Ezel / Tax Rulings / TX
TX 9711261L Franchise Tax (PRIOR TO 01/01/2008) 1997-11-21

Did a bank create former Texas franchise-tax nexus by leasing automobiles used in Texas, despite having no Texas real property, payroll, or active solicitation?

Short answer: Yes. Leasing tangible personal property used in Texas created nexus for the lessor. The bank was subject to Texas franchise tax even though it had no Texas real property or payroll and did not actively solicit business there. The letter cited the former taxable-capital and earned-surplus nexus rules.

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 Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded.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 concerns tax years 1989 through 1996 and applies the former taxable-capital and earned-surplus nexus rules to a bank leasing automobiles used in Texas. Confirm current nexus and franchise-tax 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

Automobiles leased for use in Texas created franchise-tax nexus for the out-of-state bank that owned them.

The bank had no Texas real property or payroll and did not actively solicit business in Texas. It did, however, hold a Texas sales-tax permit and collect and remit sales tax on automobile leases.

The Comptroller said leasing tangible personal property used in Texas created nexus for the lessor under both the former taxable-capital and earned-surplus nexus rules.

What this means for you

Out-of-state lessors

Property placed with Texas lessees can create tax nexus even without an office, employees, payroll, or active solicitation in the state.

Tax professionals

Inventory leased property by where it is used, not only where the lessor's personnel and facilities are located.

Common questions

Q: Did the absence of Texas payroll prevent nexus?
A: No.

Q: What activity created nexus?
A: Leasing tangible personal property used in Texas.

Q: Did the letter address both former tax components?
A: Yes, taxable capital and earned surplus.

Citations and references

  • 34 Tex. Admin. Code Secs. 3.546(c)(19) and 3.554(d)(16)

Source

Original ruling text

November 21, 1997

RE: **
FEIN: **
Tax Years 1989 - 1996

Dear Mr. **:

Thank you for your letter concerning the liability of your bank for Texas
franchise tax.

You stated in your letter that your bank does not own or occupy any real
property in Texas nor do they have any payroll in Texas. The bank does not
actively solicit business within Texas. The bank does have, however, an active
sales tax permit in Texas. It is collecting and remitting sales tax on
automobile leases.

The leasing of tangible personal property which is used in Texas creates nexus
for the lessor, therefore your bank is subject to the franchise tax. See Rule
3.546(c)(19) [Taxable Capital: Nexus] and Rule 3.554(d)(16) [Earned Surplus:
Nexus]. I have enclosed copies for your review.

This response is based on 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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