For Texas franchise tax purposes, is revenue from an online airport-parking reservation service apportioned based on where the parking lot is located or where the company's servers/customers are, and does a Multistate Tax Commission voluntary disclosure program cover franchise tax?

Plain-English summary

This ruling's central apportionment holding is now superseded — read the current-law caveat below before relying on anything here.

An online service that lets customers search, compare, and reserve airport parking spots (without owning or operating any parking lots itself) asked the Texas Comptroller two things: (1) how to apportion its receipts for franchise tax if it relocated its headquarters to Texas, and (2) whether a Multistate Tax Commission (MTC) voluntary disclosure initiative could cover its franchise tax exposure.

As originally ruled:

• Apportionment: the Comptroller applied the "end-product act" test — receipts from a service are sourced to where the specific act the customer pays for actually happens, not to incidental support activities. Since customers pay to reserve a specific parking spot, the Comptroller held receipts should be apportioned to the location of the parking lot, not to where the company's web-hosting servers were located or where its headquarters sat.
• MTC voluntary disclosure: the Comptroller ruled the MTC's limited-time voluntary disclosure initiative — aimed at out-of-state online marketplace sellers whose only Texas contact was using a marketplace facilitator like Amazon's fulfillment program to collect sales/use tax — simply does not apply to Texas franchise tax at all.

Why this matters now: the STAR system itself flags this ruling as partially superseded. The "end-product act" location test used to source the parking company's receipts was overturned by the Texas Supreme Court's 2022 decision in Sirius XM Radio, Inc. v. Hegar (STAR Accession No. 202203013C), which changed how receipts from these kinds of services are sourced for apportionment. Separately, the ruling's discussion of nexus predates a December 2019 rule change (Rule 3.586) that added an economic-presence nexus test in response to the U.S. Supreme Court's Wayfair decision — so even the nexus framing here is dated.

What this means for you

Online marketplaces, booking platforms, and similar service intermediaries

Don't use this ruling's specific apportionment method (source receipts to the location of the underlying reserved item/service) as current law — Sirius XM v. Hegar changed the Comptroller's approach to sourcing service receipts. Check current STAR guidance or Comptroller's Decision 202203013C directly before apportioning similar receipts.

Companies considering the MTC voluntary disclosure program for Texas exposure

The MTC's marketplace-facilitator voluntary disclosure initiative referenced here was a limited-time sales/use tax program and, per this ruling, was never available for Texas franchise tax liability in the first place — that conclusion isn't affected by the later apportionment reversal.

Accountants and tax professionals

This is a useful example of the corpus's "don't treat every STAR document as current law" caveat in action: STAR's own metadata marks this ruling as superseded, with a specific citation to the overturning authority (Sirius XM Radio, Inc. v. Hegar, STAR 202203013C) and reason (the end-product-act location method for sourcing receipts). Always check a STAR document's supersede status before relying on its apportionment holding specifically.

Common questions

Q: Can I still use the "location of the parking lot" (or similar end-product location) rule to apportion service receipts?
A: Not based on this ruling alone — that specific method was overturned by Sirius XM Radio, Inc. v. Hegar (2022). Consult current STAR guidance (STAR Accession No. 202203013C) or a Texas tax professional for the current sourcing rule.

Q: Does the MTC's marketplace-seller voluntary disclosure program ever apply to Texas franchise tax?
A: No, per this ruling — it was designed for sales/use tax collection by out-of-state online marketplace sellers and doesn't extend to franchise tax.

Q: Is the ruling's nexus discussion still current?
A: Not entirely — it predates the December 2019 amendment to Rule 3.586 that added an economic-presence nexus test following the U.S. Supreme Court's Wayfair decision.

Citations and references

Statutes and rules:

• Tex. Tax Code § 171.001 (Tax Imposed; General Definitions)
• Tex. Tax Code § 171.0002 (Definition of Taxable Entity)
• Tex. Tax Code § 171.106 (Apportionment of Margin to this State)
• Tex. Tax Code § 171.103(a)(2) (receipts from services performed in Texas)
• 34 Tex. Admin. Code Rule 3.591(e)(26) (Margin: Apportionment — services)

Cited prior guidance and superseding authority:

• Comptroller's Decision No. 104,224 (2013), citing Comptroller's Decision No. 10,028 (1980) — "end-product act" test for service sourcing (superseded, see below)
• Sirius XM Radio, Inc. v. Hegar (2022), STAR Accession No. 202203013C — overturned the end-product-act location method used in this ruling
• South Dakota v. Wayfair, Inc., 139 S. Ct. 2080 (2018) — prompted the 12/29/2019 amendment to Rule 3.586 adding an economic-presence nexus test

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MAR
• Opinion: https://star.comptroller.texas.gov/view/201808030L

Original ruling text

ALERT: Effective 12/29/2019, Rule 3.586 (relating to nexus for franchise tax purposes) was amended to include an economic presence test in this state in response to the United States Supreme Court decision in South Dakota v. Wayfair, Inc., 139 S. Ct. 2080 (2018).

STAR Superseded Information

Supersede type: partial

Document superseded on: 04/28/2023

Issue(s) that caused the document to be superseded: determination of allocating receipts according to where the end-product act occurs for which a customer contracts and pays to receive

Reason(s) This allocation method has been overturned by Sirius XM Radio, Inc v. Hegar (2022), STAR 202203013C.

