Texas Adopts Economic Nexus Standards for its Franchise Tax

Out-of-state companies earning Texas gross receipts of $500,000 or more are now subject to the franchise tax as well as sales tax.

The Texas Comptroller has established the threshold for determining when an out-of-state company has margin/franchise tax liability for revenue earned in Texas.

The latest amendments to the state’s nexus regulations apply to “any foreign” entity that does not have a physical presence in Texas. Such companies 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. (A foreign entity is defined as a taxable entity not chartered or organized in Texas.) The $500,000 gross receipts threshold is determined using Texas apportionment sourcing rules.

The new rule was finalized in late December and applies to all franchise tax returns due on or after January 1, 2020. The franchise tax economic nexus threshold is identical to the sales tax economic nexus threshold that became effective October 1, 2019.

For franchise tax purposes, nexus can now be triggered by having a physical presence in the state, or meeting the $500,000 gross receipts in the state threshold, or having a Texas sales tax permit. A foreign taxable entity that holds a Texas use tax permit is presumed to have nexus. Thus, a company that holds a sales tax permit in Texas may have franchise tax compliance obligations even if it has no physical presence and less than $500,000 in sales.

The Comptroller has been considering the nexus threshold for some time. Following a decision by the U.S. Supreme Court that established liability for remote sellers, states have moved to establish economic thresholds for determining nexus.

If your company wasn’t chartered in Texas but is selling products into the state, consult one of our tax advisors for more information about these new standards.

© 2020