Did the former Texas throwback rule cover interstate solicitation and products sold to customers outside the United States?

Plain-English summary

Independent solicitation produced different interstate throwback results, while foreign-country sales did not throw back at all.

For taxable capital, merely soliciting orders through independent representatives created nexus in another state, so Texas-origin shipments there were not thrown back. For earned surplus, solicitation alone was protected by Public Law 86-272, so the seller was not subject to taxation there and the shipments were thrown back into Texas receipts.

Products shipped from Texas to customers outside the United States were receipts everywhere but not Texas receipts. The throwback rule covered only U.S. states, the District of Columbia, Puerto Rico, and U.S. territories or possessions.

What this means for you

Interstate manufacturers

The same solicitation facts could create taxable-capital nexus while remaining protected for earned-surplus purposes.

Export sellers

The three foreign-sale payment and consignment patterns did not change the stated no-throwback result.

Common questions

Q: Did independent solicitation prevent taxable-capital throwback?
A: Yes.

Q: Did it prevent earned-surplus throwback?
A: No, because Public Law 86-272 protected solicitation alone.

Q: Were foreign sales Texas receipts?
A: No; they were receipts everywhere only.

Citations and references

• 34 Tex. Admin. Code Sec. 3.549(e)(41)(I) and Sec. 3.557(e)(37)(I), as cited in the letter
• 34 Tex. Admin. Code Sec. 3.546(c) and Sec. 3.554(d), as cited in the letter
• Public Law 86-272, as cited in the letter

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9609114L

Original ruling text

September 10, 1996

Dear **:

Thank you for your August 29 letter concerning the calculation of your client's
franchise tax liability.

You stated in your letter that your client, ABC, is a corporation, properly
organized and authorized to conduct business in the state of Texas. ABC is in
the business of selling products of its own manufacture. ABC's offices are
located within the state of Texas and the functions performed there cover all
aspects of the business. ABC does not maintain an office, inventory or bank
accounts in any other state. ABC does, however, sell it's products to
customers in other countries under one of three scenarios.

1) ABC consigns product to one of its agents outside the USA. The agent
originates a sale within his own country for one of ABC's products. The agent
ships the product to the end user and is paid by the end user. The agent then
pays ABC through either a US dollar account in Texas or a foreign currency
account in a bank outside of the USA.

2) ABC consigns goods to one of its agents outside the USA. ABC then receives
payment from an end user for its product. The end user is in the same country
as the agent and is outside the USA. The payment may be made into either a US
dollar account in Texas or into one of ABC's foreign currency accounts in
outside the USA. ABC then instructs its agent to ship the product from his
consignment inventory.

3) ABC receives an order for one of its products from an end user outside the
USA. ABC receives payment into either a US dollar account in Texas or into one
of ABC's foreign currency accounts in a bank outside the USA. ABC then ships
the product directly to the end user from its Texas warehouse.

I presume from your statement that your client is "selling products of its own
manufacture" that your client is producing tangible personal property. In your
prior letter, dated August 2, 1996, your client was providing "information of a
technical nature" that was available to customers in either a written text
format or in personal computer software. In my response, dated August 15,
1996, I stated that your client was performing information services. The
receipts from services are apportioned based on where the service is performed.

I have restated your questions from your August 29 letter below. The responses
are based on the presumption that your client is manufacturing tangible
personal property.

Questions 1 and 2 (combined):

Do sales to ABC customers in other states constitute "Texas Sales" for purposes
of the apportionment formula used in determining tax on taxable capital or
earned surplus?

Answer to questions 1 and 2:

Sales of tangible personal property (TPP) shipped from this state to a
purchaser in another state are not included in Texas receipts unless the
"throwback rule" applies.

Rules 3.549(e)(41)(I) and 3.557(e)(37)(I) discuss sales to which the throwback
rule applies. It applies to "each sale of tangible personal property shipped
from this state to a purchaser in another state in which the seller is not
subject to taxation." The phrase "subject to taxation" means constitutional
nexus. If a corporation performs any of the activities listed in Rule 3.546(c)
concerning Taxable Capital: Nexus or Rule 3.554(d) concerning Earned Surplus:
Nexus, the corporation will be considered subject to taxation in the other
state. I have enclosed copies of these rules for your review.

I'd like to point out that Rules 3.546 and 3.554 are different when it comes to
solicitation of orders by independent representatives. For taxable capital,
the activity of merely soliciting orders does constitute nexus and would
subject a corporation to taxation in another state. Sales of tangible personal
property shipped to customers in those states would not be "thrown back" into
Texas receipts for the taxable capital component of the tax.

For the earned surplus component, however, the mere solicitation of orders is a
protected activity under Public Law 86-272 (PL 86-272). PL 86-272 is a federal
law which provides that a state cannot impose a net income tax upon a taxpayer
whose only business activity within the state consist of the solicitation of
sales of TPP. If solicitation is the only activity conducted in another state,
then the corporation would not have constitutional nexus in the other state and
would not be subject to taxation. Therefore, sales of TPP shipped to customers
in those states will be "thrown back" into Texas receipts for the earned
surplus component of the tax.

Question 3:

In each of the three circumstances previously described which relate to sales
of product in foreign countries:

a) Do sales to ABC customers in other countries constitute "Texas Sales" for
purposes of the apportionment formula used in determining tax on Taxable
Capital?

b) Do sales to ABC customers in other countries constitute "Texas Sales" for
purposes of the apportionment formula used in determining tax on Earned
Surplus?

Answer to questions 3(a) and 3(b):

Sales of tangible personal property shipped from this state to purchasers
outside of the USA are gross receipts everywhere. They are not Texas receipts.
The "throwback rule" mentioned above applies only to sales of tangible
personal property shipped to a state of the United States, the District of
Columbia, Puerto Rico, or any territory or possession of the United States.

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

If you have any questions about this or any other franchise tax matter, please
call me at 1-800-531-5441, extension 34612. My direct number is (512)
463-4612. You may write me at Tax Policy Division, Comptroller of Public
Accounts, Austin, Texas 78774.

Sincerely,
Janet Spies
Tax Policy Division