Texas proposes franchise tax economic nexus rule

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October 2019

Update: Changes to Rule Sec. 3.586 were finalized and published on December 20 with no significant changes from the summary provided below.

Overview

The Texas Comptroller of Public Accounts on September 27 published proposed amendments to Rule §3.586. One change involves treating any out-of-state taxable entity with greater than $500,000 in Texas gross receipts as having economic nexus in the state.

The proposed change could impose a filing responsibility under the Texas franchise tax on certain out-of-state taxable entities with no physical presence in the state, effective beginning with franchise tax reports due on May 15, 2020.

Interested taxpayers can submit comments during the 30-day review period to the Comptroller for consideration.

The takeaway

If approved, the proposed amendments to Texas Admin Code 3.586 will trigger nexus for an out-of-state entity that meets the specified criteria, even if the taxable entity has no physical presence in the state. This may result in significantly more taxpayers having a filing obligation caused by the new nexus standards.  Also, current taxpayers may have an increase to Texas receipts for taxable entities that previously excluded those receipts pursuant to the ‘Joyce’ rule (i.e., only receipts of those unitary entities with Texas nexus are included in a combined group’s Texas receipts).

Service providers and financial institutions should be aware of the proposed new standard as they may satisfy economic nexus principles. Such entities should consider how Texas sources sales of non-tangible personal property. Tax Admin Code 3.591 may be instructive related to the sourcing of services, interest, and intangible receipts.    Taxpayers also should review Sirius XM Radio, Inc. v. Hegar, Cause No. D-1-GN-16-000739, whereby the state views services to be sourced to the location of where the “act is done.”

The proposed regulation amendments were published on September 27.  Interested taxpayers can submit comments during the 30-day review period to the Comptroller for consideration.  Comments may be submitted to Teresa G. Bostick, Director, Tax Policy Division, P.O. Box 13528, Austin, Texas 78711-3528.

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Peter Michalowski

Peter Michalowski

State and Local Tax Leader, PwC US

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