Ezel / Tax Rulings / TX
TX 9702414L Franchise Tax (PRIOR TO 01/01/2008) 1997-02-27

Did Public Law 86-272 protect a Texas-authorized corporation from both former franchise-tax components?

Short answer: No. The certificate of authority made the corporation subject to the former taxable-capital component even if its only Texas activity was protected solicitation. If the stated activities qualified under P.L. 86-272, the corporation was protected from the earned-surplus component, but that federal law did not apply to 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 Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded.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 assumes the corporation's Texas activity was protected under P.L. 86-272 and applies the former taxable-capital and earned-surplus components. It does not independently verify the protection facts. Confirm current federal and Texas 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

P.L. 86-272 could protect earned surplus, but it did not protect taxable capital for a corporation authorized in Texas.

The corporation said it had no Texas offices, property, or employees and that orders were approved, filled, and shipped from outside Texas. It believed its activity fell within P.L. 86-272.

Section 171.001 separately imposed the former franchise tax on a corporation authorized to do business in Texas. Because this corporation held a certificate of authority, it was subject to taxable capital.

If its activities were protected by P.L. 86-272, it was not subject to earned surplus. The letter cited Administrative Hearing No. 32,873 for the conclusion that P.L. 86-272 did not apply to taxable capital.

What this means for you

Foreign corporations with Texas authority

Protected solicitation did not eliminate the historical taxable-capital obligation created by authorization to do business.

Tax professionals

Analyze each former component separately and first verify that the activities actually satisfied P.L. 86-272.

Common questions

Q: Did the certificate create taxable-capital liability?
A: Yes.

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

Q: Did P.L. 86-272 protect taxable capital?
A: No, under the authority cited in the letter.

Citations and references

  • Texas Tax Code Sec. 171.001
  • Public Law 86-272, 15 U.S.C. Sec. 381
  • Administrative Hearing No. 32,873

Source

Original ruling text

February 27, 1997

RE: Texas Taxpayer Number: ***
Charter/COA Number: *****
1996 Franchise Tax Report

Dear ***:

Thank you for your February 4, 1997 letter regarding the franchise tax filing
responsibilities of your corporation.

You stated that you have determined that the company's activity falls under the
purview of Public Law (PL) 86-272 and that you do not have any contact (nexus)
outside of that federal law that would require you to pay franchise tax in
Texas. You also stated that the company does not have any offices, property,
or employees within Texas. Any sales are approved, filled and shipped from
outside the state.

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 corporation is authorized to do
business in Texas, as evidenced by its Certificate of Authority, your
corporation is subject to the taxable capital component of the franchise tax.
If the activities of your corporation are protected under PL 86-272, then it
will not be subject to the earned surplus component of the tax.

I have enclosed a copy of Administrative Hearing number 32,873 for your review.
The Administrative Law Judge in this hearing ruled that PL 86-272 does not
apply to the taxable capital component of the franchise 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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