Did a remote Internet seller create Texas franchise-tax nexus by having a Texas corporation drop-ship hardware and software to customers nationwide?

Plain-English summary

A Texas drop-shipping supplier did not create franchise-tax nexus for the remote seller when that arrangement was the seller's only Texas contact and none of the stated Texas-receipts triggers applied.

The remote seller operated outside Texas and sold computer hardware and software over the Internet using an out-of-state server. It contracted with a Texas corporation to ship products from the Texas corporation's inventory by common carrier to customers across the United States.

The Comptroller imposed three assumptions: there was no throwback, no item was delivered in Texas, and no sale was made to a payor legally domiciled in Texas. Under those assumptions, the Texas corporation had no Texas gross receipts from the transactions.

If the drop-shipping relationship was the remote seller's only Texas contact, the remote seller was not subject to either taxable capital or earned surplus.

Currency note: This 1999 response predates the margin tax and modern remote-seller rules. Texas replaced the former franchise tax effective January 1, 2008; confirm current nexus and sourcing law.

What this means for you

Remote sellers using Texas fulfillment vendors

The ruling depended on a narrow set of facts, including no other Texas contact. A different delivery destination, payor domicile, throwback result, or in-state activity could change the answer.

Texas drop-shippers

The letter also concluded that the Texas corporation had no Texas gross receipts from these transactions under the stated assumptions.

Common questions

Q: Were any products delivered in Texas?
A: No, under the letter's assumptions.

Q: Did the remote seller have another Texas contact?
A: No. The ruling assumes drop-shipping was its only Texas contact.

Q: Which former tax components applied to the remote seller?
A: Neither taxable capital nor earned surplus.

Citations and references

• The letter cites no specific section or rule number; its conclusion is expressly limited by the stated no-throwback, delivery, payor-domicile, and sole-contact assumptions.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9910325L

Original ruling text

October 27, 1999

Dear **:

Thank you for your letter concerning the franchise tax consequences of a
particular set of facts. I apologize for the delay in this response.

You state that a remote seller located outside of Texas sells computer hardware
and software over the Internet on a server located outside of Texas. The
remote seller contracts with a Texas corporation to direct ship the products
from the Texas corporation's inventory via common carrier to customers located
across the United States.

Assuming there is no "throw-back" and none of the items are delivered in Texas
or sold to payors legally domiciled in Texas, the Texas corporation would not
have any Texas gross receipts from these transactions.

If this is the only contact the remote seller has with Texas, the remote seller
would not be subject to either component of the Texas franchise tax.

This response is based on the facts presented in your letter. If the facts
change or if there are additional relevant facts, the response may change.

If you have any questions, please do not hesitate to write me or call me toll
free at 1-800-531-5441, extension 34662.

Sincerely,

Jerry Oxford
Tax Policy Division