For a limited partnership and its partners, where is the partnership's commercial domicile, and which entities have Texas franchise-tax nexus?

Plain-English summary

A taxpayer asked several questions about a limited partnership (P), its partners (A and B), and a related corporation (Z). The Comptroller first noted Texas has no income tax and that partnerships are not subject to the franchise tax (which reaches corporations and certain other entities and is the larger of the taxable-capital or earned-surplus components). It then answered:

1. Commercial domicile of P. Commercial domicile is the principal place from which the business is directed (Rules 3.549(b)(2), 3.557(b)(2)). Because the general partner B makes P's business decisions at B's office in Nevada, P's commercial domicile appears to be Nevada.
2. P's nexus and filings. P is doing business in Texas (partner A services P's receivables from a Texas branch office), but because partnerships are not subject to the franchise tax, P does not file franchise-tax reports.
3. Partners' nexus. A has nexus because it has a Texas branch location; B has nexus because it is the general partner of P (Rule 3.546(c)(12)). Both look to Rule 3.544 for filing requirements.
4. Even if P did not have nexus, A and B still would (as explained in point 3).
5. Apportionment. Partnership income is apportioned on the taxable partner's return under Rules 3.549(e)(29) and 3.557(e)(24).

The Comptroller declined to answer questions about Secretary of State filings, directing the taxpayer to that agency.

Important currency note: STAR marks this document partially superseded on 12/15/2014 on the taxation of partnerships. The 2007 legislation (House Bills 3 and 3928) restructured the franchise tax into the current margin tax effective January 1, 2008 and made partnerships subject to the tax — reversing the premise that the partnership does not file. Treat the entity-level conclusions as historical and confirm current law.

What this means for you

Multistate partnerships with a Texas footprint

Before 2008, a partnership with Texas activity still filed nothing for franchise tax — the tax fell on its corporate partners instead. Nexus reached a partner with its own Texas presence (A's branch) and the general partner (B). Commercial domicile followed where the business is directed, not where its assets or customers sit.

Accountants and tax professionals

Watch the split: the partnership had Texas nexus yet no filing duty; its taxable partners picked up the income via the partnership apportionment rules. The margin tax has since made the partnership itself a filer, so re-verify.

Common questions

Q: Did the partnership owe Texas franchise tax?
A: No. It had Texas nexus but partnerships were not subject to the pre-2008 franchise tax, so it filed no reports.

Q: Where was the partnership's commercial domicile?
A: Nevada — where the general partner directed the business.

Q: Which partners were taxable?
A: Partner A (a Texas branch office) and partner B (the general partner of a Texas-active partnership).

Citations and references

Statutes and rules:

• Franchise Tax Rules 3.549(b)(2) and 3.557(b)(2) (commercial domicile)
• Franchise Tax Rules 3.546 and 3.554 (Taxable Capital / Earned Surplus: Nexus)
• Franchise Tax Rule 3.546(c)(12) (general partner of a Texas-active partnership is subject)
• Franchise Tax Rule 3.544 (filing requirements)
• Franchise Tax Rules 3.549(e)(29) and 3.557(e)(24) (apportionment of partnership income to a partner)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9312L1276D01

Original ruling text

STAR SUPERSED INFORMATION
Accession No. —
Supersede type - Partial
Document superseded on - 12/15/14
Issue(s) that caused the document to be superseded — Taxation of partnerships
Reason(s): The Franchise Tax Code was amended by House Bill 3 and House Bill 3928,
Acts 2007, 80th Legislative Session, effective January 1, 2008 and affected Franchise
tax reports due on or after January 1, 2008. One of the many changes to this Tax Code
subjected partnerships (previously not required to file) to the franchise tax reporting
requirement.

December 17, 1993

Dear *****:

In your letter, you requested responses to several questions regarding a
limited partnership (P), the partners (A and B), and a related corporation (Z).

First, Texas does not impose an income tax. Although the state does impose a
franchise tax on corporations and other specified entities, partnerships are
not subject to the tax. I have enclosed a copy of Publication #96-114-C which
provides some general information regarding the franchise tax. Note that the
tax is the larger of the tax on the net taxable capital or net taxable earned
surplus component.

Second, my responses to your questions are limited to tax filings. I am unable
to answer your questions regarding filings with the Texas Secretary of State.
You should contact that agency at:

Secretary of State
Rudder Bldg.
1019 Brazos
Austin, Texas 78701

Finally, I have restated your questions followed by a response:

1. Where is P's state of commercial domicile?

Response

For franchise tax purposes, the commercial domicile is the principal place from
which the trade or business is directed (see Rule 3.549(b)(2) and Rule
3.557(b)(2) enclosed). You state that B (the general partner) will make the
business decisions of P at B's office in Nevada. Thus, P's commercial domicile
appears to be Nevada.

2. Will P have nexus in Texas. If yes, what state filings are required of P?

Response

The partnership is doing business in Texas because A is servicing P's
receivables from a branch office in Texas (see Rule 3.546 and 3.554 enclosed).
As I indicated above, partnerships are not subject to franchise tax.
Therefore, the partnership does not have to file franchise tax reports.

