Does an out-of-state insurance and bonding company have Texas franchise tax nexus if its representatives periodically enter Texas to inspect job sites?

Plain-English summary

An out-of-state corporation that provides insurance and bonds for Missouri and Kansas contractors who occasionally do work in Texas asked whether it had Texas franchise tax nexus. It stressed that it does not solicit business in Texas and does not write insurance for Texas contractors (it had obtained a Texas Certificate of Authority in July 2003). In a follow-up call, though, it disclosed that its representatives periodically enter Texas to inspect job sites and work completed by the contractors it insures.

The Comptroller's answer was yes, the company has nexus. Under Comptroller's Rules 3.546 and 3.554, if a corporation has employees in Texas performing the corporation's duties, it has nexus. Because the company periodically sends employees into Texas to inspect job sites, it has nexus for Texas franchise tax purposes - regardless of the fact that it does not solicit or write Texas business.

Currency note: This applies the pre-2008 franchise tax, 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 insurers, sureties, and service companies

Not soliciting or writing business in Texas did not shield this company. What created nexus was sending employees into the state to perform a company function - here, inspecting job sites. Physical, in-person activity by your own people in Texas, even if periodic and incidental to out-of-state contracts, can be enough.

Accountants and tax professionals

The nexus test is whether employees are in Texas performing the corporation's duties (Rules 3.546 and 3.554), not whether the company markets or sells in Texas. Track in-state visits by staff - inspections, site checks, and similar activities count. Note that having nexus and filing obligations is separate from whether tax is actually owed after apportionment.

Common questions

Q: The company doesn't sell or solicit in Texas - why does it have nexus?
A: Because its representatives periodically enter Texas to inspect job sites, and having employees in Texas performing the corporation's duties creates nexus under Rules 3.546 and 3.554.

Q: Do the inspection trips have to be frequent to create nexus?
A: The letter treated periodic inspection visits as sufficient; the key is that employees are in Texas performing the corporation's duties.

Q: Does holding a Texas Certificate of Authority by itself create nexus?
A: The letter grounded nexus on the in-state employee activity (the inspections), not on the certificate alone.

Citations and references

Rules:

• 34 Tex. Admin. Code Secs. 3.546, 3.554 (a corporation with employees in Texas performing its duties has franchise tax nexus)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200311244L

Original ruling text

November 25, 2003

Dear **:

This letter is in response to your ruling request regarding Texas franchise tax
nexus for your corporation.

You have indicated that the corporation provides insurance and bonds for
Missouri and Kansas contractors that complete work in Texas on various
occasions. You have also indicated that representatives of the corporation do
not solicit business in Texas nor write any insurance for Texas contractors.
The corporation obtained a Texas Certificate of Authority on July 24, 2003.

In a follow-up telephone conversation, you also indicated that representatives
of your company enter Texas periodically to inspect job sites and work
completed by the Missouri and Kansas contractors that you provide with
insurance and bonds.

If the corporation has employees in Texas performing the duties of the
corporation, then the corporation has nexus. See Comptroller's Rules Sec.
3.546 and Sec. 3.554. Since the corporation periodically sends employees to
inspect job sites, then the corporation has nexus for Texas franchise tax
purposes.

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

If you have any questions or need additional information, please call me at
1-800-531-5441, extension 3-4629.

Sincerely,

Lowell Olsen Dunn
Tax Policy Division