Did delivering products to Texas in vehicles borrowed or assigned from a parent corporation create earned-surplus nexus for both companies?

Plain-English summary

Both related corporations had Texas nexus when parent-owned or leased vehicles were used under the manufacturer's control to deliver products into Texas.

Corporation A manufactured goods outside Texas. Parent Corporation B owned or leased railcars and trailers, then lent or assigned them to A without a written agreement or payment. A used the vehicles for Texas customer deliveries. Both corporations also solicited Texas sales.

Solicitation created taxable-capital nexus for both. For earned surplus:

• Corporation A: controlled the vehicles and delivered its products into Texas. Rules 3.546(c)(18) and 3.554(d)(13), (d)(20) treated delivery and delivery coordination as unprotected business activity.
• Corporation B: owned or leased the vehicles used in Texas and therefore also had nexus.

Subletting or trip-leasing the vehicles to the customer did not change A's earned-surplus result when delivery still occurred in Texas.

Currency note: This is a pre-2008 delivery-nexus ruling. Texas replaced the former tax with the margin tax effective January 1, 2008.

What this means for you

Related companies sharing transportation assets

Informal assignment without rent did not avoid nexus. Control and in-state use of the vehicles mattered.

Tax professionals

Analyze both the operating seller and the vehicle-owning affiliate; the same delivery fleet created distinct nexus facts for each.

Common questions

Q: Did Corporation A own the vehicles?
A: No, but it controlled and used them.

Q: Did Corporation B have nexus too?
A: Yes, because it owned or leased vehicles used in Texas.

Q: Did trip-leasing to the customer avoid nexus?
A: No.

Citations and references

• 34 Tex. Admin. Code Secs. 3.546(c)(18), 3.554(d)(13), and 3.554(d)(20)
• 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/9806622L

Original ruling text

June 4, 1998

Dear **:

Thank you for your letter concerning the nexus of your client.

You stated in your letter that Corporation A would be a manufacturer with
plants in several states outside of Texas. Corporation B, the parent of
Corporation A, would own and lease railcars from a railcar and trailer leasing
company. Corporation B would then lend or assign the leased vehicles to
Corporation A. No written agreement would be made between the parties and no
payment would be made for the use of the vehicles. Corporation A would then
use the vehicles to transport its product to Texas for delivery to Texas
customers. Corporation B would only have solicitation activities in Texas. No
other activities would be conducted in Texas that would exceed the protection
of P.L. 86-272.

Based on the information provided, I presume that both Corporation A and B are
foreign corporations and that both corporations solicit sales of products in
Texas. Because of this solicitation activity, both corporations will be
subject to the taxable capital component of the Texas franchise tax.

Your specific questions concerned the nexus of Corporation A for the earned
surplus component. I have restated your questions below.

Question 1:
Does delivery of a company's product using "borrowed" or "assigned" vehicles
constitute nexus for the earned surplus component of the Texas franchise tax?

Response:
Yes. Rule 3.554 (d) (13) states that "providing shipping information or
coordinating deliveries" constitutes doing business in Texas. Subsection
(d)(20) of the rule goes on to say that "conducting any activity listed as
doing business in Sec. 3.546 of this title (relating to Taxable Capital:
Nexus), which is not protected by Public Law 86-272" also constitutes doing
business in Texas. The delivery of product into Texas is discussed in
subsection (c)(18) of Rule 3.546 and would create nexus for the seller.

The vehicles in question are under the control of Corporation A, whether they
are borrowed, assigned, or leased, and create nexus for Corporation A for the
earned surplus component of the tax. Corporation B will also have nexus in
Texas for the earned surplus component of the tax because they own or lease the
vehicles that are being used in Texas.

Question 2:
In the event Corporation A sublet or trip leased the vehicles to their customer
and delivery was made in Texas, would Corporation A be subject to tax for the
earned surplus component?

Response:
Yes. See answer to number 1 above.

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