Did a New Jersey corporation create Texas franchise-tax nexus when independent contractors solicited consumers and merchants for its promotional program?

Plain-English summary

Independent contractors soliciting Texas consumers and merchants on the corporation's behalf created nexus for both components of the former franchise tax.

The New Jersey corporation planned to use Texas independent contractors who purchased salable territories. The contractors operated without supervision, could hire and fire their own employees, could represent other companies, and could choose their legal form.

They solicited consumers and merchants for the corporation's promotional membership program. Consumers received discounts or gifts, prepaid telephone time, and eligibility for a monthly cash drawing. The corporation billed participating merchants when consumers used the program, and contractors received commissions from those billings.

Despite the contractors' operational independence, the Comptroller concluded that their solicitation on the corporation's behalf created Texas nexus under Rule 3.546(c)(4) for taxable capital and Rule 3.554 for earned surplus.

The letter addressed franchise tax only and said other Texas taxes would be handled separately.

Currency note: Texas replaced the former two-component franchise tax with the margin tax effective January 1, 2008. Confirm current physical and economic nexus rules.

What this means for you

Out-of-state businesses using Texas contractors

Calling representatives independent contractors did not prevent nexus when they performed ordinary customer and merchant solicitation for the company in Texas.

Tax professionals

The holding is tied to in-state solicitation on behalf of the corporation. It does not decide the other Texas taxes mentioned in the request.

Common questions

Q: Were the representatives employees?
A: No. The letter describes independent contractors who controlled their territories and operations.

Q: What activity created nexus?
A: Soliciting Texas consumers and merchants on the corporation's behalf.

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

Citations and references

• Texas Tax Code Sec. 171.001
• 34 Tex. Admin. Code Sec. 3.546(c)(4)
• 34 Tex. Admin. Code Sec. 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/9910265L

Original ruling text

October 18, 1999

Dear **:

Thank you for your letter concerning the your client's liability for the Texas
taxes. This response will address the Texas franchise tax. Other taxes will
be addressed under separate covers.

You stated in your letter that your client, a New Jersey Corporation, will
start utilizing independent contractors within Texas, on or about October 1,
1999, to perform certain services. The independent contractors will purchase
territories within which they will represent your client. The territories are
owned and operated by the independent contractor and are salable. The
contractor operates without supervision; can hire and fire their own employees;
represent other companies; and can operate in any form of legal entity.

The independent contractors solicit consumers and merchants to participate in a
promotional plan. Membership in the program is evidenced by a card with your
clients name on it. The consumer obtains a discount or in kind gifts from
participating merchants, telephone time on a prepaid card, and eligibility to
be in a monthly cash drawing. Your client bills participating merchants for
each time that a consumer utilizes the program. The independent contractor is
paid a commission from each billing to the merchant.

Texas does not have a corporate income tax. 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..." The
phrase "doing business" is defined in our franchise tax rules 3.546, Taxable
Capital: Nexus, and 3.554, Earned Surplus: Nexus.

Based on the information provided in your letter, your client has nexus in
Texas and is subject to both components of the Texas franchise tax because of
the independent contractors soliciting on your client's behalf in Texas. See
Rule 3.546(c)(4), Taxable Capital: Nexus and Rule 3.554, Earned Surplus: Nexus.
I have enclosed copies of both rules for your review.

A foreign corporation may be required to obtain a Certificate of Authority
(COA) to transact business in Texas from the Texas Secretary of State's office
(SOS). The application for a COA may be obtained from Secretary of State,
Statutory Filings Division, Corporations Section, P.O. Box 13697, Austin, Texas
78711-3697 or their web site at .
. The Secretary of State's
telephone number is (512)463-5581.

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