Did a Pennsylvania online retailer create Texas franchise-tax nexus by placing link and icon code on a Texas company's server and paying sales commissions?

Plain-English summary

Link and icon software code on a Texas server did not create franchise-tax nexus for the Pennsylvania online retailer.

The retailer operated its shopping site on a Pennsylvania server, had no Texas physical location, property, payroll, or representatives, and used an unrelated distributor to drop-ship orders by common carrier.

A Texas online magazine displayed a “buy now” icon linking users to the retailer's site. The retailer paid the Texas company a percentage commission on sales generated through that link. All of the Texas company's website personnel and maintenance activity were in Texas.

On those facts, the Comptroller found insufficient Texas contact for either the taxable-capital or earned-surplus component. The response did not decide sales tax.

What this means for you

Online retailers

Under this fact-specific 1998 ruling, link code and a commission arrangement alone did not create franchise-tax nexus for a retailer with no other Texas presence.

Tax professionals

Keep the holding limited to the precise technology and fulfillment facts. The letter expressly separated franchise tax from sales tax.

Common questions

Q: Where did customers place orders?
A: On the retailer's Pennsylvania website.

Q: Did the Texas company receive a commission?
A: Yes, based on sales generated through the link.

Q: Did the ruling decide sales-tax nexus?
A: No.

Citations and references

• The ruling identifies no statute or rule by section number

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9801286L

Original ruling text

January 14, 1998

Dear Mr. *:

Thank you for your letter regarding your client's responsibility for Texas
taxes. I will address only the liability of your client as it relates to the
Texas franchise tax. I have forwarded a copy of your letter to our sales tax
policy group. They will address, under a separate cover, the responsibility of
your client for sales tax.

You stated in your letter that your client is a Pennsylvania corporation. The
client has developed and maintains an Internet web site located on a server in
Pennsylvania through which consumers can browse a database of music selections
and, if interested, purchase compact discs and various other music-related
items. The client fills the orders through an unrelated wholesale distributor,
who drop-ships the items by way of common carrier in accordance with the
client's orders. The distributor, in turn, bills the client who bills the
ultimate consumer. The client has customers located in Texas. However, the
client does not maintain any physical location (e.g. retail store) in Texas,
and its headquarters and offices are in Pennsylvania. The client has no
property or payroll in Texas and no representatives in Texas.

The client will be entering into an Internet "linking agreement" with a Texas
company. The Texas company maintains an Internet web site on a server located
in Texas through which it maintains an entertainment related content site in
the form of an online magazine, which Internet users are able to browse. If
interested in purchasing a particular product from our client, the user will
click on the client's "buy now" icon. This icon will "link" the consumer to
the client's Internet web site where the consumer may place a direct order for
the product with the client. In return for the marketing efforts of the Texas
company, the client will pay the Texas company a commission based on a
percentage of the sales generated through the link. The orders will be filled
by an unrelated wholesale distributor. All of the Texas company's activity
relative to the maintenance of its web site will be within Texas. The Texas
company's personnel will be located in Texas and all design and updating
activity will take place in Texas.

Your specific question is whether or not your client will be subject to either
the earned surplus or taxable capital component of the Texas franchise tax due
to the presence of its linking and icon software code on a Texas server.

Based on current law and the facts presented, your client will not have
sufficient contact with Texas to be subject to either component of the
franchise tax. If there are different or additional facts, this 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