Did a Delaware corporation create Texas franchise-tax nexus by keeping a Texas checking account and hiring a Texas resident as president?

Plain-English summary

Keeping a Texas checking account and hiring a Texas resident as president did not, by themselves, create franchise-tax liability for the Delaware corporation. Conducting corporate business from Texas would.

The Delaware corporation planned to acquire all stock of a bank. Based on the described activities, the Comptroller said the corporation was not subject to franchise tax merely because it retained a checking account at a Texas bank and employed a Texas resident as president.

The line changed if the president actually conducted the corporation's business while in Texas. That activity would constitute doing business and make the corporation liable for the tax.

The letter also addressed dividends paid by the Delaware corporation to its Texas corporate owner. Those dividends were sourced to the payor's state of incorporation: they entered receipts from everywhere but were not Texas receipts, provided Section 171.1031 did not apply. The letter notes that Section 171.1031 applied to dividends and interest received by banking corporations and savings and loan associations on reports due before January 1, 2000.

Currency note: This is a historical nexus and receipts-sourcing response under the pre-2008 franchise tax. Confirm current margin-tax nexus and apportionment rules.

What this means for you

Out-of-state corporations with Texas officers

An officer's Texas residence was not enough on these facts. The decisive risk was whether the officer performed the corporation's business in Texas.

Corporate owners receiving dividends

Under the rule applied here, dividends from the Delaware subsidiary were non-Texas receipts but remained in the everywhere denominator, subject to the financial-institution caveat.

Common questions

Q: Did the Texas checking account create nexus?
A: No, not on the facts presented.

Q: Did hiring a Texas resident as president create nexus?
A: No, unless the president conducted the corporation's business in Texas.

Q: How were dividends from the Delaware corporation treated?
A: They were receipts from everywhere but not Texas receipts, subject to Section 171.1031.

Citations and references

• Texas Tax Code Sec. 171.1031 - historical sourcing rule for certain financial institutions' dividends and interest

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9911322L

Original ruling text

November 18, 1999

Dear **:

Thank you for the information contained in your letter of October 29, 1999
concerning a Delaware corporation that will be acquiring 100 percent of the
stock of BANK of CITY. This response represents the Texas franchise tax
implications of the situation described in the ruling request.

Based on your description of the corporation's activities, it will not be
subject to the franchise tax. Retaining a checking account in a Texas bank and
hiring a Texas resident as President will not subject the corporation to the
tax. However, if the President conducts the business of the corporation while
in Texas, such activity would constitute doing business by the corporation and
make it liable for the tax.

With respect to your question about the receipt of dividends by the Texas
corporation that owns all of the stock of the Delaware corporation, the
dividends are apportioned to the state of incorporation of the payor.
Dividends declared and paid by a Delaware corporation are gross receipts from
everywhere but are not Texas receipts, provided that Sec. 171.1031 of the Texas
Tax Code does not apply. Please note that Sec. 171.1031 applies to dividends
and interest received by banking corporations and savings and loan associations
on franchise tax reports due prior to January 1, 2000.

This response is based on the facts presented. If there are different or
additional facts, the response may change.

If you have any questions, please call toll-free 1-800-531-5441, extension
3-4496. My regular number is (512)463-4496.

Sincerely,

Jerry Bobbitt
Tax Policy Division