Which occasional Texas activities created earned-surplus nexus, and when did Public Law 86-272 protect a seller?

Plain-English summary

Texas found nexus in four of five examples; only the assumed one-time buyer visit avoided the earned-surplus component.

The letter answered five separate fact patterns:

1. A representative's single annual trip to tour a supplier, review operations, and negotiate a future purchasing contract did not create earned-surplus nexus, assuming the company was buying from the supplier and had no other Texas contact.
2. A customer training seminar provided technical assistance or services in Texas and was not treated as de minimis, so it created nexus.
3. Four annual bank-review trips were continuous, nontrivial Texas business activity and created nexus.
4. Acquisition due diligence—book reviews, inventory reviews, and investigations—was not solicitation of orders for tangible personal property, so P.L. 86-272 did not apply and nexus began when the company started coming to Texas.
5. A Texas salesperson's home office appeared attributable to the company because the company was named on and reimbursed the telephone service. That fact removed P.L. 86-272 protection and created earned-surplus nexus.

What this means for you

Multistate businesses

Occasional activity is not automatically de minimis. Its purpose, recurrence, and connection to the company's business matter.

Tax professionals

Test P.L. 86-272 only for protected solicitation of tangible-personal-property orders, and verify every assumption about home-office attribution and trip purpose.

Common questions

Q: Did one supplier visit create nexus?
A: No, on the stated buyer-side assumptions.

Q: Did a customer seminar create nexus?
A: Yes.

Q: Did acquisition due diligence receive P.L. 86-272 protection?
A: No.

Q: Why did the salesperson's home office defeat protection?
A: The Comptroller assumed the company held and reimbursed the home's telephone service, making the office attributable to it.

Citations and references

• Public Law 86-272, 15 U.S.C. Sec. 381
• 34 Tex. Admin. Code Sec. 3.554(c)(3), (d)(6), (d)(18), (e)(8), and (e)(10)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9703419L

Original ruling text

March 18, 1997

Dear ***:

Thank you for your letter asking whether your clients are subject to the earned
surplus component of the franchise tax.

Question 1:
Your client, Company A, sends a representative into Texas one (1) time during
the year to tour a supplier's plant, review their operations, and negotiate a
future contract. No other activities are performed in Texas during the year.
Does this activity alone constitute nexus in Texas?

Answer:
I assume your client is buying from a supplier, rather than selling to the
supplier. If so, your client would not be subject to the earned surplus
component, if that is their only contact with Texas.

Question 2:
Company B holds a training seminar in the State of Texas for it's customers.
Sales are made by mailing catalogs to prospective customers and shipments are
by UPS and Federal Express only. Not other sales activity is conducted in the
state and the company has no assets or other employees in the state. Does the
training seminar alone constitute nexus?

Answer:
Subsection (d)(6) of Rule 3.554, Earned Surplus: Nexus, states that "providing
any kind of technical assistance or services" constitutes doing business in
Texas, assuming that this activity is not of a de minimus level.

The term de minimus is defined in subsection (c)(3) of the rule as those
"activities that, when taken together, establish only a trivial connection with
Texas." The definition goes on to state
that "an activity regularly conducted within Texas pursuant to a company policy
or on a continuous basis shall normally not be considered trivial." Therefore,
your client will be subject to the earned surplus component of the tax.

Question 3:
Company C is a publicly traded company and has a banking relationship with a
major Texas bank. The only activities conducted or assets maintained in Texas
relates to this banking relationship. Approximately four (4) trips are made by
the Chief Financial Officer, annually, for bank reviews. Do these trips for
bank reviews alone constitute nexus with Texas?

Answer:
Because the bank reviews are conducted within Texas on a continuous basis, the
reviews do not qualify as a de minimus activity. The performance of any
business of the corporation, such as
the bank reviews, by the corporation in Texas is considered doing business and
will subject the foreign corporation to the earned surplus component of the
franchise tax.

Question 4:
Company D is attempting to acquire a Texas company. As part of the due
diligence, several trips are made to review the books, perform inventory
reviews, and conduct other investigations. Company D does not complete the
transaction before 12/31/96. No other assets are owned or controlled or
activities performed by Company D, in Texas, during 1996. Do these acquisition
investigations and reviews exceed the de minimus threshold and create nexus for
the year 1996?

Answer:
Because the facts in your question do not deal with the solicitation of orders
for sales of tangible personal property, Public Law 86-272 does not apply. The
performance of any business of the corporation in Texas is considered doing
business in Texas and will subject your client to the earned surplus component
of the franchise tax beginning on the date they began coming into Texas.

Question 5:
Company E sells business forms. It maintains no assets in Texas and performs
no other activities in the state that would cause it to be subject to tax
except the maintenance of a sales person in the state. The sales person's
office in their home. The sales person is not reimbursed for any expenses
other than the long distance bill. The bill is addressed to the Company (at
the sales persons residence). The sales person submits a monthly expense
report and receives reimbursement for the long distance charges. Does this
activity alone cause the Company to be subject to tax in Texas?

Answer:
Public Law 86-272 protects a company from the tax on earned surplus if the
company's only activity in Texas is the solicitation of orders for sales of
tangible personal property and the orders are sent outside of the state for
approval or rejection, and if approved, are filled by shipment or delivery from
a point outside this state.

Based on the information provided, I presume that the telephone service in the
sales persons home office is in the name of the Company. Therefore, it appears
that the sales person's home office can be attributed to the Company, which
removes the protection provided by PL 86-272 and subjects your client to the
earned surplus component of the franchise tax. See Rule 3.554 (d)(18), (e)(8),
and (e)(10).

This response is based on current law, the facts presented, and my assumptions.
If there are different or additional facts or my assumptions are incorrect, 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