Texas: Amended Franchise Tax Nexus Regulation Would Adopt Economic Nexus

In response to the Wayfair decision, the Texas Comptroller recently issued draft proposed amendments to TAC § 3.586, which addresses franchise tax nexus. Historically, the Comptroller has applied a physical presence nexus standard for franchise tax purposes. In fact, in a 2018 ruling issued post-Wayfair, the Comptroller clarified that, despite the Wayfair decision, Texas “has not moved away from the physical presence requirement for franchise tax at this time.”   

The draft proposed amendments would revise the regulation to provide that a foreign (non-Texas) taxable entity with gross receipts from business done in Texas of $500,000 or more has Texas nexus, even if the entity has no physical presence in the state. A taxable entity will be deemed to be “doing business” in Texas on the earliest of (1) the date the entity has physical presence; (2) the date the entity obtains a use tax permit, or (3) the first day of the accounting period in which the entity has gross receipts from business done in Texas in excess of $500,000. Recall, the Comptroller’s position has historically been that Public Law 86-272 does not apply for franchise tax purposes. Thus, under an economic nexus standard, remote sellers of tangible personal property with no physical presence in Texas will be deemed to have nexus and will not be able to claim 86-272 protection.  Per the proposed regulation, the Comptroller's office will apply the economic nexus standard beginning with reports due on or after January 1, 2020. Comments on the proposed regulation can be directed to Teresa G. Bostick, Director, Tax Policy Division, P.O. Box 13528, Austin, Texas 78711-3528. Any comments must be received no later than 30 days from the date the proposed regulation is published in the Texas Register.  Please contact Jeff Benson at (214) 840-6911 with questions on the proposed draft regulation.