Are a Texas company's out-of-state salespeople - who hand out business cards with a local phone number but no local address - protected by PL 86-272, so the throwback rule applies?

Plain-English summary

This is an internal Tax Policy question-and-answer memo addressing the mirror image of the same-era clarification letter (STAR Accession No. 200210497L): here a Texas-based company wants to know whether its out-of-state salespeople are protected by Public Law 86-272 - which matters because if the company is not taxable in those other states, the (pre-2008) Texas franchise tax throwback rule pulls those sales back into Texas receipts.

• The facts. A Texas pharmaceutical/mineral-supplement manufacturer ships from its Texas plant by common carrier to customers in other states. Its out-of-state salespeople work from home, only solicit orders, and carry business cards showing the company name/logo, a local home-office phone and fax, an 800 number to corporate, and a Texas PO box - but the telephone listings are in each salesperson's own name, not the company's.
• The rule. Under Rule 3.554(d)(18), a corporation is doing business (for earned surplus) where it maintains an office or place of business, and an employee's home can count only if facts show it is formally attributed to the company - e.g., the company advertises the home address as a place where its goods can be bought or business transacted.
• Business cards are "business literature." The memo confirms business cards (and a local phone-book listing) are business literature - objective evidence of what the company represents to the public. But a card with a local phone number and no local address does not rise to the level of an office: there is no specific place a person can physically go to transact business.
• The holding. Because the salespeople's cards had local phone numbers but no local addresses, their homes are not attributed to the taxpayer; the company did not exceed PL 86-272 in those states. It is therefore not taxable there, so the throwback rule applies to those out-of-state sales (they count as Texas receipts).
• Disavows a misleading email. The memo says a July 23, 2002 Tax Policy email the taxpayer's consultant relied on "could be seen as somewhat misleading" and, to the extent inconsistent, should be disregarded; Tax Policy would clarify that email to the original questioner - which it did in STAR Accession No. 200210497L.

Currency note: This applies the pre-2008 franchise tax's earned surplus nexus and throwback rules, replaced by the current margin tax (House Bills 3 and 3928) effective January 1, 2008. Treat as historical.

What this means for you

Texas companies selling into other states

The throwback rule cuts the opposite way from what a seller usually wants: if your only activity in the destination state is protected solicitation (so you are not taxable there), those sales get thrown back into your Texas receipts. Thin presence - home-based reps whose cards show a local phone but no local address - kept the company inside PL 86-272 protection and therefore inside throwback.

Anyone relying on an informal Tax Policy email

The agency here expressly disavowed a prior email as misleading. Informal email answers are not reliable authority; the published STAR letter controls, and this memo and its companion (200210497L) restate the actual policy.

Accountants and tax professionals

The pivotal fact for the office/place-of-business test is a local address or a company-name listing, not the phone number alone. Apply that both ways - to test a Texas company's out-of-state protection (throwback) and an out-of-state company's Texas nexus (earned surplus).

Common questions

Q: Do out-of-state business cards with a local phone number defeat PL 86-272 protection?
A: Not by themselves. Without a local address, the cards do not establish an office or place of business, so protection is not lost (Rule 3.554(d)(18)).

Q: Why does that trigger the Texas throwback rule?
A: If the company is not taxable in the destination state (because it stays within PL 86-272), the throwback rule treats those sales as Texas receipts.

Q: Are business cards "business literature"?
A: Yes. The memo confirms business cards are business literature - but a card with a local phone and no local address still does not create an office.

Citations and references

Authorities:

• 34 Tex. Admin. Code Sec. 3.554(d)(18) - a corporation is doing business in Texas (earned surplus) if it maintains an office or place of business, including an employee's home formally attributed to the company
• 34 Tex. Admin. Code Sec. 3.554(d)(8) - business literature
• Public Law 86-272 - federal protection from a net-income tax where in-state activity is limited to solicitation of orders

Related ruling (described in prose, not linked):

• STAR Accession No. 200210497L - the companion clarification letter to the person who received the disavowed July 23, 2002 email

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200209451L

Original ruling text

September 24, 2002

Subject: Telephone line and nexus for ES

QUESTION: I have a question as to whether Taxpayer's activities in other
states fall within the protection of PL 86-272 to warrant the application of
the throw back rule.

