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 out-of-state mortgage broker create Texas franchise-tax nexus by soliciting loans through mail and telephone?
No, if mail and telephone solicitation of mortgage loans was the corporation's only Texas activity and it lacked a Texas certificate of authority. Texas surveys, inspections, or other activities relat…
How did Texas treat S corporations and their subsidiaries before addressing the 1996 Small Business Job Protection Act changes?
Under the existing 1994-Code reference, the S corporation and its C-corporation subsidiaries filed separately and reported earned surplus separately. The S corporation received no Schedule C deduction…
Did Texas change its franchise tax treatment of municipal bond income for 1996 or 1997?
No changes. This December 1996 Comptroller letter confirmed there were no 1996 changes to the Texas franchise tax code and no tax-code changes affecting holders of municipal bonds set to take effect i…
Did proceeds from selling treasury stock enter taxable-capital gross receipts under the former Texas franchise tax?
No. Texas treated the treasury-stock sale as an issuance of the corporation's capital stock, so none of the proceeds entered Texas or everywhere gross receipts for taxable-capital apportionment. Divid…
When could a Comptroller sales-tax audit sample be used to project the former franchise-tax credit for manufacturing equipment?
Only a sample selected and projected by a Comptroller auditor could be used; taxpayer-created samples were not allowed. Projection was limited to the audited October 1, 1991 through September 30, 1993…
Could a corporation extend the deadline to amend its former Texas franchise-tax report after an IRS audit?
No. If a finalized IRS Revenue Agent's Report changed amounts used for Texas franchise tax, Rule 3.544(d)(2) required an amended Texas report within 120 days. The RAR became final when IRS administrat…
Was a qualified settlement fund subject to the former Texas franchise tax?
No, on the Comptroller's stated understanding. The letter said a qualified settlement fund could not be a corporation, LLC, bank, or savings and loan association under state or foreign law. Because it…
How did corporate expenses affect the two former Texas franchise-tax components?
Corporate expenses were generally deductible in computing taxable capital. They also reduced earned surplus to the extent the expenses were allowed as deductions when computing the corporation's feder…
Did leasing airplanes and train cars that lessees used in Texas create franchise-tax nexus for the lessor?
Yes. The lessor was subject because it held a Texas certificate of authority. It also had nexus independently because it leased airplanes and train cars that lessees used in Texas, even though the les…
Did changing fiscal year-end require an extra former Texas franchise-tax filing, and which earned-surplus periods applied?
No additional report was required solely because the fiscal year-end changed. The 1997 annual report used August 1, 1995 through April 11, 1996 for earned surplus. The 1998 report used April 12, 1996 …
Did an out-of-state alarm-monitoring company have Texas franchise-tax nexus without Texas plant, equipment, or employees?
Yes. The alarm-monitoring company was subject because it held a Texas certificate of authority. Texas also found independent service nexus because it processed monitoring signals for Texas customers, …
Did Canadian sales representatives soliciting Texas dealers create former franchise-tax liability, and did P.L. 86-272 protect the company?
Texas representatives soliciting dealer purchases of office furniture subjected the Canadian corporation to the former taxable-capital component. If their Texas activity was limited to soliciting orde…
How were intercompany receivable sales, collection gains, and servicing fees sourced under the former Texas franchise tax?
The parent's sale of receivables to its subsidiary created no gross receipts for either corporation. Any subsidiary gain collected above its purchase price was sourced to the customer-debtor's legal d…
Could an S corporation deduct IRS payroll-tax penalties when computing former Texas earned surplus?
No. Texas treated shareholder-allocated S-corporation items as if the corporation were taxed as a C corporation. Because the Comptroller understood Section 162 to disallow deductions for U.S. governme…
How did Texas source property sales, interest, rental-broker services, and railroad-car lease receipts under the former franchise tax?
Tangible-property sales were sourced where delivery occurred; interest followed the payor's legal domicile; lease-negotiation and car-rental management receipts followed where services were performed;…
How did an accounting-year and S-election change affect the 1997 former Texas report, and where were export commissions sourced?
