Did an out-of-state alarm-monitoring company have Texas franchise-tax nexus without Texas plant, equipment, or employees?

Plain-English summary

The alarm-monitoring company had nexus through both its Texas authority and the services provided to Texas customers.

The company processed alarm signals in Minnesota. Texas resellers usually billed end users and remitted the monitoring fee, while the company directly billed a small number of customers and used a Texas sales-tax permit for those transactions. It had no Texas plant, equipment, or employees.

The certificate of authority created franchise-tax status under Rule 3.546(a). Texas also said the company would have nexus without the certificate because it provided a service in Texas under Rules 3.546(c)(2) and 3.554.

What this means for you

Remote monitoring businesses

Performing the technical work outside Texas did not prevent historical service nexus when the monitoring service was provided to Texas customers.

Tax professionals

Analyze authorization and service nexus separately, including reseller and direct-billing arrangements.

Common questions

Q: Did the company have Texas physical presence?
A: It reported no plant, equipment, or employees there.

Q: Why was it still subject?
A: It was authorized in Texas and provided monitoring services in Texas.

Q: Would nexus exist without the certificate?
A: Yes, under the service-nexus conclusion.

Citations and references

• 34 Tex. Admin. Code Secs. 3.546(a), 3.546(c)(2), and 3.554

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9611854L

Original ruling text

November 20, 1996

Dear **:

In your FAX of November 12, you requested an opinion regarding ABC
Corporation's liability for franchise tax.

ABC Corporation (ABC) provides interstate alarm monitoring services.
Specifically, ABC processes an electronic signal which is transmitted from
customers to the company through phone lines

Usually the monitoring service is billed to a reseller in Texas who bills the
end users for the service. The reseller then remits the monitoring fee portion
of the bill to ABC. However, the resellers receive no compensation from ABC.
The resellers are obtained through advertising, trade shows, associations, and
the like. The contract for service to the reseller is accepted and performed
in Minnesota. ABC does have a sales/use tax permit which it uses to remit
taxes for the few customers that the company bills directly because the
resellers will not bill the customer and remit the sales tax. In any case, ABC
has no plant, equipment, or employees 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.

However, based on the information submitted, ABC would be subject to franchise
tax even if the company did not have a certificate of authority. In
particular, ABC is providing a service in Texas as indicated in Rule
3.546(c)(2) and Rule 3.554 (enclosed).

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