Does a mail-order company that has no property or payroll in Texas, but uses an independent contractor in Texas to handle customer calls and sometimes take orders, have nexus for Texas sales and franchise tax?

Plain-English summary

The Texas Comptroller's Tax Policy Division answered a ruling request about a mail-order company that has no property or payroll of its own in Texas, but hires an independent contractor located in Texas. That contractor adjusts customers' accounts, answers billing questions, answers general questions about promotions and contests, and responds to customer complaints. The contractor doesn't normally take orders, but will take an order if a customer wants to place one over the phone. When customers call, the contractor answers using the company's name, so the customer believes they're speaking directly with the company itself.

The company asked whether it has nexus with Texas for sales and/or franchise tax purposes. The Comptroller's opinion was that the company does have nexus for sales tax under Tex. Tax Code § 151.107(a)(1), (2), and (7), because the company employs the contractor to carry out its business within Texas. The letter notes that even though taking orders isn't the contractor's main job, the company recognizes — and the Comptroller suspected the company even expects — that the contractor will take an order if a customer wants to place one that way.

On the franchise tax side, the Comptroller explained that Texas is authorized to tax to the constitutional limit, and because the company carries on its everyday business in Texas through the independent contractor, it is subject to both components of the franchise tax. The letter specifically states that federal P.L. 86-272 — a law that can protect certain out-of-state sellers from state net-income-type taxes when their only in-state activity is soliciting orders for tangible goods — is "no protection under the facts you have outlined."

What this means for you

Mail-order, catalog, and remote sellers using Texas-based contractors

If you're based outside Texas but pay someone physically located in Texas to act as your customer-service representative — answering the phone in your company's name, handling billing and complaints, and being willing to take an order if a customer asks — this letter says that alone can create Texas nexus for sales tax, even if you have no offices, property, or payroll of your own in the state.

Businesses relying on P.L. 86-272 for franchise tax protection

Don't assume federal P.L. 86-272 protects you from Texas franchise tax just because your physical presence is limited to an independent contractor rather than employees. This letter found no P.L. 86-272 protection where the contractor was carrying out the company's everyday business functions (customer service, billing, complaint handling, and occasional order-taking) in Texas.

Accountants and tax professionals structuring outsourced customer service

The ruling illustrates that using a third-party/independent contractor for call-center-style functions doesn't avoid nexus if the contractor represents itself as the company and performs regular business functions on the company's behalf in Texas — the "independent contractor" label doesn't neutralize the nexus analysis under § 151.107(a)(1), (2), and (7).

Common questions

Q: Does a company need its own employees or property in Texas to have nexus?
A: No, according to this letter. The company here had no property or payroll in Texas, but the Comptroller still found nexus because it used a Texas-based independent contractor to carry out its business.

Q: Does it matter that taking orders wasn't the contractor's main job?
A: The Comptroller didn't treat that as decisive. The letter notes that even though order-taking wasn't the primary purpose of the contractor's role, the company recognized (and was believed to expect) that the contractor would take orders if customers wanted to place them that way.

Q: Does P.L. 86-272 protect this company from Texas franchise tax?
A: No. The letter states directly that "P.L. 86-272 is no protection under the facts you have outlined," because the company carries on its everyday business in Texas through the contractor and is therefore subject to both components of the franchise tax.

Q: Is this letter also about franchise tax, even though it's filed under sales tax?
A: Yes. The letter itself notes it is also starred as a franchise tax document (STAR 9510001L), and the Comptroller's analysis in the text addresses nexus for both sales tax and franchise tax purposes.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.107(a)(1), (2), (7) (retailer engaged in business in this state)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9510880L

Original ruling text

Note: This document is also STARRED as a Franchise Tax document under STAR 9510001L.

October 3, 1995

Dear *****:

On September 22, 1995, you made a ruling request concerning a client in the

mail order business. The client does not have property or payroll in the state

but employs an independent contractor located in Texas to adjust customers'

accounts and answer billing questions, answer general questions concerning

promotions and contests, respond to customer complaints. While the service

provider does not take orders normally, if the customer wishes to make an order

with them, the provider does take the order. When the customer calls the

provider, the provider answers in your client's name, and the customer believes

it is speaking directly with the company.

Your question was whether your client has nexus for sales and/or franchise tax

purposes. It is my opinion that the company has nexus for sales tax under sec.

151.107 (a) (1),(2) & (7), Tex Tax Code. The company employs the contractor to

carry out its business within Texas. What's more, while taking orders is not

the primary purpose of the contractor, your client recognizes and indeed I

would suspect expects the contractor to take orders if the customer wants to

make them over the phone with the contractor. Under the franchise tax, we are

authorized to tax to the constitutional limit. Because the company carries on

its everyday business in Texas through the independent contractor, it is

subject to both components of the franchise tax. P.L. 86-272 is no protection

under the facts you have outlined.

I hope this satisfactorily answers your questions.

Sincerely,

Wade Anderson

Director Tax Policy