Texas State Tax Rulings
Free plain-English summaries of state tax letter rulings and advisory opinions issued in Texas, with full citations and the original source on every page.
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Did an Arkansas seller create former Texas franchise-tax nexus when its Texas salesperson provided customer service and occasionally delivered small items?
Yes. The salesperson's Texas customer-service activity subjected the corporation to the former taxable-capital component. The salesperson's occasional deliveries went beyond protected solicitation und…
Did a corporation become subject to former Texas franchise tax by providing consulting services in Texas during 1994 and 1995?
Yes. Providing consulting services in Texas meant the corporation was doing business in the state under Section 171.001. If its Texas activity occurred only during 1994 and 1995, the letter said it wo…
Could a corporation exclude accrued vacation reserves from taxable-capital surplus as debt when vacation would be paid at each employee's future pay rate?
No. Because vacation pay would be calculated at each employee's salary when the vacation was taken, the accrued amount was an estimate rather than a legally enforceable obligation measured in a certai…
Did an independent contractor living in Texas and taking sales orders create former franchise-tax nexus for a corporation with no Texas assets?
Yes. The Texas independent contractor created nexus and required franchise-tax reports even though the corporation had no Texas assets. The corporation was subject to the former taxable-capital compon…
How did a corporation apportion its share of a Texas partnership's receipts under the former taxable-capital and earned-surplus components?
For taxable capital, the corporation generally included its share of partnership net profit, although it could use its share of gross receipts if GAAP treated them as revenue. Net-method receipts were…
What franchise-tax filings were required after a corporation's Texas certificate of authority was forfeited and its account became inactive?
The Comptroller returned the submitted initial report because the corporation's franchise-tax account was inactive after its certificate of authority was forfeited. If it did business in Texas after J…
When an S corporation acquires a Texas limited partnership through general-partner and limited-partner LLCs, which entities owe Texas franchise tax?
Only the LLC acting as general partner owes franchise tax; the controlling S corporation and the limited-partner LLC do not. A Delaware S corporation planned to acquire a Texas mining limited partners…
How were dividends and interest, including income from federal obligations, treated under the former Texas franchise-tax components?
Taxable capital included dividends and interest, even federally tax-exempt interest, in surplus and everywhere receipts; Texas receipts depended on the payor's legal domicile. Earned surplus included …
Was gain from selling subsidiary stock to an Ohio corporation a Texas receipt for former taxable-capital apportionment, and did a Section 338(h)(10) election change the result?
The gain was included in everywhere receipts but not Texas receipts because securities sales were sourced to the payor's legal domicile and the buyer was an Ohio corporation. The seller had to calcula…
How did Texas treat a sale of 90% of LLC interests followed by a federal Section 754 basis adjustment under the former franchise tax?
If the seller's gain was unitary income, Texas treated the LLC-interest sale as an intangible sale sourced by the payor's location for both former franchise-tax components. The LLC itself recognized n…
How did the former Texas franchise tax define taxable capital, surplus, and net taxable capital?
Taxable capital consisted of the corporation's stated capital plus surplus. Net taxable capital was the taxable-capital amount after apportionment and allowable deductions. The letter directed readers…
How did Texas calculate former franchise-tax penalty and interest when an annual report was extended, underpaid, or filed without an extension?
An extended report still showed its original due date. The 90% payment test used total tax on line 36, less the payment made by the original due date. The unpaid difference drew 5% penalty, another 5%…
Could a multistate air-freight carrier use a special four-factor formula for the former Texas franchise tax?
No. Texas denied the carrier's proposed formula based on miles, arrivals and departures, shipping weight, and sales. Section 171.106 required a single gross-receipts factor for both former franchise-t…
Were S corporations subject to the former Texas franchise tax?
Yes. Texas imposed the former franchise tax on each corporation doing business in Texas or chartered or authorized to do business there, including an S corporation. A 1993 bill that would have exempte…
How did Texas address possible double taxation of related S corporations and LLCs under the former earned-surplus tax?
