When did the former Texas throwback rule treat equipment shipped from Texas to another state as Texas receipts?

Plain-English summary

Texas-origin equipment sales threw back to Texas when the seller was not subject to taxation in the destination state, but each tax component used a different test.

The Texas S corporation manufactured commercial ice equipment in Texas and shipped it outside Texas, although Arizona personnel took all orders. F.O.B. shipping terms did not change the rule described in the letter.

For taxable capital, the seller was subject to taxation in another state if chartered or authorized there, or if it did business there under Rule 3.546(c). In-state sales representatives soliciting equipment sales were the letter's example of activity preventing throwback for that component.

For earned surplus, the test was whether the destination state could impose a net-income tax without violating Public Law 86-272. If the seller's activities were protected by that federal law, Texas-origin shipments into that state were included in Texas receipts.

What this means for you

Texas manufacturers shipping interstate

The destination-state nexus analysis could produce different receipt treatment for taxable capital and earned surplus.

Businesses relying on solicitation protection

Public Law 86-272 protection meant the destination state failed the earned-surplus taxation test described here, causing throwback to Texas.

Common questions

Q: Did taking orders in Arizona alone answer every destination state's throwback result?
A: No. The letter states component-specific tests for the state receiving each shipment.

Q: Did protected activity under Public Law 86-272 prevent earned-surplus throwback?
A: No. Protection meant the sale was included in Texas receipts.

Q: Were the taxable-capital and earned-surplus tests identical?
A: No.

Citations and references

• 15 U.S.C. Sec. 381 (Public Law 86-272), as cited in the letter
• 34 Tex. Admin. Code Sec. 3.546(c), as cited in the letter
• 34 Tex. Admin. Code Sec. 3.554, as cited in the letter

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9609700L

Original ruling text

September 19, 1996

Dear **:

In your letter of September 12, you requested information regarding the
determination of Texas receipts for sales of ice-making equipment.

You state that Taxpayer is a Texas corporation which has elected to be treated
as an S corporation for federal income tax purposes. Taxpayer manufactures
large commercial ice-making equipment in Texas. However, all orders are taken
by personnel located in Arizona . The equipment is then manufactured and
shipped outside Texas. Orders may be shipped F.O.B. shipping point or
destination.

For the taxable capital and earned surplus components of the franchise tax,
sales of tangible personal property shipped from Texas to another state are
included in Texas receipts if the seller is not subject to taxation in that
state. However, the definition of "subject to taxation" for the purposes of the
throwback rule differs for these components.

For the net taxable capital component, a seller is subject to taxation in
another state if the seller is chartered in that state, has a certificate of
authority in that state, or is doing business in that state based on the
activities outlined in subsection (c) of the enclosed Rule 3.546. For example,
if Taxpayer solicits sales of equipment in a state through sales
representatives physically in that state, receipts from shipments of tangible
personal property into that state would not be included in Texas receipts.

For the net taxable earned surplus component, a seller is subject to taxation
in another state if the seller is chartered in that state or the state could
impose a tax on the seller's net income without violating Public Law 86-272 (15
United States Code, Sec. 381). If the activities in a state are protected under
Public Law 86-272, sales of tangible personal property shipped from Texas into
that state would be included in Texas receipts. I have also enclosed Rule 3.554
which addresses the nexus standards for the earned surplus component.

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, contact Tax Policy Division. You may call toll free
1-800-531-5441, or our regular number is 512/463-4600. My extension is 3-4662.
You may write me at Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Bob Jeffcoat
Tax Policy Division