What did the Comptroller's 1986 internal guidance say changed in Franchise Tax Rule 3.406 and its throwback-rule application?

Plain-English summary

This internal memorandum told auditors that Rule 3.406 had been amended effective January 9, 1986. It identified two actual policy changes for reports due on or after that date: eliminating a real-estate exception in subsection (c)(5) and adding corporations that delivered sold items into Texas in their own vehicles in subsection (c)(18).

The memo said other wording changes—including solicitation in Texas by foreign corporations—had reflected agency policy since at least September 5, 1983. Newly written sections covering business on federal enclaves in Texas, consigned goods in Texas, and leases of tangible personal property used in Texas also reflected prior policy and therefore were to be applied as far back as the statute of limitations allowed.

For throwback purposes, auditors were reminded to use Rule 3.406 to determine whether a corporation was subject to tax in another state. If an auditor found a corporation that should have been set up for franchise tax, the memo instructed the auditor to contact Tax Administration first so the agency would not duplicate an existing contact.

Common questions

Which provisions were new policy? The real-estate exception's elimination and the own-vehicle delivery provision.

When did those two changes apply? For reports due on or after January 9, 1986.

Were the federal-enclave, consigned-goods, and leased-property provisions new policy? No. The memo said they had always been agency policy.

How did Rule 3.406 relate to throwback? It was used to determine whether a corporation was subject to tax in another state.

Citations and references

• 34 Tex. Admin. Code § 3.406 — former rule on foreign corporations doing business in Texas and franchise-tax liability.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8601L0698E14

Original ruling text

DUE: January 23, 1986

TO: Ledford Kelly, Audit Division
FROM: ***, Franchise Tax Policy, Tax Administration Division

SUBJECT: Franchise Tax Rule 3.406, "Foreign Corporations Doing Business in
Texas: Liability for Franchise Tax''

34 T.A.C. 3.406 (copy attached) has been amended effective January 9,
1986. Please inform auditors, and anyone else you think would like to
know, of the following.

Changes

The only changes in policy are the elimination of the exception in the
real estate area (see c)(5)) and an addition for corporations delivering
items sold into Texas in their own vehicles (see (c)(18)). These two
changes will be effective for reports due on or after January 9, 1986.

All other (changes in the wording of the rule, including solicitation in
Texas by foreign corporations, have been our policy since at least
September 5, 1983.

Sections have been added to cover corporations doing business on federal
enclaves within Texas, corporations with consigned goods in Texas, and
corporations which lease tangible personal property which is used in
Texas. These sections have always been our policy and, thus, should be
applied as far back as the statute of limitations allows.

Throwback Rule

Please remember Rule 3.406 affects receipts in the sense that it is
applied to determine if a corporation is subject to tax in another state
for "throwback rule" purposes.

Set Up

If at corporation is discovered which is not set up for franchise tax
but should be, Tax Administration Division should be contacted to make
sure the corporation is, not already being contacted by this agency.

If you have any questions, please do not hesitate to call us.