Texas did not resolve the stated S-corporation parent-and-subsidiary issue because it was still considering Qualified Subchapter S Subsidiary treatment. It did explain that an LLC investor should excl…
How did an acquired company report the former Texas franchise tax after changing from a December 31 to March 31 year-end?
The company did not need Texas permission to change its accounting period and should not file a short-period franchise-tax report. Its 1998 annual report used the 12 months ending March 31, 1997 for t…
Could a company use an intended later restructuring or another entity's apportionment factor to reduce former Texas taxable capital?
No. Texas required the taxpayer's taxable-capital component to reflect its actual financial condition at the relevant period end and its own apportionment activity. The Comptroller rejected using anot…
Does owning an interest in — or being a partner in — a partnership that does business in Texas make a corporation 'doing business' in Texas for franchise tax?
It depends on the type of partner: a general partner is doing business in Texas if the partnership is, but a limited partner is not — if its only Texas connection is the partnership interest. The Comp…
Did a Section 332 liquidation create former Texas earned surplus or receipts for the parent or subsidiary?
No. Based on the Comptroller's understanding of Sections 332 and 337(a), the parent excluded the deferred gain from former earned surplus and receipts because it was not federal taxable income or fede…
How did a parent LLC account for an investment in a subsidiary LLC under the former Texas franchise tax?
Texas treated an LLC as a corporation for the former franchise tax. A parent LLC used the cost method for its subsidiary investment under the taxable-capital component. For earned surplus, it excluded…
How did Texas treat a Nevada loan-participation subsidiary, its Texas nexus, and dividends paid to a Texas bank?
On the original facts, Texas found the Nevada subsidiary had nexus because the Texas bank and other Texas servicers performed services for it. Dividends formally declared from earnings were respected;…
Did a foreign corporation create Texas franchise-tax nexus by serving as general partner of Texas limited partnerships?
Yes. Assuming the three limited partnerships did business in Texas, the California corporation's role as their general partner created Texas nexus under the former franchise tax. It had to file an ini…
If Texas adopted the 1996 Internal Revenue Code definition, would 1997 federal changes count when determining S-corporation status?
Conditionally, yes. The Comptroller said that if pending legislation changed Texas's statutory IRC definition to the Code in effect for 1996, provisions specified in that Code but effective in 1997 wo…
Did out-of-state contractor licensing or ownership of Texas partnerships create nexus for a holding company and its subsidiaries?
The holding company and two subsidiaries were not doing business in Texas so long as partnership employees did not act as their agents in Texas and no other Texas connections existed. Two different su…
How did Texas treat a Nevada loan-participation subsidiary and dividends paid to its Texas bank parent?
Texas found the Nevada subsidiary had nexus because the Texas bank and other Texas servicers performed services for it. Dividends formally declared from earnings were respected. The Texas-domiciled ba…
How did the former Texas franchise tax apply to an S corporation?
Texas generally taxed an S corporation like any other corporation doing or authorized to do business in the state. Under the 1997 system it computed taxable-capital and earned-surplus components, appo…
How were receipts from a software support, maintenance, and enhancement plan apportioned under the former Texas franchise tax?
Texas treated the plan as licensing a computer program because nearly all costs related to upgrades, extensions, and enhancements rather than telephone support. Renewal charges were therefore apportio…
Could a federal S corporation opt out of S-corporation treatment for the former Texas franchise tax?
No. Texas had no separate state election to accept or reject S-corporation status for franchise-tax purposes. Most treatment matched other corporations, but an S corporation could elect the federal in…
When was the initial former Texas franchise-tax report due after a company with nexus obtained a certificate of authority?
The Comptroller restated a prior determination that the company had Texas nexus and was subject to franchise tax, but this letter did not repeat the underlying nexus facts. After receiving authority t…
Where were royalty receipts from trademarks, franchises, and licenses sourced under the former Texas franchise tax?
Texas sourced the intellectual-property owner's royalty revenue to the payor's location for both former franchise-tax components. Rule 3.549 expressly used that rule for taxable capital. Although the …
Did a publicly traded company have to send its Public Information Report to a director paid for board service?
