Does the Texas franchise tax wholesale-center exemption still apply to an out-of-state company that leases trade-show space in Texas but also uses an independent representative soliciting in Texas year-round?

Plain-English summary

An out-of-state corporation leased permanent space in a permanent wholesale facility in Texas and participated in trade shows twice a year, five days at a time. It also used an independent manufacturer's representative who solicited sales in Texas throughout the year. It asked whether it qualified for the franchise tax wholesale-center exemption in Tax Code Section 171.084(c) (this letter was a clarification of an earlier response).

The Comptroller confirmed the company was right about the law but reached an unfavorable result on the facts:

• HB 2424 did expand the definition of "wholesale center" to mean a permanent wholesale facility that has permanent tenants and that promotes at least four national or regional trade shows in a calendar year. A tenant leasing space longer than the base period can qualify for the exemption only if it solicits orders on an occasional basis at the trade show.
• But the exemption did not apply here. Because the corporation maintained an independent representative soliciting business in Texas throughout the year, its Texas activity went beyond occasional trade-show solicitation. Those activities also went beyond what Public Law 86-272 protects, so the corporation was subject to both components of the Texas franchise tax.

The lesson: the wholesale-center exemption is narrow - it covers occasional solicitation at the trade show itself, not a year-round in-state sales presence.

Currency note: This applies the pre-2008 franchise tax and the Section 171.084(c) exemption as it then stood, 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 sellers exhibiting at Texas wholesale centers

Leasing permanent trade-show space and attending shows did not, by itself, cost you the exemption - occasional solicitation at the show was contemplated. What broke the exemption here was the separate, continuous solicitation by an independent representative operating in Texas all year. Layering a year-round in-state sales channel on top of trade-show attendance pushed the company into full franchise tax liability.

Accountants and tax professionals

Test the wholesale-center exemption against the taxpayer's total Texas footprint, not just the trade-show activity. Year-round solicitation by employees or independent reps both exceeds the "occasional basis" limit in Section 171.084(c) and typically exceeds Public Law 86-272 protection, exposing the company to both the taxable-capital and earned-surplus components.

Common questions

Q: Did attending Texas trade shows cost the company the exemption?
A: No - occasional solicitation at the trade show is within the exemption. The year-round independent-rep solicitation is what defeated it.

Q: Why doesn't Public Law 86-272 protect the company?
A: Its Texas activities went beyond the solicitation of orders that P.L. 86-272 shields, so the protection did not apply.

Q: What is the consequence of losing the exemption?
A: The corporation is subject to both components of the Texas franchise tax (taxable capital and earned surplus).

Citations and references

Statutes and authorities:

• Tex. Tax Code Sec. 171.084(c) (wholesale-center trade-show exemption; "wholesale center" definition as expanded by HB 2424)
• Public Law 86-272 (federal protection limited to solicitation of orders for tangible personal property)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200310576L

Original ruling text

October 23, 2003

TO: **

Dear **:

This correspondence is a clarification from an earlier response I sent to you
regarding nexus for your corporation.

The rules and statute I mention, as well as other related materials, are
available online at http://www.window.state.tx.us/taxinfo/franchise/index.html.

You indicated your company, an out of state corporation, leases a permanent
space in a permanent wholesale facility within the State of Texas. The company
participates in trade shows twice a year, for five days at a time, at this
facility. The company also has an independent manufacturer's representative
that solicits sales in Texas throughout the year.

You are correct that HB 2424 did expand the definition of "wholesale center" in
Texas Tax Code Section 171.084(c) to mean "a permanent wholesale facility that
has permanent tenants and that promotes at least four national or regional
trade shows in a calendar year. A tenant leasing space at a wholesale center
for a period longer than the period prescribed by Subsection (b) may qualify
for the exemption provided by this section only if the tenant solicits orders
on an occasional basis at the trade show as prescribed by Subsection (b)."

However, your corporation maintains an independent representative that solicits
business in Texas throughout the year. Therefore the exemption in Tax Code
Sec. 171.084(c) does not apply. The corporation will be subject to both
components of the Texas franchise tax, because its activities in Texas go
beyond those protected by Public Law 86-272.

This response is based on the facts presented and current law. If there are
different or additional facts, the response may change.

Our goal is to provide you with prompt, professional service. Please take a
moment to complete our on-line survey at
http://aixtcp.cpa.state.tx.us/surveys/tpsurv/.

If you need any additional information, please feel free to call me at
1.800.531.5441, extension 34629.

Sincerely,

Lowell Olsen Dunn
Tax Policy Division