Ezel / Tax Rulings / TX
TX 9804395L Franchise Tax (PRIOR TO 01/01/2008) 1998-04-23

Did a corporation have Texas nexus when its only Texas activity was employees developing software rather than soliciting business?

Short answer: Yes. The corporation had no other Texas operations, but Texas employees wrote software code for products sold to real-estate-industry customers. Even though those employees did not solicit business, the Comptroller found nexus and liability for both former franchise-tax components under Rules 3.546(c)(2)(A) and 3.554(d)(6).

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This page answers the general question as of 1998. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 1998
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 Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. The nexus conclusion depends on employees performing software-development work in Texas and applies to the former two-component franchise tax; different or additional facts could change the response. Confirm current nexus 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

Texas employees developing software created nexus for both former franchise-tax components even though they did not solicit business.

The corporation said it had no Texas operations other than employees whose only activity was writing software code for products sold to real-estate-industry customers.

The Comptroller found that this in-state development work created Texas nexus and subjected the corporation to both franchise-tax components under Rules 3.546(c)(2)(A) and 3.554(d)(6).

What this means for you

Remote employers

Employees performing product-development work in Texas were enough for nexus under the historical rules; sales solicitation was not required.

Tax professionals

Analyze what employees actually do in Texas, not merely whether the corporation labels itself as having Texas operations.

Common questions

Q: Did the employees solicit customers?
A: No.

Q: What did they do in Texas?
A: They developed software code for products sold to customers.

Q: Which tax components applied?
A: Both components of the former franchise tax.

Citations and references

  • 34 Tex. Admin. Code Secs. 3.546(c)(2)(A) and 3.554(d)(6)

Source

Original ruling text

April 23, 1998

RE: **
Texas Taxpayer Number: **

Dear **:

Thank you for your letter March 17, 1998 letter concerning the Texas franchise
tax responsibilities for the corporation referenced above. I apologize for the
delay in responding to your letter.

You stated in your letter that the corporation does not have any operations in
Texas. However, the corporation does have employees in Texas whose only
activity is the development of computer software. The employees do not solicit
business for the corporation. The employee software developers write code for
products that are sold to various customers in the Real Estate industry.

Based on this information, the corporation does have nexus in Texas and is
subject to both components of the franchise tax. See franchise tax rule
3.546(c)(2)(a) and rule 3.554(d)(6). I have enclosed copies of the rules 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

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