Taxpayer is based in Texas and manufactures pharmaceuticals and mineral
supplements for human consumption. Taxpayer uses common carriers to directly
ship the products from its Texas manufacturing facility to customers in other
states. Taxpayer has salespersons who live in various out-of-state locations
and who solicit customers in those states. These salespersons work out their
homes and have both telephones and fax machines at their "home offices." The
telephone listings are under the name of each individual salesperson, and not
in Taxpayer's name. However, Taxpayer reimburses their salespersons for their
telephone and fax lines expenses. The out-of-state salespersons have business
cards that show the company name/logo, local home office phone number and local
fax number, an 800 number to the Corporate Center, and a Texas PO Box address.

Taxpayer contends that the business cards are "business literature" as
contemplated by Rule 3.554(d)(8) and that Tax Policy Division (written by Joe
Mancuso) issued an e-mail response on July 23, 2002 indicating that a
corporation had nexus in Texas for earned surplus when it reimbursed the cost
of the telephone lines, that are listed on the corporation's employee business
card. Taxpayer contends that the converse must be true - i.e., it is
sufficient nexus in other states. My understanding of the agency's policy was
that corporations must have a telephone listing in the local city where the
salesperson lives in order to establish representation in that city. My
research shows that Taxpayer does not have telephone listings in Taxpayer's
name in the cities where the salespersons live.

Because there is no telephone listing for the Taxpayer and because the
salesperson's "home office" is neither open to the public nor identified as a
specified place where customers can come, it is my opinion that Taxpayer does
not fall within Rule 3.554 (d)(18). I believe the throw back rule is
applicable. I have been unsuccessful in locating any research materials as it
pertains to business cards as "business literature" or company listing. I
request clarifications or guidance on the above scenarios.

ANSWER: Rule 3.554(d)(18) specifies that a corporation is doing business in
Texas for earned surplus purposes if the corporation maintains an office or a
place of business in Texas. It recognizes that private homes from which
employees make sales could be considered the corporation's offices or places of
business if there are facts to establish that those private homes are an
extension of the corporation's business. For example, if a corporation
requires an employee in Texas to use his home as an office and also advertises
the employee's home address as a place where the corporation's goods can be
purchased or where other corporate businesses can be transacted, the agency
would conclude that employee's home to be the corporation's office or place of
business in Texas. A corporation that maintains an office or place of business
in Texas would not fall within the protection of PL86-272.

In making a determination whether an employee's home should be formally
attributed to the corporation, all facts are considered. Generally, business
literature used by a corporation or its employees are good sources of facts
because they are an objective evidence of the corporation's representation made
to the general public as to the existence of its office or place of business.
The term "business literature" is broadly defined, and it can be any written
document that is used by the corporation or its employees to advertise,
promote, or distribute information about the corporation, or the corporation's
products. Business cards constitute a form of business literature. Similarly,
a local telephone book is an objective evidence of the corporation's
representation as to its office or place of business.

Business cards that have a local address and telephone number under the
corporation's name in a state would indicate that the corporation has an office
or place of business in that state. Likewise, a local telephone book that has
a local address and local telephone number under the corporation's name would
indicate that the corporation has an office or place of business in the state.
However, your facts suggest otherwise. Based on the facts presented, the
business cards used by Taxpayer's salespersons have local telephone numbers,
but do not have local addresses. Having a business card with an in-state
telephone number does not seem to rise to the level of an office or place of
business. There is no specific location where a person can physically go to
discuss or transact business. Accordingly, the agency would conclude that the
homes of the salespersons cannot be attributed to Taxpayer and that Taxpayer
did not go beyond the activities protected by PL 86-272. The throwback rule
should be applied.

Taxpayer's tax consultant relies on an e-mail response received from Tax Policy
Division in advocating for a different result. In reviewing that July 23, 2002
e-mail response, it appears that the response could be seen as somewhat
misleading. To the extent that e-mail response is inconsistent to the agency's
response stated herein, it should be disregarded as not reflecting the agency's
policy. Tax Policy Division will clarify its response to the person who
submitted the question that generated the July 23, 2002 response [See
200210497L.].

ASK POLI - 200209451L