Must a wholly-owned company with no Texas gross receipts still file a separate Texas franchise-tax report if it was physically present in Texas?

Plain-English summary

Responding to a Notice of Lien, a taxpayer explained that its client did not file a 2003 franchise-tax report because the client was wholly owned by another company that filed (and filed a federal return covering the client), and the client had zero Texas gross receipts on both a combined and separate basis. The Comptroller disagreed with skipping the filing:

• The tax and the ban on consolidation. Tax Code Section 171.001 imposes the franchise tax on each corporation and LLC organized in Texas or doing business in Texas. Sections 171.109(d), 171.110(h), 171.112(d), and 171.1121(c) state that consolidated reporting is prohibited — so a subsidiary cannot be covered by its parent's report.
• Physical presence triggers a separate report. If the client was physically present in Texas at any time during 2003, it had a duty to file a separate-company franchise-tax report for 2003, even with no Texas gross receipts and no tax owed.
• No presence, no duty. If the client was not physically present in Texas during 2003 and later, it had no franchise-tax responsibility for those privilege periods but could keep its certificate of authority (citing Rylander v. Bandag Licensing Corp., 18 S.W.3d 296 (Tex. App.-Austin 2001, pet. denied)). It would still owe a final report if it physically left Texas during 2002.
• Enforcement. Remedies for failure to file (Chapter 171, Subchapters F, G, H) include forfeiture of the certificate of authority, and Chapters 111 and 113 provide collection procedures and state tax liens.

Important currency note: This letter applies the pre-2008 franchise tax and its separate-entity (no-consolidation) regime. The 2007 legislation (House Bills 3 and 3928) replaced it with the current margin tax, which requires combined reporting for affiliated unitary groups. The separate-entity conclusion here may not hold today — confirm current law.

What this means for you

Subsidiaries and members of corporate groups with any Texas footprint

Under the pre-2008 tax, being covered by a parent's return was not enough: a subsidiary physically present in Texas had to file its own report even at zero receipts and zero tax. Skipping it risked liens and certificate forfeiture. The margin tax's combined reporting later changed the filing structure.

Accountants and tax professionals

Two pre-2008 fundamentals: no consolidated reporting, and physical presence alone created a separate-entity filing duty regardless of receipts. Note the Bandag point that a non-present entity could keep its certificate of authority without franchise-tax liability. Re-verify under the margin tax's combined-reporting rules.

Common questions

Q: Could the subsidiary rely on its parent's franchise-tax report?
A: No. Consolidated reporting was prohibited, so it had to file separately if it had a Texas filing duty.

Q: Did zero Texas gross receipts excuse filing?
A: No. If the entity was physically present in Texas during the year, it had to file a separate report even with no receipts and no tax due.

Q: What if the entity had no Texas physical presence?
A: Then it had no franchise-tax responsibility for those years but could keep its certificate of authority (per Rylander v. Bandag Licensing Corp.), subject to a final report if it left Texas during 2002.

Citations and references

Statutes and rules:

• Tex. Tax Code Sec. 171.001 (franchise tax on each corporation and LLC organized in or doing business in Texas)
• Tex. Tax Code Secs. 171.109(d), 171.110(h), 171.112(d), and 171.1121(c) (consolidated reporting is prohibited)
• Tex. Tax Code Chapters 111 and 113 (collection procedures; state tax liens)

Case: Rylander v. Bandag Licensing Corp., 18 S.W.3d 296 (Tex. App.-Austin 2001, pet. denied).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200505103L

Original ruling text

May 9, 2005

Re: COMPANY, Taxpayer Number: **

Dear **:

Thank you for your letter of April 21, 2005 in which you discuss your client's
responsibility for filing Texas franchise tax reports. Your letter was in
response to a Notice of Lien filing issued by our office.

You stated in your letter that your client did not file a franchise tax report
for 2003 for the following reasons:

• Your client is wholly-owned by another company;

• The other company did file a Texas franchise tax report for 2003, as well as
  a federal tax return which included all items related to your client; and

• Your client, both on a combined and separate basis, had zero Texas gross
  receipts for 2003.

Additionally, you stated that "although Texas generally requests that
disregarded LLC's file separate reports showing any Texas receipts on a
stand-alone basis, this should not be necessary for 2003 since neither on a
group or stand-alone basis were there any Texas gross receipts."

Texas Tax Code (TTC) Section 171.001 imposes a franchise tax on each
corporation and each limited liability company that is organized in Texas or
that does business in Texas. In addition, TTC sections 171.109(d), 171.110(h),
171.112(d), and 171.1121(c) state that consolidated reporting is prohibited.

TTC Chapter 171, subchapters F, G, and H provide actions and remedies for
failure to file franchise tax reports. These remedies include the forfeiture
of the Certificate of Authority. TTC Chapter 111 provides for collection
procedures for those taxpayers that fail to comply with any chapter of the Tax
Code. TTC Chapter 113 specifically discusses the filing and release of state
tax liens.

Based on all of the statute cites mentioned and the fact that your client has a
calendar year accounting period, if your client was physically present in Texas
at any time during calendar year 2003, your client had a responsibility to file
a Texas franchise tax report on a separate company basis, even if your client
had no Texas gross receipts and owed no tax.

If your client was not physically present in Texas during calendar year 2003
and subsequent years, then they have no responsibility for the franchise tax
for the 2003 and later privilege periods, but can maintain their certificate of
authority to transact business in Texas in keeping with the decision issued in
Rylander v. Bandag Licensing Corp., 18 S. W. 3d 296 (Tex. App. - Austin 2001,
pet. denied). Your client, however, will be responsible for a final franchise
tax report if it physically left the State of Texas during calendar year 2002.

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

If you have questions about this, my email address is
[email protected], or you may call toll-free at 1-800-531-5441,
extension 3-4612.

Sincerely,

Janet Spies
Tax Policy Division