Texas Adopts Economic Nexus Standard for Franchise Tax Purposes

Thoughtware Alert Jan 21, 2020
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The Texas Comptroller adopted an amended regulation requiring foreign entities to file Texas franchise tax reports. The amended regulation, 34 Tex. Admin Code Section 3.586, is effective December 29, 2019, and applies to franchise tax reports due on or after January 1, 2020.

Texas’ amended regulation indicates nexus is established with Texas for franchise tax purposes on the earliest of the following dates:

  1. The date the entity has physical nexus;
  2. The date the entity obtains a Texas use tax permit; or
  3. The first day of the federal income tax accounting period in which the entity had gross receipts from business done in Texas in excess of $500,000

It is also important to note that for Texas franchise tax purposes, Public Law 86-272 protection does not apply for out-of-state sellers of tangible personal property.

The amended franchise tax regulation creates a presumption that a foreign entity that is subject to Texas sales tax filing requirements and has a Texas sales tax permit is now subject to the Texas franchise tax as well. Texas previously adopted an economic nexus standard for sales tax purposes based on the U. S. Supreme Court ruling in South Dakota v. Wayfair, Inc., 585 U.S. ____ (2018) (“Wayfair”). The Court held that South Dakota’s imposition of sales tax on out-of-state vendors with no physical presence in South Dakota and sales of $100,000 or 200 transactions with South Dakota residents was reasonable. Texas adopted a Wayfair economic nexus standard and reporting requirement for sales tax purposes with a $500,000 sales threshold that became effective on October 1, 2019.

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