Ezel / Tax Rulings / TX
TX 9702091L Franchise Tax (PRIOR TO 01/01/2008) 1997-02-06

Did a Texas certificate of authority create franchise-tax liability when a corporation had no physical presence and took only customer-initiated phone orders?

Short answer: Yes for taxable capital. The certificate of authority made the corporation subject to the former franchise tax even though it reported no Texas property, payroll, employees, or physical presence and took only customer-initiated phone orders. If P.L. 86-272 applied, it protected the earned-surplus component but not taxable capital.

Apply this to your situation

This page answers the general question as of 1997. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 1997
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is an official Texas Comptroller of Public Accounts letter published on the State Tax Automated Research (STAR) system. Letters on STAR can be the basis of a detrimental reliance claim only for the taxpayer to whom the letter was directly issued (see 34 Tex. Admin. Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. This 1997 response applies former taxable-capital and earned-surplus components. It states the effect if P.L. 86-272 applies but does not independently determine whether customer-initiated telephone orders satisfied every federal condition. Confirm current law. Taxpayer-identifying details are redacted. This summary is informational only and is not legal or tax advice. Consult a licensed Texas tax professional about your specific situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page) is the authoritative source for any reliance.

Plain-English summary

The certificate of authority created taxable-capital liability; P.L. 86-272 could protect only earned surplus.

The corporation reported no Texas property, payroll, physical presence, or sales personnel. Its sales arose solely from telephone orders initiated by customers.

Section 171.001 nevertheless applied the former franchise tax because the corporation was authorized to do business in Texas.

If P.L. 86-272 applied, the corporation was not subject to earned surplus. The federal protection did not apply to taxable capital.

What this means for you

Foreign corporations with Texas authority

The historical taxable-capital obligation could arise from authorization even without physical presence.

Tax professionals

Analyze certificate status separately from P.L. 86-272, and verify whether the actual order activity met the federal protection's conditions.

Common questions

Q: Did the corporation owe taxable capital?
A: Yes.

Q: Could P.L. 86-272 protect earned surplus?
A: Yes, if it applied to the corporation's activities.

Q: Could it protect taxable capital?
A: No.

Citations and references

  • Texas Tax Code Sec. 171.001
  • Public Law 86-272, 15 U.S.C. Sec. 381

Source

Original ruling text

February 6, 1997

RE: **
FEIN: **
Texas Taxpayer Number: **

Dear **:

Thank you for your December 13, 1996 letter regarding the franchise tax filing
responsibilities of the corporation noted above.

You stated that the company does not have any property, payroll, or physical
presence in the state of Texas. You also stated that the company does not
employ any sales personnel within the state of Texas. All sales are generated
solely by telephone orders initiated by customers.

Section 171.001 of the Texas Tax Code imposes a franchise tax on "each
corporation that does business in this state or that is chartered or authorized
to do business in this state." Because your company is authorized to do
business in Texas, as evidenced by its Certificate of Authority, your company
is subject to both components of the Texas franchise tax.

If Public Law (PL) 86-272 applies to your company, it will not be subject to
the earned surplus component of the franchise tax. PL 86-272 does not apply to
the taxable capital component of the tax.

This response is based on current law and the facts presented. If there are
different or additional facts, the response may change.

If you have any questions about this or any other franchise tax matter, please
call me at
1-800-531-5441, extension 34612. My direct number is (512) 463-4612. You may
write me at Tax Policy Division, Comptroller of Public Accounts, Austin, Texas
78774.

Sincerely,
Janet Spies
Tax Policy Division

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