The Texas Comptroller—in response to the decision of the U.S. Supreme Court in “South Dakota v. Wayfair, Inc.”—issued draft proposed amendments to TAC § 3.586 concerning franchise tax nexus.
Historically, the Comptroller applied a physical presence nexus standard for franchise tax purposes. In a 2018 ruling issued post-Wayfair, the Comptroller clarified that, despite the Wayfair decision, Texas “has not moved away from the physical presence requirement for franchise tax at this time.”
The draft proposed amendments would revise the regulation to provide that a foreign (non-Texas) taxable entity with gross receipts from business concluded in Texas of $500,000 or more has Texas nexus, even if the entity has no physical presence in the state.
A taxable entity would be deemed to be “doing business” in Texas on the earliest of: (1) the date the entity has physical presence; (2) the date the entity obtains a use tax permit; or (3) the first day of the accounting period in which the entity has gross receipts from business concluded in Texas in excess of $500,000.
Under the proposed regulatory amendment, the Comptroller's office would apply the economic nexus standard beginning with reports due on or after January 1, 2020. Comments on the proposed regulation must be received no later than 30 days from the date of the proposed regulation in the state’s register.
The Comptroller’s position has historically been that Pub. L. No. 86-272 does not apply for franchise tax purposes. Thus, under an economic nexus standard, remote sellers of tangible personal property with no physical presence in Texas would be deemed to have nexus and will not be able to claim Pub. L. No. 86-272 protection.
Read an August 2019 report prepared by KPMG LLP
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.