Did Canadian sales representatives soliciting Texas dealers create former franchise-tax liability, and did P.L. 86-272 protect the company?

Plain-English summary

Texas solicitation created taxable-capital liability, while P.L. 86-272 protected earned surplus if the activity stayed limited to solicitation.

The Canadian manufacturer had no U.S. permanent establishment or employees. Its U.S. representatives identified dealers, which bought the office furniture for their own account, received direct shipments, and handled installation and after-sales service.

If the representatives entered Texas to solicit dealer purchases, Texas said the company was subject to taxable capital. Mere solicitation of tangible-personal-property orders was protected by P.L. 86-272, so the company was not subject to earned surplus on those limited facts.

What this means for you

Foreign manufacturers using independent dealer networks

Protected solicitation did not eliminate the historical taxable-capital component.

Tax professionals

Verify that representatives did nothing beyond solicitation and that dealers independently handled installation and after-sales service.

Common questions

Q: Did Texas solicitation create taxable-capital liability?
A: Yes.

Q: Did P.L. 86-272 protect earned surplus?
A: Yes, if activity was limited to protected solicitation.

Q: Did the company have U.S. employees?
A: No, according to the stated facts.

Citations and references

• Texas Tax Code Sec. 171.001
• Public Law 86-272, 15 U.S.C. Sec. 381
• 34 Tex. Admin. Code Secs. 3.549 and 3.554, 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/9611096L

Original ruling text

November 15, 1996

RE: Tax on Canadian Corporation

Dear **:

Thank you for your letter concerning the franchise tax liability of your
Canadian client.

You stated in your letter that your client is a Canadian Corporation ("Canco")
which manufactures office furniture and related component furniture ("the
products") in Vancouver, British Columbia. "Canco" has no permanent
establishment (i.e. office, branch, place of management, etc.) in the U.S.
Moreover, "Canco" has no employees, either U.S. or Canadian, operating or
located in the U.S. However, "Canco" does have representatives in the U.S. to
identify persons who can act as dealers in the U.S. for "the products."
Dealers then purchase products for their own account and resell the products to
their own customers. "The products" are shipped directly to the dealers.
Dealers are responsible for installation and after-sales service of "the
products."

The Texas franchise tax is imposed on "each corporation that does business in
this state or that is chartered or authorized to do business in this state."
[Texas Tax Code (TTC) Sec. 171.001]
Franchise tax rules 3.549, Taxable Capital: Nexus, and 3.554, Earned Surplus:
Nexus, contain listings of activities, when performed in Texas, which will
subject a corporation to the tax.

Both rules discuss the solicitation of sales of tangible personal property. If
"Canco's" representatives enter Texas to solicit sales of "the products" to
dealers in Texas, then "Canco" will be subject to the taxable capital component
of the franchise tax. Mere solicitation of sales of tangible personal property
is a protected activity under Public Law 86-272 and therefore, "Canco" would
not be subject to the earned surplus component of the tax.

I have enclosed copies of both rules for your review.

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