Texas: Franchise Tax Assessment Upheld Against Company with One Texas Employee

A Texas Administrative Law Judge recently addressed whether a taxpayer, a Colorado-based financial planning service provider, had nexus in Texas for franchise tax purposes as a result of having a single employee working in the state. During the tax years at issue, the taxpayer paid wages to a Texas-based employee, as evidenced by Texas Wage Commission reports. After ignoring a nexus questionnaire, the taxpayer was assessed tax, penalties, and interest for failure to file and pay Texas franchise taxes. Under Texas law, franchise tax is imposed on “each taxable entity that does business in this state or that is chartered or organized in this state.” Currently, there is a physical presence nexus standard for franchise tax purposes and having an employee or representative in Texas doing the business of the taxable entity is one of the conditions that can create nexus. The Comptroller, in the ALJ’s view, had provided sufficient evidence to establish that the taxpayer had nexus in Texas based on the fact that the taxpayer was paying wages to an employee residing in Texas. Note that for each federal income tax period ending in 2019 or later, a proposed regulation published in the Texas Register on September 27, 2019 would replace the state’s current physical presence standard with an economic nexus threshold for franchise tax purposes. For more information on this ALJ decision (TCPA Hearing No. 114,474), please contact Doug Maziur at 713-319-3866.