Do business cards showing a salesperson's local Texas phone number - but no local address - create earned-surplus franchise tax nexus beyond PL 86-272?

Plain-English summary

A state-tax consultant asked whether an out-of-state manufacturer's presence in Texas - salespeople who work from home and hand out business cards showing a local Texas phone number - crosses the line that would subject the company to the earned surplus component of the (pre-2008) Texas franchise tax. This letter clarifies an earlier July 23, 2002 email response from Tax Policy that an auditor had flagged.

• The facts. A Wisconsin manufacturer of topical ointments and personal-care products has no plants, warehouses, inventory, or facilities in Texas. Its Texas salespeople only solicit orders, work from home offices, cannot accept orders, and do not check stock or issue credits. The company reimburses their phone/fax lines (billed in the employee's name), and each salesperson's business card shows the company name, a Wisconsin PO box address, and a local Texas phone and fax number.
• The clarified holding. Merely handing out business cards with the salesperson's local telephone number - without a local address - would not go beyond Public Law 86-272 and would not subject the corporation to the earned surplus component of the franchise tax, if that is the corporation's only Texas connection.
• What changed. The earlier email had assumed the salesperson also had a home office and a telephone listing tied to a local address where company business could be transacted. Rule 3.554(e)(18) treats maintaining such an office/place of business (including an in-home one "formally attributed" to the company through a telephone listing or business literature) as exceeding mere solicitation. Because the additional facts showed no local address/listing, the card alone did not create that office.
• Process note. Tax Policy asked that audit-related inquiries be routed through the auditor going forward. The Comptroller separately addressed the parallel question (a Texas company's out-of-state salespeople and the throwback rule) in STAR Accession No. 200209451L, which points back to this clarification.

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

What this means for you

Out-of-state companies with traveling or home-based salespeople in Texas

A salesperson who only solicits orders is protected by PL 86-272 from the net-income-style (earned surplus) part of the tax. Giving customers a business card with a local phone number, by itself, did not defeat that protection. What would have mattered is a local address or a telephone listing in the company's name that tells the public the company can be reached at a specific Texas place - that is what turns a home into a company "office or place of business."

Tax consultants advising on nexus restructuring

The line is fact-specific and the detail that flips it is the local address/listing, not the mere phone number. Note also that Tax Policy will not stand behind an informal email answer built on assumed facts - confirm the actual facts, and route audit-stage questions through the assigned auditor.

Common questions

Q: Does a local Texas phone number on a business card create franchise tax nexus?
A: Not by itself. Without a local address, handing out such cards does not exceed PL 86-272 or create earned-surplus nexus (Rule 3.554(e)(18)).

Q: What would cross the line?
A: A local address or a telephone listing in the company's name indicating the public can contact the company at a specific Texas place - i.e., an office or place of business attributed to the company.

Q: Why did this letter issue?
A: To clarify an earlier July 23, 2002 email response that had assumed a home office and a local telephone listing existed; the corrected facts showed neither.

Citations and references

Authorities:

• Public Law 86-272 - federal protection from a net-income tax where in-state activity is limited to solicitation of orders
• 34 Tex. Admin. Code Sec. 3.554(e)(18) - maintaining an office or place of business (in-home or otherwise) attributed to the company, e.g., through a telephone listing or business literature

Related ruling (described in prose, not linked):

• STAR Accession No. 200209451L - the companion memo on a Texas company's out-of-state salespeople and the throwback rule, which points back to this clarification

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200210497L

Original ruling text

October 8, 2002

To:

From: Jerry Bobbitt

Dear **:

One of our auditors has brought to our attention the need to clarify Tax
Policy's e-mail response that was sent to you on July 23, 2002. We understand
that the issue that was the subject of the inquiry came up during the audit.

You asked whether certain activities were protected by PL 86-272. Our response
assumed that the employee had a home office and a telephone listing that
included a local address where business of the company could be transacted.
Our auditor has provided us with some additional information about the
situation. He will base his audit on the policy described below.

Merely handing out business cards with the salesperson's local telephone
number, without a local address, would not go beyond PL 86-272 and would not
subject the corporation the salesperson represented to the earned surplus
component of the Texas franchise tax, if that was the corporation's only
connection with Texas.

In the future, if an issue comes up in an audit situation, please send all such
inquiries through the auditor so that we may consult with the auditor if we
have any questions as to the facts.

If you have any questions, my internet address is
jerry.bobbitt@cpa,state.tx.us, or you may call me at 1-800-531-5441, extension
34496.

Sincerely,

Jerry Bobbitt
Tax Policy Division

Date: Wed, 10 Jul 2002 14:28:55 -0500
From: **
Subject: Nexus Rules
Sender: **
To: [email protected]
Reply-To:
Message-ID:

Dear Jerry,

We are working with a client on a state tax consulting project who is
attempting to restructure their activities in the state of Texas to allow them
to claim an exemption from the earned surplus component of the Texas franchise
tax. We would like some clarification regarding the application of T.A.C.
3.554(e)(18) to a specific fact situation.

Facts

Our client is a manufacturer of topical ointments and personal care products.
The company has no plants, warehouses, inventory or company facilities in the
state of Texas. No company personnel travel to the state. The company has
salespersons residing here in Texas. Deliveries are not coordinated within the
state and the company ships all of its product from out of state via common
carrier. Salesmen do not have the authority to accept orders and do not do
stock or inventory checks and do not issue credits to customers. Salesmen
conduct no activities within the state of Texas except the solicitation of
sales. Company salesmen reside throughout the state and maintain an office in
each of their homes. The company reimburses each of the sales people for the
cost of the phone and fax lines even though the phone bills are in the name of
the employee. Each sales person has business cards showing the company name,
post office address in the home state (Wisconsin) and the local (Texas) phone
number and fax number.

Questions

T.A.C. 3.554(e)(18) states:

"(18) maintaining, by any employee, an office or place of business (in-home or
otherwise) that is paid for directly or indirectly by the company and that is
formally attributed to the company or to the agent(s) of the company in their
agency status, even if such office is for the exclusive use of soliciting
orders. (For example, a telephone listing for the company or for the agents of
the company in their capacity as agents or other indications through
advertising or business literature that the company or its agents can be
contacted at a specific place will normally be determined as the company
maintaining within this state an office or place of business attributable to
the company or to its agents in their agency status);"

1. Does the reimbursement by the company of the employees' phone bills
   constitute indirect payment by the company for the expenses of a home office
   pursuant to the rule stated above? If so, can the company still claim an
   exemption from the earned surplus component of the franchise tax based on P.L.
   86-272?

2. The business cards show the company's name and the local Texas phone
   number. Would this be considered business literature according to the usage in
   the stated rule? Could the company continue to claim an exemption from the
   earned surplus component of the franchise tax if this was the only activity
   that falls within the nexus rule?

3. Does the fact that the Texas number on the business card indicates that the
   company can be contacted in Texas cause the company to be subject to the earned
   surplus component of the franchise tax?

Please provide us an opinion as to the interpretation of the rule based on the
above fact situation.

Thanks for your assistance.