Does an out-of-state company create Texas nexus just by hiring a former employee, now living in Texas, as an independent contractor to do customer support?

Plain-English summary

An out-of-state company sells tangible personal property and downloadable software over the Internet to customers worldwide, including Texas, with no office or other presence in Texas -- except one thing: a former employee moved to Texas, and the company kept her on as an independent contractor answering customer-support e-mails for products already sold from the company's out-of-state office. She isn't a salesperson and doesn't solicit new business. The question: does this one contractor relationship create Texas nexus?

The Comptroller said yes. Rule 3.286(a)(1) lists activities that make a seller "engaged in business" in Texas, including having any representative, agent, or solicitor operating in the state under the seller's authority (subsection (B)), and conducting business through employees, agents, or independent contractors (subsection (G)). The Texas-based customer-support contractor qualifies as a representative under those provisions -- even doing only support work, not sales, is enough.

The letter adds a second, independent nexus trigger: because Texas treats software as tangible personal property for sales tax purposes, if the company licenses its software for use in Texas, that's a rental/lease of tangible personal property located in Texas, which creates nexus under a separate subsection, (a)(1)(E) -- regardless of the contractor issue.

What this means for you

Out-of-state companies with remote Texas-based workers

Even a single non-sales independent contractor working from Texas -- doing customer support, not solicitation -- can be enough to create Texas nexus. Don't assume "she's not a salesperson" gets you out of it.

Software companies licensing product for use in Texas

Licensing software used in Texas is treated as leasing tangible personal property located in Texas, which is its own independent basis for nexus -- separate from any employee/contractor presence.

Accountants and tax professionals

This letter shows nexus can arise from multiple independent grounds simultaneously (representative/contractor presence AND software licensed for in-state use) -- clearing one doesn't clear the other.

Common questions

Q: If my only Texas connection is one remote independent contractor doing customer support, do I have nexus?
A: Yes, per this letter -- a representative or independent contractor operating in Texas under the company's authority creates nexus under Rule 3.286(a)(1)(B)/(G), even without sales activity.

Q: Does licensing software for use in Texas create nexus on its own?
A: Yes -- Texas treats software as tangible personal property, so licensing it for Texas use is a taxable lease of property located in Texas, an independent nexus trigger under Rule 3.286(a)(1)(E).

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.286(a)(1) (Seller's and Purchaser's Responsibilities)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9911897L

Original ruling text

November 16, 1999

Question: Independent Contractors

Dear **:

This is in response to your request for a ruling on the following fact
situation and questions:

I am trying to determine whether my client's company has established nexus in
Texas. The company does not reside in Texas.

The company sells some tangible personal property and software by download over
the Internet to customers worldwide, including Texas. The company has only one
link to Texas. An employee of the company's only office (located outside of
Texas) moved to Texas. Although no longer an "employee" of the company, the
company hired her as an independent contractor to continue her work from her
Texas location. The contractor performs "customer support" by answering e-mail
from customers of the company who have already purchased products of the
company. These products most often are software, but may be tangible personal
property. She is not a sales person, but supports that which has already been
sold from the company's out of state location.

Please respond to inform me whether the company has established nexus.

Response: Subsection (a)(1) of Rule 3.286 - Seller's and Purchaser's
Responsibilities, sets out the activities that cause a retailer to be engaged
in business in Texas. Relevant activities are restated below:

(A) maintaining, occupying, or using, permanently or temporarily, directly or
indirectly, or through an agent, by whatever name called, an office, place of
distribution, sales or sample room, warehouse or storage place, or other place
of business;

(B) having any representative, agent, salesperson, canvasser, or solicitor
operating in this state under the authority of the seller for the purpose of
selling, delivering, or taking orders for any taxable items;

. . . . .

(E) deriving receipts from a lease of tangible personal property located in
this state;

. . . . .

(G) conducting business in this state through employees, agents, or independent
contractors.

The contractor is considered a representative of your company and thereby
creates nexus under subsection (a)(1)(B) and possibly (G) of this rule.
Additionally, the Texas Tax Code treats software as tangible personal property
for sales tax purposes. If your company licenses software for use in Texas,
this is considered a rental or lease of tangible personal property and would
also create nexus under (a)(1)(E).

Sales tax rules can be accessed on the Internet at:
http://www.window.state.tx.us/taxinfo/rulendx/ruleindex.html

You may download an application for a sales tax permit, which allows you to
issue resale certificates for taxable items that you will resell, at :

The State Tax Automated Research system may be accessed on the Internet at:

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts. You may also e-mail our tax help section at:

Gilbert Zamora

Tax Policy