Did out-of-state contractor licensing or ownership of Texas partnerships create nexus for a holding company and its subsidiaries?

Plain-English summary

Out-of-state licensing did not create Texas nexus for the holding companies, but serving as general partner of a Texas partnership did.

Employees of two Texas limited partnerships planned to obtain contractor licenses in other states in the name of the top holding company. The licenses would not be used in Texas.

Texas said the top holding company and two subsidiaries would not be doing business in Texas so long as the partnership employees did not act as their agents in Texas and there were no other Texas connections.

Two other subsidiaries were doing business in Texas because they acted as general partners of the Texas limited partnerships under Rule 3.546(c)(12).

What this means for you

Multientity groups

Common ownership and out-of-state licensing did not automatically give every entity Texas nexus on the limited facts presented.

Tax professionals

Analyze agency activity and general-partner status entity by entity; the no-nexus answer depended on employees not acting for those corporations in Texas.

Common questions

Q: Did the out-of-state contractor licenses create Texas nexus?
A: No, on the stated facts.

Q: What fact created nexus for two subsidiaries?
A: Their roles as general partners of Texas limited partnerships.

Q: Was the no-nexus answer unconditional?
A: No. It depended on no Texas agency activity and no additional Texas connections.

Citations and references

• 34 Tex. Admin. Code Sec. 3.546(c)(12)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9705428L

Original ruling text

May 21, 1997

Dear ***:

Thank you for your April 17 letter concerning the nexus of your client.

You stated in your letter that your client, Z, Inc., is a Delaware corporation
which acts as a holding company for various other corporations and limited
partnerships. Z, Inc. has no nexus in the State of Texas. It has no offices
or employees in Texas. Z, Inc. owns two other Delaware corporations, Z
Commercial, Inc. and Z Residential, Inc. Z Commercial owns A, Inc. and B, Inc.
who in Turn own a Texas limited Partnership, Z Commercial, L.P. Z Residential,
Inc. owns C, Inc. and D, Inc. who in turn own a Texas Limited Partnership, Z
Residential, L.P.

Recently Z Commercial, L.P. and Z Residential, L.P. were awarded construction
contracts in states in which they are not licensed as contractors. For
purposes of obtaining licenses in these states, it is proposed that employees
of Z Commercial, L.P. and Z Residential, L.P. obtain licenses in the name of
Z., Inc. These licenses will not be used in Texas.

Your specific question is "will the activities of Z, Inc. or the activities of
the employees of either Z Commercial, L.P. or Z Residential, L.P. on behalf of
Z, Inc., in obtaining and utilizing contractors licenses in states other than
Texas cause Z, Inc. or its other corporate subsidiaries to be considered doing
business in Texas?"

Z, Inc., B, Inc. and D, Inc. will not be considered doing business in Texas as
long as the employees of Z Commercial, L.P. and Z Residential, L.P. do not act
as agents of Z, Inc., B, Inc., or D, Inc. in Texas and there are no connections
with Texas other than those stated. A, Inc. and C, Inc. will be considered to
be doing business in Texas because they are acting as the general partners in Z
Commercial, L.P. and Z Residential, L.P. See franchise tax Rule 3.546(c)(12).
[Copy enclosed]

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