Taxable capital used the December 31, 1996 financial condition and calendar-year receipts. Earned surplus combined February 1, 1995 through December 31, 1996, including short federal periods before an…
How did changing a corporation's year-end from July 31 to January 31 affect its 1997 and 1998 former Texas franchise tax reports?
The change created no additional filing requirement. The 1997 report used December 31, 1996 for taxable capital, the August 1, 1995-July 31, 1996 period for earned surplus, and the 1998 report used th…
What former Texas franchise-tax reports and additional tax applied when a corporation planned to dissolve in 1996?
The corporation properly filed its 1996 annual report and a 1996 final report paying additional tax because dissolution would end its earned-surplus liability. If it did not dissolve by December 31, i…
Did installment-sale gain belong in a dissolving S corporation's former Texas franchise-tax final report?
Only to the extent the gain was reported on the S corporation return through dissolution. That portion entered receipts and taxable earned surplus on the final report. Installment income reported late…
Did a corporation independently tax two short federal periods after its stock changed owners, or combine them on its former Texas report?
It combined them. Because the stock sale changed ownership but not the corporation's legal status, the 1996 annual report used the full 1995 calendar year. The corporation added both short-return amou…
Was a nonprofit charitable organization that may have done business in Texas during 1995 subject to former Texas franchise tax?
Possibly, but the letter did not decide the organization's liability. It said liability depended on whether the nonprofit was a corporation or other taxable entity, had Texas nexus under Rule 3.546, a…
In a reorganization, which entities owe Texas franchise tax when a corporate general partner and an out-of-state limited partner hold a Texas-active limited partnership?
The general-partner corporation owes franchise tax; the out-of-state limited-partner corporation and the partnership itself do not. As part of a reorganization, a parent corporation withdrew from Texa…
Did a corporate member include its share of partnership-taxed LLC income and receipts in former Texas earned surplus?
No. Assuming the LLC was treated as a partnership federally, the corporate member excluded its share of LLC income or loss from federal taxable income reported for Texas earned surplus and excluded th…
Did Texas or its political subdivisions impose income tax on individuals, or franchise tax on an unconnected North Dakota S corporation?
No on both stated facts. Texas and its political subdivisions imposed no individual income tax on wages, interest, dividends, capital gains, or other income. The North Dakota S corporation also was no…
When did a corporation's beneficial interest in a trust owning a Texas real-estate joint venture create former Texas franchise-tax nexus?
The joint venture and trust escaped franchise tax only if they were not formed as taxable entity types. The trust was doing business in Texas through its general-partnership interest in a venture owni…
How did a Texas S corporation report recognized gain from land sold under threat of condemnation for former franchise tax?
The recognized net gain entered both former franchise-tax components. It was included in taxable-capital surplus and earned-surplus federal taxable income, and the net gain entered both Texas receipts…
How does a Texas bank treat gains, losses, interest, and dividends from federal government obligations it buys and sells for its own account?
Only net gains and losses on the securities go into gross receipts, sourced by the payor's location; interest and dividends from federal obligations are excluded from the earned-surplus base. A Texas …
When did the former Texas throwback rule treat equipment shipped from Texas to another state as Texas receipts?
Sales shipped from Texas entered Texas receipts when the seller was not subject to tax in the destination state. Taxable capital used charter, authority, or doing-business standards; earned surplus as…
Did a Texas-organized LLC owe former franchise tax and have to file an initial report even if taxed federally as a partnership?
Yes. Organization under Texas law made the LLC subject to former franchise tax despite federal partnership treatment. Its initial report used Rule 3.562 for taxable capital and earned surplus, includi…
What former Texas franchise-tax penalties applied when a report was more than 60 days late and a tax determination remained unpaid?
A report more than 60 days late incurred a 10% penalty on unpaid tax. If the taxpayer had also received a deficiency or jeopardy determination and failed to pay it on time, the letter said an addition…
Is a foreign corporation that is the general partner of a Texas-active limited partnership subject to Texas franchise tax, and what about its shareholders and out-of-state limited partners?
The foreign corporation is subject to Texas franchise tax as the general partner of a Texas-active partnership; its individual shareholders and any out-of-state limited partners are not. A Florida S c…
Were receipts from goodwill and other intangibles sold to a Florida corporation included in former Texas receipts?
