Is a foreign corporation that is the general partner of a Texas-active limited partnership subject to Texas franchise tax, and what about its shareholders and out-of-state limited partners?

Plain-English summary

A Florida corporation that had elected S-corporation status was the sole general partner of a Florida limited partnership that sold advertising placed on tractor trailers moving in interstate and intrastate commerce. The partnership's only office was in Florida, but it sent employees and independent contractors around the country to sell the advertising (contracts became effective only when accepted at the Florida home office). Their representative asked how the (pre-2008) Texas franchise tax applied. Because Texas has no income tax, the Comptroller answered only as to franchise tax.

The Comptroller advised:

1. Registration. The corporation should obtain a certificate of authority from the Texas Secretary of State if it is transacting business in Texas (Tex. Bus. Corp. Act art. 8.01); the limited partnership's registration should be taken up with the Secretary of State directly.
2. The corporation is subject to franchise tax — two independent ways. Franchise tax applies to a foreign corporation that is authorized to do business in Texas (holds a certificate of authority) or is actually doing business in Texas (Rule 3.546(a)). Even if the corporation is not required to obtain a certificate of authority, it is still subject to the tax because it is a general partner in a partnership doing business in Texas (Rule 3.546(c)(4), (c)(12)).
3. Individual shareholders are not subject. If the corporation's shareholders are individuals, they are not subject to franchise tax.
4. Out-of-state limited partners are not subject. A non-Texas corporation (or other entity that can be subject to franchise tax) is not subject if its only Texas activity is holding a limited partnership interest (Rule 3.546(c)(12)).

At the time, the franchise tax reached corporations, LLCs, banks, and savings and loan associations — not partnerships themselves.

Important currency note: STAR marks this document partially superseded on 12/10/2014 on the taxation of partnerships. The 2007 legislation (House Bill 3 and House Bill 3928) restructured the franchise tax into the current margin tax effective January 1, 2008 and made partnerships subject to the tax — reversing the premise that a partnership and its out-of-state limited partners escape the tax. Treat those entity-level conclusions as historical and confirm current law.

What this means for you

Out-of-state businesses operating through a Texas partnership

Being a general partner of a Texas-active partnership pulled a foreign corporation into the franchise tax even without a certificate of authority; a limited partner whose only tie to Texas was the interest itself stayed out. That general-partner/limited-partner distinction drove pre-2008 planning — but the margin tax now makes partnerships themselves taxable, so re-verify.

Accountants and tax professionals

Two separate hooks made the corporation taxable here: authorization to do business (certificate of authority) and general-partner status. Individual shareholders were never in scope. Confirm all of this under the current margin tax before relying on it.

Common questions

Q: Was the foreign corporation subject to Texas franchise tax even without a certificate of authority?
A: Yes. It was subject as a general partner in a partnership doing business in Texas (Rule 3.546(c)(4), (c)(12)), independent of whether it held a certificate of authority.

Q: Were the individual shareholders subject to the tax?
A: No. Individual shareholders are not subject to Texas franchise tax.

Q: Was an out-of-state limited partner subject?
A: No — not if its only Texas activity was holding the limited partnership interest.

Citations and references

Statutes and rules:

• Tex. Bus. Corp. Act art. 8.01 (foreign corporation certificate of authority to transact business in Texas)
• Franchise Tax Rule 3.546(a) (franchise tax on foreign corporations authorized or doing business in Texas)
• Franchise Tax Rule 3.546(c)(4), (c)(12) (corporate general partner of a Texas-active partnership is subject; out-of-state limited partner is not)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9609794L

Original ruling text

STAR SUPERSED INFORMATION
Accession No. —
Supersede type - Partial
Document superseded on - 12/10/14
Issue(s) that caused the document to be superseded — Taxation of partnerships
Reason(s): The Franchise Tax Code was amended by House Bill 3 and House Bill 3928,
Acts 2007, 80th Legislative Session, effective January 1, 2008 and affected Franchise
tax reports due on or after January 1, 2008. One of the many changes to this Tax Code
subjected partnerships (previously not required to file) to the franchise tax reporting
requirement.

September 13, 1996

Dear ***:

In your letter of August 28, you requested information regarding the impact of
sales and use taxes and income taxes on your clients. Your questions related
to sales and use taxes will be addressed in a separate letter by our Sales Tax
policy section.

You state that your clients are *** (a Florida corporation) (the
Corporation) and *****. (a Florida limited partnership) (the
Partnership). The Corporation which has elected treatment as an S corporation
for federal income tax purposes is the sole general partner of the Partnership.

The Partnership provides "advertising agency services". Specifically, the
Partnership sells advertising services which are placed on tractor trailers
involved in interstate and/or intrastate commerce. Although its only business
office is located in Florida, the Partnership will send employees and
independent contractors throughout the United States on a temporary basis to
sell the advertising services. However, the contracts will not be effective
until accepted by the Partnership at the home office in Florida.

The Partnership will secure licenses with various owners of tractor trailers to
carry the advertisements on the trailers. Under the agreement, the owners will
be required to document the mileage in each state for trailers with
advertising.

Although Texas does not impose an income tax, the state does impose a franchise
tax on corporations, limited liability companies, banks, and savings and loan
associations. Therefore, my responses are related to the franchise tax.

I have restated your questions related to franchise taxes followed by a
response:

1. Is either the Partnership or the Corporation required to register as a
   foreign entity under your state law?

Response

The Corporation should obtain a certificate of authority from the Texas
Secretary of State if it is transacting business in Texas under Article 8.01 of
the Texas Business Corporation Act. I have enclosed a copy of Article 8.01 for
your review.

I suggest that you contact the Texas Secretary of State regarding registration
requirements for the limited partnership. The address is:

Secretary of State
Rudder Building
1019 Brazos
Austin, TX 78701
Telephone: 512/463-5701

2. Will either the Corporation or its shareholders be subject to franchise tax
   in Texas?

Response

The franchise tax is imposed on foreign (non-Texas) corporations that are
authorized to do business in Texas (i.e., have a certificate of authority) or
are actually doing business in Texas as indicated in enclosed Rule 3.546(a).
Therefore, the Corporation would be subject to franchise tax if it obtained a
certificate of authority.

However, even if the Corporation is not required to obtain a certificate of
authority, the Corporation is subject to franchise tax because it is a general
partner in a partnership which is doing business in Texas (see subsections
(c)(4) and (c)(12) of enclosed Rule 3.546).

If the shareholders are individuals, the shareholders would not be subject to
franchise tax.

3. Will either the Partnership or its partners be subject to franchise tax in
   Texas?

Response

As I indicated in my response to No. 2, the Corporation is subject to the
franchise tax. If the other partner(s) is a non-Texas corporation (or other
type of non-Texas entity which can be subject to franchise tax), the partner
would not be subject to franchise tax if the only activity in Texas were
holding a limited partnership interest in the Partnership (Rule 3.546(c)(12)).

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