Did an independent contractor living in Texas and taking sales orders create former franchise-tax nexus for a corporation with no Texas assets?

Plain-English summary

A Texas independent contractor who took sales orders created taxable-capital nexus, but P.L. 86-272 might protect the earned-surplus component.

The corporation had no assets in Texas. Its independent contractor lived in Texas, and the contractor's sole function was taking sales orders.

The Comptroller said the corporation had nexus, had to file franchise-tax reports, and was subject to the former taxable-capital component. The letter did not definitively impose earned-surplus tax; it said the corporation might be protected by P.L. 86-272 because the activity was limited to solicitation.

What this means for you

Out-of-state sellers using independent representatives

Independent-contractor status did not prevent Texas nexus for taxable capital.

Tax professionals

The earned-surplus answer turned on what the representative actually did. Activities beyond taking orders could change the P.L. 86-272 result.

Common questions

Q: Did the absence of Texas assets prevent nexus?
A: No.

Q: Was taxable capital due?
A: Yes.

Q: Was earned-surplus tax definitely due?
A: No; the letter said P.L. 86-272 might protect it.

Citations and references

• Texas Tax Code Sec. 171.001
• P.L. 86-272

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9710258L

Original ruling text

October 20, 1997

Dear Ms. **:

Thank you for your letter concerning your corporation's responsibility for
Texas taxes.

Texas does not have a corporate income tax. However, Section 171.001 of the
Texas Tax Code imposes a franchise tax on "each corporation that does business
in this state or that is chartered or authorized to do business in this state."

The franchise tax consists of two components: Taxable Capital and Earned
Surplus. The taxable capital component is based on the equity (i.e. assets
minus debts) of the corporation. The earned surplus component is based on
federal taxable income with modifications. Both components are apportioned and
multiplied by the appropriate tax rates (.25% for taxable capital and 4.5% for
earned surplus). A corporation will pay the greater of the two taxes. If the
calculated tax due is less than $100, no tax is due, but a franchise tax report
must be filed.

You stated in your letter that the corporation does not have assets in Texas,
but you do have an independent contractor residing in Texas whose sole function
is to take sales orders.

Based on this information, the corporation would have nexus in Texas and would
be responsible for filing our franchise tax reports. The corporation would be
subject to the tax on taxable capital but may not be subject to the tax on
earned surplus because of PL 86-272.

I have forwarded to you, under a separate cover, copies of our nexus rules and
some general information on the Texas franchise tax.

This response is based on current law and 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