Did subleasing office space create nexus and establish other-state taxability that prevented Texas throwback?

Plain-English summary

Subleasing office space created nexus in the state where the office was located and could satisfy the other-state taxability test that prevented throwback.

The letter addressed two separate situations.

First, an Arizona investment company had closed its Texas office but subleased the remaining space, collected rent, and passed it to the landlord. Rule 3.546(c)(5) treated leasing property in Texas as doing business, so the company remained subject to both taxable capital and earned surplus.

Second, a Texas corporation shipped products to Arizona. Its only Arizona contact was an office sublease. Because the same leasing activity was enough to make a corporation subject to tax, the Arizona sublease satisfied the other-state taxability test. The Arizona sales were not Texas gross receipts under throwback for either former tax component.

Currency note: This is a pre-2008 nexus and throwback ruling. Texas replaced the former franchise tax with the margin tax effective January 1, 2008.

What this means for you

Businesses subleasing former offices

Closing operations did not end nexus when the corporation continued leasing the in-state space to another tenant.

Texas sellers evaluating throwback

Even a limited property-leasing contact in the destination state could establish other-state taxability and prevent throwback under the former rules.

Common questions

Q: Did the former Texas office sublease create Texas nexus?
A: Yes.

Q: Did the Arizona office sublease prevent throwback?
A: Yes.

Q: Which former tax components were affected?
A: Both taxable capital and earned surplus.

Citations and references

• 34 Tex. Admin. Code Secs. 3.546(c)(5), 3.554(d)(20), and 3.549(e)(41)(I)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9902587L

Original ruling text

February 22, 1999

Dear Mr. **:

Thank you for the information contained in your recent e-mail inquiry. This
response represents the franchise tax implications of the two situations
described in the ruling request.

In the first situation, you have indicated that an investment company located
in Arizona has only two sources of income, dividend income and income related
to a sublease of office space in CITY. The corporation owns no real property
in Texas. Prior to last year, the corporation was a tenant in an office
building in CITY, Texas.

After closing the CITY office, the corporation leased the office space to
another company for the remainder of the lease agreement and assigned the
leasehold interest to the new tenant. The corporation collected rent from the
sublet tenant and passed the rent on to the landlord.

The ruling request asks if the sublet office space in CITY creates nexus for
the corporation. Franchise Tax Rule 3.546(c)(5) holds that the leasing of any
property located in Texas constitutes doing business in Texas. We would
consider the sublease of the office space in CITY to fall under this provision.
Therefore, the corporation would be subject to the taxable capital and earned
surplus components of the franchise tax. Also, see Franchise Tax Rule
3.554(d)(20).

In the second situation, you asked about the throwback implications of a Texas
corporation's sales of products that are shipped from Texas to Arizona by
common carrier. The corporation's only contact with Arizona is the sublease of
office space in that state.

A corporation's sales of tangible personal property shipped from Texas to a
purchaser in another state in which the selling corporation is not subject to
taxation are considered Texas gross receipts for apportionment purposes. In
the situation described, the relevant question is does the sublease of the
office space in Arizona represent enough contact with that state so that it
could tax the seller. The activities listed in Rule 3.546(c) are considered
activities subject to taxation of taxable capital in the other state. See Rule
3.549(e)(41)(I).

As stated above, the sublease of office space in Texas will subject a
corporation to the franchise tax. This activity will, therefore, meet the
subject to taxation test of the throwback provision. To the extent the
corporation has such presence in Arizona, the sales to Arizona would not be
Texas gross receipts for both taxable capital and earned surplus.

This response is based on the facts presented. If there are different or
additional facts, the response may change.

If you have any questions, my internet address is
[email protected], or you may call toll free at 1-800-531-5441,
extension 3-4496.

Sincerely,

Jerry Bobbitt
Tax Policy Division