A mail order company plans to set up two subsidiary corporations and a limited partnership that will operate in Texas, buying goods for resale to the mail order company, which then ships items to Texas customers; the mail order company will also periodically send a handful of employees into Texas to train and check on the limited partnership's staff. Does any of this create Texas sales/use tax and franchise tax nexus for the mail order company, and does the limited partnership have to collect sales tax on sales to the mail order company or its customers?

Plain-English summary

A mail order company asked the Comptroller for a ruling on its Texas sales/use tax and franchise tax exposure before restructuring its business. The plan: form two subsidiary corporations and a limited partnership. One subsidiary would hold a 1% general-partner interest in the limited partnership; the other would hold a 99% limited-partner interest. The limited partnership — which would actually do business in Texas — would buy goods for resale to the mail order company. When a customer placed an order, the mail order company would buy the item from the limited partnership, and the limited partnership would ship it directly to the customer, tucking in the mail order company's advertising material for a service fee.

Neither the mail order company nor the 99%-owner subsidiary would otherwise do business in Texas — except that, when the limited partnership was first set up, the mail order company would send personnel to Texas to train the limited partnership's staff, and afterward would send roughly six employees on periodic (quarterly or semi-annual), limited-duration site visits to check that operations were running properly. These visiting employees would not solicit sales, deliver merchandise, take orders, or assemble/construct property.

The taxpayer argued this employee activity was too minor ("de minimis") to create nexus. The Comptroller disagreed: the mail order company is crossing the Quill v. North Dakota "bright line" physical-presence test by sending employees into Texas at all — the only real question is whether that activity is de minimis. The Comptroller concluded it is not, because the visits are regular and systematic training and review of the limited partnership's personnel, done to keep the mail order company's own business running smoothly. That is enough to create nexus for both franchise tax and sales/use tax purposes, meaning the mail order company must collect Texas sales and use tax on items delivered to its Texas customers.

Separately, the limited partnership does not have to collect sales tax from either the mail order company or the mail order company's customers, because it is selling the goods for resale to the mail order company and doesn't fall within Sec. 151.024, Tex. Tax Code as a retailer required to collect the tax on those resale transactions.

What this means for you

Out-of-state (mail order) sellers considering a Texas affiliate or distribution partner

Even if your own employees never solicit sales, deliver goods, or take orders in Texas, sending them into the state on a recurring, systematic basis — such as periodic training or oversight visits to an affiliated Texas operation — can be enough to cross the physical-presence nexus line. "De minimis" contact generally means occasional, incidental activity, not a regular cadence of visits tied to running the business.

Businesses structuring resale arrangements through a Texas partnership

A Texas entity that sells goods for resale to an out-of-state affiliate (rather than directly to end customers) is not required to collect sales tax on those resale transactions under Sec. 151.024, Tex. Tax Code — the resale exemption logic applies even within an affiliated group structure.

A note on "Internet seller" framing

This 1996 letter predates the modern discussion of internet/remote-seller nexus; it deals with physical-presence nexus for a traditional mail order business under the Quill v. North Dakota standard, established via employee travel to Texas — not online sales activity. The alert text at the top of the STAR page (referencing the 2018 Wayfair decision and the current $500,000 economic-nexus threshold) was added later by the Comptroller's office and describes current law, not the substance of this 1996 letter.

Common questions

Q: Does an out-of-state seller create Texas nexus just by having a related company do business in Texas?
A: Not automatically — the limited partnership doing business in Texas didn't by itself create nexus for the mail order company. What mattered was the mail order company's own employees traveling to Texas on a regular, systematic basis.

Q: Is a one-time visit by out-of-state employees enough to create nexus?
A: This letter suggests a single, isolated visit could be viewed differently, but recurring, systematic visits (initial training plus ongoing quarterly/semi-annual reviews) were enough here, even though the employees didn't solicit sales or handle merchandise.

Q: Once a mail order company has nexus, what does it have to do?
A: Collect sales and use tax on items it delivers to its Texas customers, and it also becomes subject to Texas franchise tax.