No. The Comptroller said the publicly traded company did not need to send a copy to a director who was paid for board services. Section 171.203 targeted people who might be listed after their relation…
Which accounting periods applied to taxable capital and earned surplus on an initial former Texas franchise-tax report?
The corporation's normal December 31 year-end did not satisfy the taxable-capital timing test, so taxable capital used the month-end nearest the first anniversary of doing business in Texas. Earned su…
Did a foreign corporation owe the former Texas franchise tax even without a certificate of authority?
Yes. The corporation lacked authority to transact business in Texas, but it appeared to have begun doing business there in 1988 and was therefore subject to the former franchise tax. The letter treate…
Could a parent reduce its former Texas taxable-capital basis after liquidating a subsidiary whose charter remained active?
No for taxable capital. Because the subsidiary's charter remained active, Texas did not recognize the liquidation or adjust the parent's cost-method investment basis on its 1997 report. Earned-surplus…
What former Texas franchise-tax filing rules applied to a foreign S corporation and its nonresident shareholders?
The foreign S corporation itself had to file an initial franchise-tax report and annual reports and was taxed like a C corporation under the former system. The initial report was due 89 days after the…
Could an S corporation with up to 75 shareholders qualify for the 1998 former Texas earned-surplus report?
Not under the statute as it stood on March 21, 1997, because Texas still calculated earned surplus using the 1994 Internal Revenue Code. If pending legislation changed the reference to the 1996 Code, …
How did Texas treat a Qualified Subchapter S Subsidiary under the former franchise tax in March 1997?
Texas treated a state-law QSSS as a separate corporation required to file its own franchise-tax report, because the tax applied to each corporation and consolidated reporting was prohibited. For earne…
How did the former Texas franchise tax apply to a new S corporation's expenses, apportionment, and filing duty?
Texas generally taxed the S corporation like other corporations. Earned surplus allowed expenses to the extent deductible under federal law, while taxable capital reflected wages and expenses through …
Did a Texas-based employee investigating aircraft accidents create franchise-tax nexus for an out-of-state corporation?
Yes. Even though the corporation had no Texas facilities or sales activity, its employee lived and worked from home in Texas and investigated aircraft accidents in Texas and nearby states. Performing …
Which occasional Texas activities created earned-surplus nexus, and when did Public Law 86-272 protect a seller?
A one-time buyer visit to a supplier did not create earned-surplus nexus on the assumed facts. A customer seminar, recurring Texas bank reviews, and acquisition due diligence did. P.L. 86-272 did not …
Did using independent contractors for computer programming in Texas create franchise-tax nexus for an out-of-state corporation?
Yes. The corporation employed its own programmers outside Texas but used independent contractors to perform programming services in Texas. Those in-state services subjected it to both former franchise…
How did the former Texas franchise tax define taxable capital and surplus?
Taxable capital was the corporation's stated capital plus surplus. Section 171.109(a)(1) defined surplus as net assets minus stated capital and said it included unrealized, estimated, or contingent lo…
Were commissions earned in Texas and shoe sales delivered in California Texas receipts under the former franchise tax?
The commissions were Texas receipts for both former franchise-tax components because the taxpayer performed the customer service in Texas. The shoe-sale receipts were not Texas receipts because delive…
Did Public Law 86-272 protect a Texas-authorized corporation from both former franchise-tax components?
No. The certificate of authority made the corporation subject to the former taxable-capital component even if its only Texas activity was protected solicitation. If the stated activities qualified und…
What initial and later former Texas franchise-tax reports followed a merger into a newly formed surviving corporation?
The surviving corporation's initial report was due May 7, 1997 and covered the privilege period from February 8, 1996 through December 31, 1997. Its December 31, 1996 year-end supplied both initial co…
Could a corporation use federal net operating losses from before 1991 to reduce later former Texas earned surplus?
No. Former Texas earned surplus began with federal taxable income before federal net operating loss deductions. Texas instead allowed its own apportioned business-loss carryforward for up to five year…
Did forming a Texas corporation create former franchise-tax liability even before considering its business activity?
