Ezel / Tax Rulings / TX
TX 200311230L Franchise Tax (PRIOR TO 01/01/2008) 2003-11-20

If an out-of-state company has employees based in Texas but performs all its services outside Texas, is it subject to the Texas franchise tax and does it owe any tax?

Short answer: It is subject to the franchise tax but may owe nothing. A Florida company performing services for the U.S. Army whose employees are based at a Texas military base is subject to the Texas franchise tax because it has employees in Texas (Tax Code Sec. 171.001(a); Rules 3.546(c) and 3.554(d)). However, service receipts are apportioned to the location where the service is performed (Rules 3.549(e)(38) and 3.557(e)(33)). If none of the services are actually performed in Texas, the company has no Texas gross receipts and therefore no franchise tax liability - but it must still file a Texas Franchise No Tax Due Information Report (Form 05-141) plus a Public Information Report (Form 05-102).

Apply this to your situation

This page answers the general question as of 2003. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 2003
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is an official Texas Comptroller of Public Accounts letter published on the State Tax Automated Research (STAR) system. Letters on STAR can be the basis of a detrimental reliance claim only for the taxpayer to whom the letter was directly issued (see 34 Tex. Admin. Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. It describes the pre-2008 franchise tax (based on taxable capital and earned surplus), which the 2007 legislation (House Bill 3 and House Bill 3928) replaced with the current margin tax effective January 1, 2008; treat the holding as historical. Taxpayer-identifying details are redacted. This summary is informational only and is not legal or tax advice. Consult a licensed Texas tax professional about your specific situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page) is the authoritative source for any reliance.

Plain-English summary

A Florida company that performs services for the U.S. Army had employees based at a military base in Texas, but those employees performed no services within the State of Texas. It asked about its Texas franchise tax exposure. The Comptroller separated two questions - are you subject to the tax (nexus) and do you owe any tax (apportionment) - and gave a two-part answer.

  • Subject to the tax? Yes. Every corporation or LLC that does business in Texas is subject to the franchise tax (Tax Code Sec. 171.001(a)). Because the company has employees in Texas, it is subject to the tax (Rules 3.546(c) and 3.554(d)).
  • Owe any tax? Possibly none. Franchise tax is calculated on Texas gross receipts divided by total gross receipts, and service receipts are apportioned to where the service is performed (Rules 3.549(e)(38) and 3.557(e)(33)). If none of the company's services are performed in Texas, it has no Texas gross receipts and therefore no franchise tax liability.
  • But you must still file. In that no-tax situation, the company must file a Texas Franchise No Tax Due Information Report (Form 05-141) along with a Public Information Report (Form 05-102). The letter also suggested checking with the Texas Secretary of State about a certificate of authority.

Currency note: This applies the pre-2008 franchise tax and its service-apportionment rules, replaced by the current margin tax (House Bills 3 and 3928) effective January 1, 2008, which sources receipts under its own rules. Treat as historical.

What this means for you

Out-of-state service companies with staff stationed in Texas

Having employees based in Texas made you subject to the franchise tax even if you did no actual service work in the state. Being "subject to the tax" is not the same as "owing tax," though - the two-step analysis matters.

Companies serving the federal government from Texas

Basing employees at a Texas military installation created nexus, but because service receipts source to where the service is performed, work performed outside Texas produced no Texas receipts and no tax - so long as the required no-tax-due filings were made.

Accountants and tax professionals

Run the two-step analysis: (1) nexus (employees in Texas → subject to tax under Sec. 171.001(a) and Rules 3.546(c)/3.554(d)); (2) apportionment (services sourced to place of performance under Rules 3.549(e)(38)/3.557(e)(33)). A zero Texas numerator still requires filing the No Tax Due Information Report (Form 05-141) and Public Information Report (Form 05-102).

Common questions

Q: My employees are based in Texas but do all their work elsewhere - am I subject to the Texas franchise tax?
A: Yes. Having employees in Texas makes you subject to the tax under Tax Code Sec. 171.001(a) and Rules 3.546(c) and 3.554(d).

Q: Do I owe any franchise tax if none of my services are performed in Texas?
A: No. Service receipts are apportioned to where the service is performed, so if none are performed in Texas you have no Texas gross receipts and no liability.

Q: If I owe nothing, do I still have to file?
A: Yes - a Texas Franchise No Tax Due Information Report (Form 05-141) and a Public Information Report (Form 05-102).

Citations and references

Statutes and rules:

  • Tex. Tax Code Sec. 171.001(a) (corporations and LLCs doing business in Texas are subject to the franchise tax)
  • 34 Tex. Admin. Code Secs. 3.546(c), 3.554(d) (employees in Texas create nexus)
  • 34 Tex. Admin. Code Secs. 3.549(e)(38), 3.557(e)(33) (service receipts apportioned to where the service is performed)

Forms referenced: Texas Franchise No Tax Due Information Report (Form 05-141); Public Information Report (Form 05-102).

Source

Original ruling text

November 20, 2003

To: **

Dear **:

Thank you for your Tax Help inquiry regarding the Texas franchise tax.

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

You have asked about your Florida company that performs services for the United
States Army. Your employees are based out of MILITARY BASE in Texas, but
perform no services in the State of Texas.

Each corporation or limited liability company that does business in this state
is subject to the franchise tax. See Texas Tax Code Sec. 171.001(a). If you
have employees in Texas, then your company will be subject to the Texas
franchise tax. See Comptroller's Rule Sec. 3.546(c) and Sec. 3.554(d).

Even though your company is subject to the Texas franchise tax, it may not owe
any tax. Franchise tax is calculated based on gross receipts in Texas divided
by gross receipts everywhere. Receipts from the performance of a service are
apportioned to the location where the service is performed. See Rule Sec.
3.549(e)(38) and Sec. 3.557(e)(33). Therefore, if none of the services your
company performs are performed in Texas, and there are no Texas gross receipts,
then there will be no franchise tax liability. If this is the situation, the
company will need to file a Texas Franchise No Tax Due Information Report (Form
05-141) in addition to a Public Information Report (Form 05-102).

You may need to contact the Texas Secretary of State (SOS) to determine if you
need to obtain a certificate of authority to conduct business in this state.
The SOS can be reached by telephone at 512.463.5555 or by mail at P.O. Box
12887, Austin, Texas 78711-2887. The SOS website address is
http://www.sos.state.tx.us/.

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 online 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

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