No. Assuming the asset-sale income was unitary, receipts allocated to goodwill and other intangibles followed the payor's legal domicile. Because the buyer was a Florida corporation and the tangible-p…
Did holding interests in limited partnerships doing business in Texas create former franchise-tax liability for a corporation?
Not if the corporation's only activity was holding limited-partnership interests. But if it was a general partner in any partnership doing business in Texas, the corporation was subject to former Texa…
Did the former Texas throwback rule cover interstate solicitation and products sold to customers outside the United States?
For interstate sales, independent solicitation created taxable-capital nexus but was protected under Public Law 86-272 for earned surplus, so the same shipments could avoid throwback for one component…
How did the former Texas throwback rule source receipts from medical products shipped from Texas, including exports?
Delivery to a Texas buyer produced Texas receipts. Delivery to another state produced non-Texas receipts unless the seller was not subject to tax there, in which case the receipts threw back to Texas.…
Did out-of-state salesmen who could bind the company on order terms remove Public Law 86-272 protection and Texas throwback?
Yes. Because the salesmen could bind the company on order quantities, some prices, payment terms, delivery dates, and refusals, the company had nexus in every state where it sent them. It was not prot…
Where were information-service receipts sourced for the former Texas taxable-capital and earned-surplus components?
They were sourced where the services were performed. The Comptroller classified the client's activity as information services and applied that performance-location rule to both taxable capital and ear…
How were separately contracted software modifications, upgrades, and maintenance receipts sourced under former Texas franchise tax?
Separate modifications and maintenance were services sourced where performed, while separately stated upgrades were sourced to the payor. If one upgrade-and-maintenance contract did not reasonably sta…
How were separately contracted software modifications, upgrades, and maintenance receipts sourced under former Texas franchise tax?
Separate modifications and maintenance were services sourced where performed, while separately stated upgrades were sourced to the payor. If one upgrade-and-maintenance contract did not reasonably sta…
Can a corporation use a three-factor apportionment formula instead of the single gross-receipts factor on a Texas franchise tax return?
No -- the refund was denied. A corporation filed an amended 1992 franchise tax report seeking a refund by using a three-factor apportionment formula instead of the single gross-receipts factor for bot…
A mail order company plans to set up two subsidiary corporations and a limited partnership that will operate in Texas, buying goods for resale to the mail order company, which then ships items to Texas customers; the mail order company will also periodically send a handful of employees into Texas to train and check on the limited partnership's staff. Does any of this create Texas sales/use tax and franchise tax nexus for the mail order company, and does the limited partnership have to collect sales tax on sales to the mail order company or its customers?
Yes, the mail order company has nexus. Sending its own employees into Texas on a recurring basis (initial training plus periodic quarterly/semi-annual site visits) to train and review the limited part…
When a business reorganizes — transferring assets to a new subsidiary, contributing assets between related corporations, or trading stock between commonly-owned subsidiaries — which of those transfers are subject to Texas sales tax, and how are stock-sale receipts allocated for franchise tax?
It depends on the transaction. A transfer of substantially all the assets of an identifiable business segment can still qualify for the occasional sale exemption even if a shared-use asset (like a com…
Does a mail-order company that has no property or payroll in Texas, but uses an independent contractor in Texas to handle customer calls and sometimes take orders, have nexus for Texas sales and franchise tax?
Yes. The Comptroller ruled the company has nexus for Texas sales tax under Tex. Tax Code § 151.107(a)(1), (2) and (7) because it uses the Texas-based independent contractor to carry out its everyday b…
In a reorganization forming a Texas real-estate limited partnership, which entities are subject to Texas franchise tax?
None of the three entities asked about were subject. In a planned reorganization, a Delaware parent would form two Delaware subsidiaries: one holding a 99% limited-partnership interest in a new Texas …
How does a mortgage lender apportion the proceeds from selling mortgage loans, and where are its loan-servicing receipts sourced, for Texas franchise tax?
If the mortgage loans are the corporation's inventory, the gross proceeds from selling them are gross receipts (not just the net gain), and because loan sales are sales of intangibles they are sourced…
After a corporation withdraws from Texas, does it still have franchise-tax nexus?