Yes. Section 171.001 subjected a Texas-chartered corporation to the former franchise tax. The corporation calculated taxable capital and earned surplus, apportioned each, and paid the greater amount a…
Did a minority beneficial interest in a trust doing business in Texas create franchise-tax nexus for a foreign corporation?
No. The foreign corporation held less than a majority beneficial interest, did not effectively control the trust or trustee, and had no other Texas activity. On those facts, Texas said the corporation…
Was the ultimate parent limited to a U.S. corporation for the former earned-surplus officer-compensation add-back?
No. Neither Section 171.110(c) nor Rule 3.558(h) limited the parent to a U.S. corporation. Texas interpreted the ultimate parent as any corporation exercising ultimate control over the subsidiary, inc…
What happened when a Texas corporation failed to file its initial franchise-tax and public-information reports?
The corporation's Texas privileges had already been forfeited under Section 171.251. If it did not file its overdue initial franchise-tax report and Public Information Report, its charter would be for…
Which periods did a December 11, 1996 corporation use on its initial former Texas franchise-tax report?
The initial report was due March 10, 1998 and covered the privilege period from December 11, 1996 through December 31, 1998. Because December 31, 1997 met both timing tests, taxable capital, earned su…
Did a Texas certificate of authority create franchise-tax liability when a corporation had no physical presence and took only customer-initiated phone orders?
Yes for taxable capital. The certificate of authority made the corporation subject to the former franchise tax even though it reported no Texas property, payroll, employees, or physical presence and t…
Did a Texas certificate of authority subject a corporation to both former franchise-tax components despite no Texas activity or employees?
Yes. The corporation reported no Texas business activity, employees, or other nexus for the period, but its certificate of authority meant it was authorized to do business in Texas. Section 171.001 th…
Did cumulative preferred securities tied to 49-year debentures qualify as debt under the former Texas surplus rules?
No. Texas concluded that the preferred securities failed at least one of Section 171.109(a)(3)'s three debt criteria. Mandatory redemption when the related 49-year debentures matured or were redeemed …
Could a surviving corporation inherit former Texas business-loss carryforwards from corporations merged into it?
No. Rule 3.555(g)(3) prohibited conveying, assigning, or transferring a former Texas business loss to another entity, including through a merger. The surviving corporation therefore could not use loss…
Did four annual paid Texas product-training seminars defeat P.L. 86-272 protection for a medical-products manufacturer?
Yes. Four recurring one-day seminars teaching customers how to fit the company's medical devices were training services, not protected solicitation. Their regular annual schedule meant they were not t…
Did corporations with more than 35 shareholders add back officer and director compensation under the former earned-surplus tax?
Yes. Section 171.110(a)(1) required the officer-and-director compensation add-back, while subsection (a)(2) excused corporations with no more than 35 shareholders. Presuming each claimant had more tha…
Did a voting trust holding shares for 19 people count as one shareholder for the former officer-compensation add-back exception?
Yes, if the shares were registered in the trust's name and the trust was not organized to avoid the add-back. Rule 3.558(b)(7) counted a trust, association, or other registered legal entity as one sha…
Did a stock sale and inclusion in a new federal consolidated return end a corporation's former Texas franchise-tax obligation?
No. The stock sale and shortened federal consolidated-return period did not end the corporation's Texas status while its certificate of authority remained active. Its filed 1996 report produced no tax…
Which asset basis controlled gross receipts when federal and former Texas franchise-tax depreciation methods differed?
Taxable-capital basis followed the method used to compute surplus: GAAP depreciation under the GAAP method or federal basis under the federal-income-tax method. Earned surplus used the actual Section …
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These are official tax letter rulings and advisory opinions issued by Texas's revenue authority in response to questions from specific taxpayers about how the tax law applies to their facts. A ruling is binding on the department only for the taxpayer who requested it and cannot be relied on by anyone else, but it is strong evidence of how the state reads the law. Every ruling above has a plain-English question and short answer, plus a link to the full original source.