Did an out-of-state sign manufacturer create Texas franchise-tax nexus by arranging local installation for customers?

Plain-English summary

Arranging for Texas companies to install the manufacturer's signs created franchise-tax nexus.

The out-of-state manufacturer had no Texas agents or representatives and delivered signs by common carrier. But at a purchaser's request, it located and arranged Texas installers. Sometimes it billed the customer and paid the installer; sometimes the installer billed the customer directly.

The Comptroller said the installer acted as the manufacturer's agent when the manufacturer arranged the installation. That made the manufacturer subject to franchise tax.

Public Law 86-272 did not change the result. The letter said it protected only qualifying solicitation of tangible-personal-property orders for the earned-surplus component, not product installation.

What this means for you

Out-of-state sellers

Using local independent businesses did not prevent nexus when the seller arranged the in-state installation for its customer.

Tax professionals

Determine who arranges and controls installation, not merely who receives the installer's invoice.

Common questions

Q: Did common-carrier delivery avoid nexus?
A: Not once the company arranged Texas installation.

Q: Did direct billing by the installer change the answer?
A: No distinction was made; the agency finding followed the company's arrangement of installation.

Q: Did P.L. 86-272 protect installation?
A: No.

Citations and references

• Public Law 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/9803396L

Original ruling text

March 23, 1998

Dear Ms. ****:

Thank you for your letter (dated August 26, 1997) concerning your company's
liability for Texas franchise tax. Your letter was forwarded to me, from our
Revenue Opportunity Group, on February 9, 1998. I apologize for the delay in
responding to your inquiry. Thank you also for taking time this afternoon to
discuss additional facts related to your inquiry.

You stated in your letter that your company manufactures signs. You do not
have any agents, brokers, independent contractors, or other company
representatives in Texas. All signs are delivered to Texas customers via
common carrier. The installation of the signs is completed by Texas based
companies. Contacts for the installation are made either through the use of
the yellow pages or at the request of the parties purchasing the sign(s). The
purchaser will pay the contacted installer directly, or in limited cases, the
installation fee is sent to your company and forwarded to the installer.

In our conversation today, you stated that your company arranges the
installation of the signs at the request of the purchaser. In some cases, you
bill the purchaser directly for the installation and then pay the installer.
In other cases, the installer sends a bill directly to the customer.
Unfortunately, when you arrange for the installation of the signs in Texas, the
installer is acting as your agent which creates nexus for your company.
Therefore, your company is subject to the Franchise tax.

You mentioned PL 86-272 in your letter. PL 86-272 applies only to the earned
surplus component of the Texas franchise tax and affords protection to those
companies whose only activities within this state is the solicitation of orders
for sales of tangible personal property. It does not protect a company who
installs products.

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

cc: Rose Orozco, Revenue Opportunity Program, Audit Division