tax report each year. Rule 3.584(c)(3). A taxable entity files a final report when the entity no longer has sufficient nexus with Texas to be subject to the franchise tax. Rule 3.584(b)(4). The final report period begins on the day after the last day for which the tax imposed on taxable margin was computed and ends on the date the taxable entity is no longer subject to the tax imposed under this chapter. Section 171.0011 (Additional Tax).

Taxpayer states this eSports tournament is an isolated event. Taxpayer and Subsidiaries are not hosting other events or conducting any other business in Texas. Taxpayer and Subsidiaries have no plans to return to Texas to host another tournament. Taxpayer states that excess merchandise not sold by the venue will remain in Texas for a short period following the event.

Based on these facts, Taxpayer and Subsidiaries will no longer have nexus the day after the event is over or the day after inventory is removed from Texas, whichever date is later. If filing a combined group report, the group will no longer have a filing responsibility once every member ceases to have nexus with Texas. If filing separate franchise reports, each entity will need to determine when it no longer has nexus with Texas.

The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20180228152433.

Sincerely,

Tax Policy Division – Direct and Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

[1] Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.