Did leasing airplanes and train cars that lessees used in Texas create franchise-tax nexus for the lessor?

Plain-English summary

The lessor owed both former franchise-tax components because of its Texas authority and the equipment's Texas use.

The corporation leased airplanes and train cars, while its lessees controlled where the mobile equipment traveled. The lessor had no Texas solicitation, office, employees, or agents.

Its certificate of authority created franchise-tax status under Rule 3.546(a). Even without that certificate, leasing property used in Texas constituted doing business under Rules 3.546(c)(19) and 3.554(d)(20).

Texas therefore applied both taxable capital and earned surplus.

What this means for you

Lessors of mobile equipment

Giving the lessee control over location did not prevent nexus when the leased property was used in Texas.

Tax professionals

Analyze both authorization status and actual Texas use of leased assets.

Common questions

Q: Did the certificate create liability?
A: Yes.

Q: Would equipment use create nexus without the certificate?
A: Yes.

Q: Which components applied?
A: Both taxable capital and earned surplus.

Citations and references

• 34 Tex. Admin. Code Secs. 3.546(a), 3.546(c)(19), and 3.554(d)(20)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9611853L

Original ruling text

November 21, 1996

Dear **:

In your letter of November 4, you asked if ABC (ABC) is liable for franchise
tax.

You state that ABC leases airplanes and train cars. The corporation does not
control the location of this mobile equipment. Instead, the lessee relocates
the equipment as necessary. ABC does not solicit business in Texas, has no
office or other place of business in Texas, and has no employees, or agents in
Texas.

Our records indicate that ABC has a certificate of authority issued by the
Texas Secretary of State. Therefore, ABC is subject to franchise tax as
indicated in Rule 3.546(a) (enclosed) because the company is authorized to do
business in Texas.

Based on the information submitted, ABC would be subject to franchise tax even
if the company did not have a certificate of authority. Specifically, ABC is
doing business in Texas because the corporation is leasing property which is
used in Texas (see Rule 3.546(c)(19) and Rule 3.554(d)(20) (enclosed)). Thus,
ABC is subject to both the taxable capital and earned surplus components of the
franchise tax.

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 Policy 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 Policy Division, Comptroller of Public Accounts.

Sincerely,

Bob Jeffcoat
Tax Policy Division