Did four New Mexico LLCs have Texas franchise-tax nexus when Texas-resident members performed administration, financing, and purchase decisions in Texas?

Plain-English summary

The four New Mexico LLCs had Texas nexus because their Texas-resident members performed business activities for them in Texas.

The LLCs operated exclusively in New Mexico, had no Texas gross receipts, and were treated under New Mexico income-tax law as passing income directly to members. All members were Texas residents.

The key facts were not residence alone. In Texas, the members:

• provided administrative services for the LLCs;
• made decisions about major purchases and acquisitions; and
• obtained financing for the LLCs.

The Comptroller treated those activities as business and services performed on the entities' behalf, creating nexus under Rules 3.546 and 3.554.

Currency note: This is a pre-2008 two-component franchise-tax ruling. Texas replaced that tax with the margin tax effective January 1, 2008.

What this means for you

Out-of-state LLCs owned by Texas residents

Member residence alone was not the published holding. Nexus arose because the members performed management and financing functions in Texas.

Tax professionals

Identify where entity-level decisions, administration, and financing work occur, even when operations and customers are entirely outside Texas.

Common questions

Q: Did the LLCs operate in Texas?
A: Their stated operations were exclusively in New Mexico.

Q: Did they have Texas receipts?
A: No.

Q: What created nexus?
A: Texas administration, major purchase decisions, and financing performed by members for the LLCs.

Citations and references

• 34 Tex. Admin. Code Sec. 3.546
• 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/9902590L

Original ruling text

February 18, 1999

Dear Mr. **:

Thank you for your letter concerning the nexus of four limited liability
companies and their responsibility for Texas franchise tax .

You stated in your letter that there are four Limited Liability Companies
(LLC's) operating exclusively in New Mexico. The entities are classified as
LLC's for federal income tax purposes. Under New Mexico income tax law,
however, the entities are not considered LLC's or limited Partnerships; the
income is taxed directly to the limited liability company members/partners.

You also stated that none of these entities have gross receipts in Texas nor do
they conduct any business in Texas. However, all of the LLC members/partners
are individuals that reside in Texas. These individual provide some
administrative services on behalf of the LLC's in Texas and they make decisions
concerning major purchases/acquisitions and obtain financing for the LLC's in
Texas.

Based on the information provided, all four of the LLC's have nexus in Texas
and are responsible for filing Texas franchise tax reports because the
members/partners of the LLC's are conducting business and providing services on
behalf of the LLC's in Texas. See Rule 3.546, Taxable Capital: Nexus and Rule
3.554, Earned Surplus: Nexus. I have enclosed copies 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 3-4612. 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