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Ezel / Tax Rulings / TX
TX 9710260L Franchise Tax (PRIOR TO 01/01/2008) 1997-10-31

Did an Arkansas seller create former Texas franchise-tax nexus when its Texas salesperson provided customer service and occasionally delivered small items?

Short answer: Yes. The salesperson's Texas customer-service activity subjected the corporation to the former taxable-capital component. The salesperson's occasional deliveries went beyond protected solicitation under P.L. 86-272, so the corporation was also subject to the earned-surplus component.

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 Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded.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 applies the former taxable-capital and earned-surplus components to the stated customer-service and delivery activities. P.L. 86-272 protection is fact-specific; 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

A Texas salesperson's customer service created taxable-capital nexus, and the salesperson's deliveries also exposed the corporation to earned-surplus tax.

The Arkansas corporation had no Texas warehouse, office, or employees other than a salesperson serving Texas customers. Products ordinarily shipped from Arkansas, but the salesperson sometimes delivered small items.

The Comptroller said customer service in Texas subjected the corporation to the former taxable-capital component. The deliveries placed its activities outside P.L. 86-272 protection, so the corporation was also subject to the earned-surplus component.

What this means for you

Out-of-state sellers with Texas representatives

Post-sale customer service can create nexus, and even occasional deliveries may exceed the federal protection for solicitation of orders.

Tax professionals

Review what salespeople actually do in Texas, not only their job titles or where the company's inventory ships from.

Common questions

Q: Did customer service create nexus?
A: Yes, for taxable capital.

Q: Why did P.L. 86-272 not protect earned surplus?
A: Because the salesperson made deliveries.

Q: Did the lack of a Texas warehouse prevent tax?
A: No.

Citations and references

  • Texas Tax Code Sec. 171.001
  • 34 Tex. Admin. Code Secs. 3.549 and 3.554
  • P.L. 86-272

Source

Original ruling text

October 31, 1997

Dear Mr. **:

Thank you for your letter concerning your corporation's liability for Texas
franchise tax.

You stated in your letter that your company maintains no warehouses, offices,
or employees in Texas. All products are shipped from your Arkansas warehouse.
You do, however, have a salesman that provides customer service to your Texas
customers. On occasion, the salesman makes deliveries of small items to the
customers.

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." Franchise tax rules 3.549, Taxable Capital:
Nexus, and 3.554, Earned Surplus: Nexus, contain listings of activities, when
performed in Texas, which will subject a corporation to the tax.

Because your corporation has a representative providing customer service in
Texas, your corporation is subject to the taxable capital component of the
franchise tax. Because the salesman makes some deliveries, the activities of
your corporation are not protected under PL 86-272 and will be subject to the
earned surplus component of the tax.

I have enclosed copies of our nexus rules for your review.

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
Enclosures

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