TX 9812329L Franchise Tax (PRIOR TO 01/01/2008) 1998-12-18

Did a lease-contract broker create Texas franchise-tax nexus by hiring Texas agents to repossess and liquidate property after defaults?

Short answer: Yes. The broker bought and resold short-term rights to lease cash flows and sometimes serviced contracts without owning the leased property. When defaults occurred, it hired Texas companies to repossess and liquidate the property for third parties. Those Texas agents created nexus under Rule 3.546(c)(1). The letter also said Texas credit checks, financial-data gathering, or other financial activities would create nexus under Rule 3.546(c)(13).

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This page answers the general question as of 1998. Ezel answers yours, under current Texas tax law, with citations.

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 Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. The broker did not own the tangible property; nexus arose from agents performing repossession and liquidation, with separate financial-activity examples. It applies pre-2008 nexus rules, replaced by the margin tax effective January 1, 2008; 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

Texas repossession and liquidation agents created franchise-tax nexus for the lease-contract broker even though the broker sent no employee into Texas.

The client purchased discounted lease cash-flow rights after lease sales occurred, held them briefly, and resold the notes. It sometimes retained servicing rights, collected payments, and passed through Texas sales or use tax without owning the leased property.

If a serviced contract defaulted, the client could hire a Texas company to repossess and liquidate the item for the third-party owner. Rule 3.546(c)(1) treated those agents' Texas work as nexus for the client.

The Comptroller added that performing credit checks, gathering financial data, or conducting other financial activities in Texas would independently create nexus under Rule 3.546(c)(13).

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

What this means for you

Lease brokers and contract servicers

Outsourcing default remedies did not keep the broker outside Texas when local agents performed the work on its behalf.

Tax professionals

Separate title ownership from service activity. The broker lacked title to the equipment but still had nexus through its agents.

Common questions

Q: Did the broker own the leased property?
A: No.

Q: Did it send employees into Texas?
A: No.

Q: What created nexus?
A: Texas agents repossessing and liquidating property, plus any Texas financial activities described.

Citations and references

34 Tex. Admin. Code Sec. 3.546(c)(1)
34 Tex. Admin. Code Sec. 3.546(c)(13)
34 Tex. Admin. Code Sec. 3.554

Source

STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
Opinion: https://star.comptroller.texas.gov/view/9812329L

Original ruling text

December 18, 1998

RE: **
Texas Taxpayer Number: **
Charter/COA No. **

Dear Ms. **:

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

You stated in your letter that your client is in the business of brokering
leases. The company does not sell real or tangible property, but merely
purchases the "lease contract" after the sales lease transaction has occurred.
The client purchases the right to an intangible; it buys a discounted cash
flow. Additionally, the client typically holds the intangible for a very short
period of time (one or two months) until it sells the note to another broker or
financial institution.

Upon the sale of the contract to another company, the Client will sometimes
retain the right to service the contract. They receive payments and also remit
the appropriate sales or use tax to Texas. The client does not own title to
the tangible property, but merely collects and passes through the sales tax.
If the payments go in default while the client is responsible for servicing the
contract for a third party, the Client may hire a Texas company to repossess
the item and liquidate it for the third party. At no time, however, does the
client send an employee into Texas to perform this or any other type of work.

Because your client has agents in Texas, repossessing and liquidating tangible
personal property, it is subject to the Texas franchise tax. [See Rule
3.546(c)(1).] In addition, if your client performs any credit checks in Texas,
gathers financial data in Texas, or performs any other financial activities in
Texas, it will be subject to the tax. [See Rule 3.546(c)(13).]

I have enclosed copies of Rule 3.546, Taxable Capital: Nexus, and Rule 3.554,
Earned Surplus: Nexus, 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

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