Q: Does the Texas limited partnership have to collect sales tax when it sells goods to its out-of-state affiliate for resale?
A: No — those are resale transactions, and the limited partnership isn't required to collect tax as a retailer under Sec. 151.024, Tex. Tax Code, on sales made for resale.

Q: Can I rely on this 1996 letter for my own business today?
A: No. Letters on STAR bind the Comptroller only as to the taxpayer who received them, and this letter predates major nexus developments (including the 2018 South Dakota v. Wayfair decision and Texas's current economic nexus rules for remote sellers, noted in the alert at the top of the STAR page). Consult a licensed Texas tax professional about current nexus standards.

Citations and references

Statutes and rules:

• Sec. 151.024, Tex. Tax Code (persons required to collect sales tax as a retailer)

Case law referenced in the letter:

• Quill Corp. v. North Dakota (cited in the letter as "Quill vs. State of North Dakota") — physical-presence "bright line" nexus test

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9601871L

Original ruling text

Alert: 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, 138 S. Ct. 2080 (June 21, 2018). Any remote sellers with $500,000 or more in total Texas revenue (during the preceding 12 calendar months) must apply for a use tax permit and begin collecting use tax by Oct. 1, 2019. For additional information, see STAR 201910005L. See also Rule 3.286 amended January 1, 2019.

January 3, 1996

Dear ** :

I apologize for not answering your letter of December 18, 1995, sooner. I was

on annual leave from the December 16 to January 2. In your letter, you ask for

a ruling on the sales and use tax and franchise tax liabilities of a mail order

company that is going to organize two subsidiary corporations and a limited

partnership. One of the subsidiary corporations will own a 1% interest in the

limited partnership and will be the general partner. The second subsidiary

will own a 99% interest and will be the limited partner. The limited

partnership will do business in Texas. Neither the mail order company nor the

corporation owning 99% of the limited partnership will be conducting business

in Texas other than as set out as follows.

The limited partner will buy goods for resale to the mail order company. The

mail order company will solicit orders. Once a customer orders an item, the

mail order company will buy the item from the limited partnership. The limited

partnership will ship the item directly to the customer. The limited

partnership will include for a service fee the mail order company's advertising

material with the item shipped to the customer.

When the limited partnership is set up, the mail order company will send

personnel to Texas to train the appropriate personnel of the limited

partnership. Thereafter, the mail order company will send approximately six

employees on periodic site visits to the limited partnership's facility to

ensure that the continued operations of the limited partnership are carried

forth. These subsequent visits will occur or a quarterly or semi annual basis

and generally will be of a limited duration. These employees will not be

soliciting sales, delivering merchandise, taking orders, assembling or

constructing property, or conducting any other business activity in Texas.

You were of the opinion that the mail order company would not have nexus

because the only activities carried out by employees of the mail order company

will be de minimus. I disagree.

It appears to me that the mail order company is sending its employees to Texas

in order to see that its business is carried out properly. There is no

question that the mail order company has crossed over the bright line test set

out in Quill vs. State of North Dakota. The only question is whether the

activities of its employees are de minimus as contemplated under the court

decisions. It is immaterial that the employees do not engage in the

activities that you enumerated. What is material is that they engage in

regular and systematic training and review of the personnel operating the

limited partnership. The only reason this is done is to ensure that its

business runs smoothly. Consequently, I am of the opinion that the mail order

company will have nexus for purposes of both the franchise tax and the sales

and use tax. Once nexus is established, the company will be required to

collect sales and use taxes on items delivered to its Texas customers.

Finally, you asked if the limited partnership would be required to collect

sales tax from either the mail order company or the mail order company's

customers. The answer to both questions is "no." The items are sold for

resale to the mail order company, and the limited partnership does not fall

within the terms of Sec. 151.024, Tex. Tax Code, as a person which our office

could require to collect the tax as a retailer.

I hope this satisfactory answers your inquiry. Please feel free to contact me

should you have any further questions.

Sincerely,

Wade Anderson

Director, Tax Policy