3. If P has nexus in Texas, will A and B have nexus? What state filings are
   required for A and B?

Response

A has nexus for franchise tax purposes because it has a branch location in
Texas (Rule 3.546 and Rule 3.554). B also has nexus because B is the general
partner in P (see Rule 3.546(c)(12) and Rule 3.554). You should review the
enclosed Rule 3.544 regarding filing requirements for A and B.

4. Even if P does not have nexus in Texas, will nexus be created for A and/or
   B? If yes, what state tax filings are required of A and/or B?

Response

As I indicated in my response to 3 above, A, B, and P have nexus. See Rule
3.544 regarding filing requirements.

5. If partners A and/or B have nexus in Texas, how is the partnership income
   apportioned on the partner's franchise tax return?

Response

See Rule 3.549(e)(29) and Rule 3.557(e)(24).

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 any questions, contact Tax Administration Division. You may call
toll free 1-800-531-5441, or our regular number is 512/463-4600. My extension
is 3-4662. You may write me at Tax Administration Division, Comptroller of
Public Accounts.

Sincerely,

Bob Jeffcoat
Tax Administration Division

December 2, 1993

Attn: Accounts Correspondence
Capitol Station
Austin, TX 78774

RE: Ruling on Partnership/Partner Nexus

Dear Sir/Madam:

I am requesting a letter ruling on partnership and partner nexus and
apportionment in the state of Texas for the scenario presented below.

Scenario

1) Corporation A is incorporated in Nevada and domiciled in Missouri.
Corporation A is in the business of commercial finance. Corporation A has a
branch location in Texas and currently files the necessary Texas Corporate
Franchise Tax Report.

2) Corporation A is considering a program to securitize $X amount of its
commercial finance notes receivable. These notes receivable were originated at
various offices throughout the country serving customers from all fifty states.

3) Due to the desired structure and legal requirements of the securitization,
Corporation A will invest in Corporation B by contributing notes receivable (1%
of $X) in Corporation B in exchange for 100% of the stock of Corporation B. In
affect, at this stage of the transaction, Corporation A will hold 99% of the
national mix of the receivables that Corporation A intended to securitize, and
Corporation B will hold 1%.

4) Corporation B will be incorporated and domiciled in Nevada. All of
Corporation B's business will be conducted in Nevada from an office located
there.

5) To facilitate the securitization, Corporation A and Corporation B will
organize Limited Partnership P. Corporation A will become Limited Partner A
with a 99% interest and Corporation B will become General Partner B with a 1%
interest in Limited Partnership P.

6) Limited Partner A will contribute notes receivable (equal to 99% of the
securitization amount, $X) to Limited Partnership P. General Partner B will
contribute 100% of its notes receivable (equal to 1% of the securitization
amount, $X) to Limited Partnership P.

7) Limited Partnership P will be organized under Delaware laws. Limited
Partnership P will be in the business of acquiring, owning, holding, selling,
transferring, pledging and otherwise disposing of receivables and evidences of
indebtedness which will be secured by notes receivable from customers residing
in all fifty states.

8) General Partner B will make the business decisions of Limited Partnership P
at General Partner B's office location in Nevada. Corporation Z, an affiliate
of both General Partner B and Limited Partner A, will provide management
services to Limited Partnership P; The management services, which will be
performed in Missouri, will include tax, legal, treasury, and accounting
functions. Limited Partnership P will pay a management fee to Corporation Z for
these services pursuant to a management agreement.

9) Limited Partnership P will have no employees and will own no tangible
property in Texas or any other location.

10) Limited Partner A will service Limited Partnership P's notes receivable at
each of Limited Partner A's branch offices. Limited Partnership P will pay
Limited Partner A a fee for servicing the receivables.

11) Limited Partnership P will distribute all partnership income to Limited
Partner A and General Partner B based on the percentage of their original
capital contributions.

12) As part of the securitization program, Limited Partnership P will issue
debt obligations backed by the notes receivable to investors in exchange for
cash.

13) An illustration of the proposed scenario is enclosed for reference.

Issues to Resolve

1) In Texas's opinion, where is Limited Partnership P's state of commercial
domicile?

2) Will Limited Partnership P have nexus in Texas? If yes, what state tax
filings are required of Limited Partnership P?

3) If Limited Partnership P does have nexus in Texas, then will nexus be
created for Limited Partner A and/or General Partner B? If yes, what state tax
filings are required of Partners A and/or B in Texas?

4) Even if Limited Partnership P does not have nexus in Texas, will nexus be
created for Limited Partner A and/or General Partner B? If yes, what state tax
filings are required of Partners A and/or B in Texas?

5) If Partners A and/or B have nexus in Texas, how is the partnership income
apportioned on the Partners' Texas Corporate tax return?

6) If either Limited Partnership P or the Partners A and/or B has nexus in
Texas, then do any franchise/net worth or intangible taxes apply?

I appreciate your prompt handling of this issue. Please forward your written
response including statute and regulation references to the following address:

Regards,

NOTE: Previous Accession Number 9312152L