Share with your friends

Texas: Franchise tax, economic nexus rule is finalized

Texas: Franchise tax, economic nexus rule is finalized

An amended rule adopting an economic nexus standard for Texas franchise tax purposes has been finalized, effective for federal accounting periods ending in 2019 and later.


Related content


Unlike a number of states where the nexus standard was ambiguous or unknown, the Texas Comptroller has historically 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.” 

*South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018)

Economic nexus standard

The amendments to Texas Admin. Code § 3.586 concerning franchise tax nexus were finalized on December 20, 2019.

As amended, the regulation provides that for each federal income tax accounting period ending in 2019 or later, a foreign (non-Texas) entity with gross receipts from doing business in Texas of $500,000 or more is subject to Texas franchise tax, even if the entity has no physical presence in the state.

A taxable entity will 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 federal income tax accounting period in which the entity has gross receipts from doing business in Texas in excess of $500,000. 

KPMG observation

A number of states have enacted economic nexus legislation or have issued definitive economic nexus guidance for income tax purposes in the year and a half since the Supreme Court’s decision in Wayfair. However, there are a few considerations that may heighten the implications of the Texas change.

First, the Comptroller’s position has historically been that Pub. L. No. 86-272 does not apply for franchise tax purposes (a position reiterated in the regulation). As such, companies selling tangible personal property will not be able to claim “86-272 protection” in Texas. Second, Texas is a “Joyce state” (meaning that only the sales of entities with Texas nexus are included in the Texas sales factor numerator). Therefore, any businesses that have employed Joyce planning will need to reassess their positions in light of the new standard and determine its effect on the group’s apportionment factor.

For more information, contact a KPMG State and Local Tax professional:

Doug Maziur | +1 713 319 3866 |

Jeff Benson | +1 214 840 6911 |

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.

Connect with us


Want to do business with KPMG?


loading image Request for proposal