Texas makes changes to franchise tax rule, adopts economic nexus threshold

Authored by Vicky Skowron

In response to the Wayfair decision, the Texas Comptroller of Public Accounts (“Comptroller”) adopted amendments to Texas Franchise Tax Rule 3.586 Margin: Nexus, effective Dec. 29, 2019.

Takeaways

Entities not chartered or organized in Texas (“Foreign Entities”) should consider three key takeaways:

• Beginning with franchise tax reports due on or after Jan. 1, 2020, Foreign Entities with annual gross receipts from business done in Texas of $500,000* or more have nexus even if the entity lacks Texas physical presence. A Foreign Entity is deemed to be doing business on the first day of the federal income tax accounting period in which the entity has more than $500,000 in gross receipts from business done in Texas.
• “Nexus is determined on an individual taxable entity level.” Texas has been on record in its combined filing authority that it is a “Joyce” state but until this amendment has not explicitly indicated franchise tax nexus is determined on an entity-by-entity basis in its nexus rule.
• Foreign Entities with a use tax permit are presumed to have nexus in Texas even without a physical presence or economic nexus.

The Comptroller’s rationale for the amendments

• The addition of the bright-line economic nexus standard was to simplify tax administration for both the Comptroller and taxpayers and to avoid having to make case-by-case determinations whether revenue-generating activities in Texas constitute substantial nexus.
• The presumption that having a use tax permit creates nexus was added to explicitly enumerate what was previously an existing Comptroller practice.

Points to consider

• Calendar-year Foreign Entities without physical presence that exceed $500,000 in Texas receipts in 2019 should assess their 2020 Texas franchise tax privilege period filing obligations.
• Foreign Entities should carefully consider whether they need to register for a Texas use tax permit.

Should you have any questions on the Texas franchise tax rule amendments, economic nexus or any state tax matter, please contact a member of the Baker Tilly state and local tax team to ensure you are well prepared and in compliance.