How did the former Texas throwback rules treat out-of-state delivery to a Texas buyer, independent solicitation, and foreign-country sales?

Plain-English summary

Buyer domicile did not control delivery sourcing, solicitation produced different throwback results by tax component, and foreign exports were never thrown back.

For goods shipped from Texas to a purchaser's location in another state, the sale was non-Texas unless the seller was not subject to tax there. The fact that the purchaser itself was a Texas corporation did not change delivery.

When the seller used independent representatives only to solicit orders in the destination state:

• Taxable capital: solicitation created nexus under Rule 3.546, so the seller was subject to tax there and the sale was not thrown back.
• Earned surplus: Public Law 86-272 protected qualifying solicitation, so solicitation alone did not create the required net-income-tax nexus and the sale was thrown back.

Goods shipped to a foreign country were everywhere receipts but not Texas receipts. The throwback definition of "another state" covered U.S. jurisdictions, not foreign countries.

Currency note: This is a pre-2008 two-component throwback analysis. Confirm current Texas and destination-state law.

What this means for you

Texas sellers with destination-state representatives

The same solicitation footprint produced opposite historical results across the two former tax components.

Exporters

Foreign-country delivery did not trigger Texas throwback.

Common questions

Q: Did the buyer's Texas incorporation make the sale Texas?
A: No.

Q: Did solicitation prevent taxable-capital throwback?
A: Yes.

Q: Did solicitation prevent earned-surplus throwback?
A: No, when protected by Public Law 86-272.

Q: Were foreign exports thrown back?
A: No.

Citations and references

• 34 Tex. Admin. Code Secs. 3.549(e)(41)(I), 3.557(e)(37)(I), 3.546(c), and 3.554(d)
• Public Law 86-272

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9807642L

Original ruling text

July 10, 1998

Dear **:

Thank you for your letter regarding Texas gross receipts.

I have restated your specific questions below.

Question #1
If a Texas Corporation has a sale of tangible personal property to another
Texas corporation and ships the property from the seller by a third party to a
destination outside the state of Texas, is the sale considered Texas gross
receipts for Texas franchise tax purposes?

Response #1
Sales of tangible personal property (TPP) shipped from this state to a
purchaser's location in another state are not included in Texas receipts unless
the "throwback rule" applies. The fact that the purchaser is a Texas
corporation will not change this result.

Rules 3.549(e)(41)(I) and 3.557(e)(37)(I) discuss sales to which the throwback
rule applies. It applies to "each sale of tangible personal property shipped
from this state to a purchaser in another state in which the seller is not
subject to taxation." The phrase "subject to taxation" means constitutional
nexus. If a corporation performs any of the activities listed in Rule 3.546(c)
concerning Taxable Capital: Nexus or Rule 3.554(d) concerning Earned Surplus:
Nexus, the corporation will be considered subject to taxation in the other
state. I have enclosed copies of these rules for your review.

Rules 3.546 and 3.554 are different when it comes to solicitation of orders by
independent representatives. For taxable capital, the activity of merely
soliciting orders does constitute nexus and would subject a corporation to
taxation in another state. Sales of tangible personal property shipped to
customers in those states would not be "thrown back" into Texas receipts for
the taxable capital component of the tax.

For the earned surplus component, however, the mere solicitation of orders is a
protected activity under Public Law 86-272 (PL 86-272). PL 86-272 is a federal
law which provides that a state cannot impose a net income tax upon a taxpayer
whose only business activity within the state consist of the solicitation of
sales of TPP. If solicitation is the only activity conducted in another state,
then the corporation would not have constitutional nexus in the other state and
would not be subject to taxation. Therefore, sales of TPP shipped to customers
in those states will be "thrown back" into Texas receipts for the earned
surplus component of the tax.

Question #2
Given the same facts except the destination is a foreign country, is the sale
considered Texas gross receipts for Texas franchise tax purposes?

Response #2
Sales of tangible personal property shipped from this state to locations
outside of the USA are gross receipts everywhere. They are not Texas receipts.
The "throwback rule" mentioned above applies only to sales of tangible
personal property shipped to a state of the United States, the District of
Columbia, Puerto Rico, or any territory or possession of the United States.

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