Did on-site Texas software training create nexus for both the service subcontractor and the software company promising the training?

Plain-English summary

On-site Texas software training created nexus for both the service company performing the work and the software company contractually responsible for providing it.

Corporation A, a Pennsylvania company, provided on-site training and consulting for customers of Corporation B. A sometimes used subcontractors and billed B rather than the Texas customers.

Rule 3.546(c)(2) treated A's Texas services as doing business in Texas. Rule 3.546(c)(1) also treated B as doing business when B's customer contracts required the Texas training, regardless of whether B used its own employees, local labor, or a subcontractor.

Both corporations had nexus for taxable capital and earned surplus. The response did not decide sales tax.

What this means for you

Software sellers and service subcontractors

Subcontracting the on-site work did not remove nexus for the performer or the company obligated by contract to provide the service.

Tax professionals

Review both the actual service activity and the customer contract. Billing flow did not prevent the stated nexus results.

Common questions

Q: Did Corporation A bill the Texas customers?
A: No. It billed Corporation B.

Q: Did using subcontractors avoid nexus?
A: No.

Q: Did the letter decide sales tax?
A: No.

Citations and references

• Texas Tax Code Sec. 171.001
• 34 Tex. Admin. Code Secs. 3.546(c)(1), 3.546(c)(2), and 3.554

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9801391L

Original ruling text

January 6, 1998

Dear Ms. **:

Thank you for your letter regarding your client's responsibility for Texas
taxes.

Texas does not have a corporate income tax. However, 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."
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.

The franchise tax consists of two components: Taxable Capital and Earned
Surplus. The taxable capital component is based on the equity (i.e. assets
minus debts) of the corporation. The earned surplus component is based on
federal taxable income with modifications. Both components are apportioned and
multiplied by the appropriate tax rates (.25% for taxable capital and 4.5% for
earned surplus). A corporation will pay the greater of the two taxes. If the
calculated tax due is less than $100, no tax is due, but a franchise tax report
must be filed.

You stated in your letter that your client, Corporation "A" is a Pennsylvania C
corporation. The principal and only office of "A" is in Pennsylvania.
Corporation "A" performs "on site" training and computer consulting services to
various companies throughout the United States. The majority of "A's"
assignments are obtained through the software company (Corporation "B") which
originally sold the software to these companies. While Corporation "A"
performs services for various companies in a number of states, it does not bill
the companies in those states. "A" receives its revenue from billings to the
software company, Corporation "B". In other words, the software company
(Corporation "B") subcontracts with Corporation "A" to perform any training
services necessary for clients who have purchased software from Corporation
"B". In some circumstances, Corporation "A" has to hire subcontractors to do
the "on site" training.

Based on this information, both Corporation "A" and Corporation "B" have nexus
in Texas and are subject to both components of the franchise tax, whether or
not Corporation "A" has to hire subcontractors.

Rule 3.546(c)(2), Taxable Capital: Nexus, states that any corporation providing
services in Texas is "doing business" in Texas and is subject to the franchise
tax. Corporation "A" is providing services in Texas and is subject to the tax.
In subsection (c)(1) of the same rule, it states that "the performance of any
contract in Texas regardless of whether the corporation brings its own
employees into the state, hires local labor, or subcontracts with another"
constitutes doing business in Texas. Corporation "B", therefore, is also doing
business in Texas if it has contracts with its customers to provide "on site"
training and consulting services.

I have enclosed a copy of Rule 3.546 and a copy of Rule 3.554, Earned Surplus:
Nexus, for your review.

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