August 13, 2018

RE: Private Letter Ruling No. 20171115102316

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[1] We are responding to your request dated Nov. 3, 2017. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the apportionment of revenues received from your online service allowing customers to search, select, and book reservations for airport parking.

Facts Presented

We derived the facts below from your correspondence dated Nov. 3, Nov. 26, Dec. 2, 2017, and May 27, 2018. The correspondence included a sample Partner Services Agreement (Agreement) between ** (Taxpayer), and parking lot owners and operators (Partners).

Taxpayer provides an online service allowing customers to search, select, and reserve spots at airport parking facilities in the U.S. and Canada. Taxpayer’s website aggregates parking lot information and presents it to customers so they can compare rates, services, and reviews before making a reservation. A third-party web hosting service hosts Taxpayer’s website on servers in STATE A. Taxpayer is headquartered in STATE B.

Taxpayer does not own or operate any of the parking lots listed on its website. Taxpayer contracts with Partners that provide the actual parking spaces reserved through Taxpayer’s website. Customers pay Taxpayer online, when booking, and accept the Terms of Service[2] posted on Taxpayer’s website. Taxpayer keeps a percentage of the payments collected from customers and forwards the rest to the specific Partners. Taxpayer has separate fee-sharing structures, one for Prepaid Parking Fees and the other for Deposit Parking Fees.

Under the Prepaid Parking Fee Structure, the Partner receives a percentage of gross parking revenue (i.e., the parking fees charged exclusive of “taxes and fees”) plus 100 percent of “taxes and fees.” The Agreement defines “taxes” as charges in addition to the parking fees that are paid to regulatory bodies (e.g., sales tax). The Agreement defines “fees” as charges in addition to the parking fees that are paid to regulatory bodies in the form of airport and/or access fees, and are not “taxes.” Taxpayer receives a certain percentage of gross parking revenue plus 100 percent of Taxpayer’s service fee, paid weekly.

Under the Deposit Parking Fee Structure, Taxpayer retains 100 percent of a deposit (either one day’s parking fee or a specified percentage of gross parking fees), plus Taxpayer’s service fee. The Partner collects and retains the remainder of parking charges Taxpayer collects from the customer at parking checkout.

Taxpayer has between 5 and 10 employees at its corporate headquarters in STATE B. These employees perform tasks ranging from negotiating and administering agreements with each parking lot, providing customer service by phone and email, and managing Taxpayer’s Search Engine Optimization contractors.

Taxpayer is considering relocating its headquarters to Texas.

Questions, Rulings, and Analysis

Our restatement of your questions is shown below, followed by our response and analysis.

Question 1:

Assuming Taxpayer relocates its corporate headquarters to Texas, would Taxpayer’s receipts from the sale of services be subject to Texas franchise tax?

Ruling 1:

Taxpayer is subject to Texas franchise tax if it relocates its headquarters to Texas or if it is otherwise doing business in Texas. For purposes of calculating its Texas franchise tax liability, Taxpayer’s receipts from sales of online services of booking reservations for airport parking are apportioned based on the location of the parking lot.

Analysis:

A franchise tax is imposed on each taxable entity that does business in Texas or that is chartered or organized in Texas. Section 171.001 (General Definitions). The term “taxable entity” includes a corporation. Section 171.0002 (Definition of Taxable Entity). If Taxpayer moves its headquarters to Texas or conducts business in Texas, it is subject to Texas franchise tax.

The tax is imposed on the portion of the entity’s receipts attributable to business done in Texas. Section 171.106 (Apportionment of Margin to this State). Under Section 171.103(a)(2), “in apportioning margin, the gross receipts of a taxable entity from its business done in this state is the sum of the taxable entity’s receipts from […] each service performed in this state […].” Rule 3.591(e)(26) (Margin: Apportionment) provides, “[r]eceipts from a service are apportioned to the location where the service is performed. If services are performed both inside and outside Texas, then such receipts are Texas receipts on the basis of the fair value of the services that are rendered in Texas.” See also Section 171.103(a)(2). In determining where a service is performed, “the focus is on the specific, end-product act for which the customer contracts and pays to receive, not on non-receipt producing, albeit essential, support activities.” Comptroller’s Decision No. 104,224 (2013) (citing Comptroller’s Decision No. 10,028 (1980)).

Here, the end-product act for which a customer contracts, and which it pays to receive, is reserving an airport parking space. Specifically, customers pay to reserve a parking spot using Taxpayer’s website. Since customers pay to reserve parking spots, Taxpayer’s receipts should be apportioned based on the location of the reserved parking spaces.

Although processing customers’ online reservations is essential to the performance of Taxpayer’s service, it is a support activity and not the service for which Taxpayer’s customers contract. Therefore, the location of Taxpayer’s web hosting servers does not determine the apportionment of Taxpayer’s receipts.

Question 2:

Is Taxpayer subject to franchise tax under the terms of the Multistate Tax Commission (MTC)’s limited-time voluntary disclosure initiative, considering it has no tangible sales or services?

Ruling 2:

MTC’s limited-time voluntary disclosure initiative applied to the collection of sales and use tax by out-of-state online marketplace sellers, whose only nexus in the state was using a marketplace provider/facilitator (i.e., Amazon fulfillment program) to facilitate retail sales into the state. The voluntary disclosure does not apply to the Texas franchise tax.

Comptroller’s Decisions and STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20171115102316.

Sincerely,

Tax Policy Division – Direct Taxes

Texas Comptroller of Public Accounts

ENDNOTES

[1] Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.

[2] Taxpayer's website (last accessed June 27, 2018).