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Ezel / Tax Rulings / TX
TX 9703427L Franchise Tax (PRIOR TO 01/01/2008) 1997-03-10

Did using independent contractors for computer programming in Texas create franchise-tax nexus for an out-of-state corporation?

Short answer: Yes. The corporation employed its own programmers outside Texas but used independent contractors to perform programming services in Texas. Those in-state services subjected it to both former franchise-tax components. The letter expressly left sales-tax treatment for a separate response.

Apply this to your situation

This page answers the general question as of 1997. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 1997
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is an official Texas Comptroller of Public Accounts letter published on the State Tax Automated Research (STAR) system. Letters on STAR can be the basis of a detrimental reliance claim only for the taxpayer to whom the letter was directly issued (see 34 Tex. Admin. Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. This 1997 response addresses only former franchise-tax nexus from Texas programming services. It expressly does not decide the sales-tax consequences, which were referred for a separate response. Confirm current law. Taxpayer-identifying details are redacted. This summary is informational only and is not legal or tax advice. Consult a licensed Texas tax professional about your specific situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page) is the authoritative source for any reliance.

Plain-English summary

Independent contractors performing programming in Texas created nexus for both former franchise-tax components.

The out-of-state corporation employed its own programmers outside Texas but also hired independent contractors to perform computer-programming services in Texas.

Texas said those in-state services subjected the corporation to both taxable capital and earned surplus under Rules 3.546(c)(2)(A) and 3.554(d)(6).

The letter did not decide whether the services were taxable for sales-tax purposes; that issue was reserved for separate correspondence.

What this means for you

Out-of-state software businesses

Using contractors rather than employees did not prevent nexus when the company's services were performed in Texas.

Tax professionals

Keep franchise-tax nexus separate from sales-tax classification; this record answers only the former.

Common questions

Q: Did the Texas contractors create nexus?
A: Yes.

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

Q: Did the letter decide sales-tax treatment?
A: No.

Citations and references

  • 34 Tex. Admin. Code Secs. 3.546(c)(2)(A) and 3.554(d)(6)

Source

Original ruling text

March 10, 1997

Dear ***:

Thank you for your recent e-mail request concerning your client's liability for
Texas franchise tax. This response will address only the franchise tax
implications of your question. The sale tax implications will be addressed
under a separate cover by a sales tax specialist.

In your e-mail, you stated that your client is an out-of-state corporation.
The client employs computer programmers from a location outside of Texas. They
also use independent contractors to perform computer programming services in
Texas.

Based on this information, your client is subject to both components of the
franchise tax. See franchise tax rule 3.546(c)(2)(a) and Rule 3.554(d)(6). I
have attached the rules to this response for your review.

These rules outline various activities that, when performed in Texas, create
nexus for an out-of-state corporation.

Also, for your future reference, the franchise tax statute is available on the
internet at
www.capitol.state.tx.us/statutes/txtoc.htm. Franchise tax rules are available
at www.sos.state.tx.us/tax/34/1/3/V/index.html.

If you have questions about this, my internet address is
[email protected]. You may call me at (512) 463-4612 or toll-free at
1-800-531-5441, extension 3-4612.

Sincerely,

Janet Spies
Tax Policy Division

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