The Texas Comptroller of Public Accounts recently adopted amendments to the state’s margin or franchise tax rules establishing an economic nexus standard. Accordingly, any ‘foreign’ entity which does not have a physical presence in Texas will be deemed to have nexus with the state if it has gross receipts of $500,000 in Texas during its federal income tax accounting period.
Foreign entities are defined as a taxable entity not chartered or organized in Texas. The $500,000 gross receipts threshold is determined using the Texas apportionment sourcing rules. The rule was finalized in late December and applies to all franchise tax returns due on or after Jan. 1, 2020.
Significantly, the final rule provides that a foreign taxable entity that holds a Texas use tax permit is presumed to have nexus for purposes of the franchise tax. Thus, a company with no physical presence and less than $500,000 in sales may still have franchise tax compliance obligations.
The economic nexus threshold was under consideration by the Comptroller for some time, although it was only proposed in late September. Nexus for franchise tax purposes can be triggered by 1) physical presence, 2) meeting the $500,000 threshold, or 3) having a use tax permit. Many companies that were not subject to franchise tax may not have used the Texas apportionment rules.
Noteworthy, the franchise tax economic nexus threshold is identical to the sales tax economic nexus threshold recently effective on Oct. 1, 2019. For more information on the sales and use tax nexus standard, please read our article, Texas revises remote seller nexus rules post-Wayfair. All companies selling into Texas should consult with their tax advisors for more information on these new nexus standards.