No. The Comptroller advised that after the date of its withdrawal from Texas, the corporation would no longer have nexus in Texas and therefore would not be subject to either component of the Texas fr…
Are a limited partnership, a trust, and the holders of the trust's interests subject to Texas franchise tax?
None of them were subject. Under the pre-2008 franchise tax, a limited partnership and a trust were not subject because neither is a corporation, and the holders of the trust interests were not subjec…
Is a foreign corporate limited partner in a Texas real-estate partnership subject to franchise tax, and what are the registration, penalty, and interest rules?
A foreign corporation that is only a limited partner in a Texas real-estate limited partnership is not doing business in Texas and has no franchise-tax nexus, but a general partner in the same partner…
Is a foreign corporation that is a general partner in a partnership owning a Texas apartment building subject to Texas franchise tax?
Yes. The Comptroller advised that a Wisconsin corporation that owns a general-partnership interest in a Wisconsin partnership whose main asset is a Texas apartment building has franchise-tax nexus, be…
For a limited partnership and its partners, where is the partnership's commercial domicile, and which entities have Texas franchise-tax nexus?
The partnership itself owes no franchise tax because partnerships are not subject to it, even though it has Texas nexus (one partner services its receivables from a Texas branch). Its commercial domic…
In a proposed acquisition using tiered partnerships, which corporate partners are subject to Texas franchise tax and how is their income apportioned?
The corporate general partners are subject, but the corporate limited partners, individuals, and the partnerships themselves are not. In a proposed acquisition using tiered partnerships (ABC, ABC II, …
Are limited partnerships, a trust, and the holders of the trust interests subject to Texas franchise tax?
None of them owed the tax. The Comptroller advised that two limited partnerships (ABC and EFG) and a Trust were not subject to the pre-2008 Texas franchise tax because they were not corporations, and …
Do a software developer's Texas sales, installation, and license fees create franchise-tax nexus, and do a franchisor's initial fee and royalties?
Both out-of-state corporations had Texas franchise-tax nexus. A New Jersey software developer with salespeople soliciting sales in Texas had nexus for both the taxable-capital and earned-surplus compo…
Does a bank have to include 'credit amounts' used to reduce its service charges in its gross receipts for Texas franchise tax purposes?
No. The Comptroller ruled that 'credit amounts' used to calculate bank service charges are not receipts to the bank for Texas franchise tax purposes, because they merely reduce a service-charge expens…
Does licensing software to Texas customers to access an out-of-state database service create Texas franchise tax nexus, even with no salespeople in the state?
Yes. The Comptroller ruled that licensing software to Texas customers so they can access an out-of-state gateway/database service creates substantial nexus with Texas for franchise tax purposes, even …
In a limited partnership, is the corporate general partner subject to franchise tax, is a corporate limited partner subject, and how is an affiliate's administrative fee added back to earned surplus?
The corporate general partner is subject to the franchise tax, because the limited partnership is doing business in Texas. A corporation whose only Texas connection is being a limited partner is not s…
In a corporate restructuring, is a subsidiary doing business in Texas, how are dividends and interest allocated, and is a partnership subject to franchise tax?
A partnership is not subject to the pre-2008 Texas franchise tax, even if it is characterized as a corporation for federal income tax purposes. In a corporate restructuring, the Comptroller also advis…
Did an out-of-state software company create Texas tax obligations by sending employees into Texas for customer training, and which software charges were taxable?
Yes. Employee training visits made the company engaged in business in Texas, requiring a permit and use-tax collection. Software, installation, and support were taxable; separately stated training was…
Did Texas-based independent salespeople require an out-of-state seller to collect tax, and what resale or exemption documents could the seller accept?
Yes. Commissioned independent salespeople created Texas business activity, requiring a permit and tax collection or valid certificates. A permit copy was not a certificate; Texas required separate res…
For Texas franchise-tax purposes, could a trust, partnership, association, corporation, or employee stock-plan trust count as one shareholder of a close corporation?
Yes. Each qualifying entity could count as one shareholder if it was not created primarily to hold the close corporation's stock. An employee stock-plan trust generally counted as one shareholder, sub…
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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.