Background
Texas is now the fourth jurisdiction to have changed its corporate income/franchise tax law in response to Wayfair joining Hawaii, Pennsylvania, and the City of Philadelphia. This new amendment comes as a response to the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc., 138 S. CT. 2080 (2018) which held that the Court’s long-standing physical presence nexus standard is an “unsound and incorrect” interpretation of the Commerce Clause. Historically, the Texas Comptroller had applied a physical presence standard for nexus franchise tax purposes.
Economic Nexus Standard
Texas Amin. Code § 3.586 states:
“For each federal income tax accounting period ending in 2019 or later, a foreign taxable entity has nexus in Texas and is subject to Texas franchise tax, even if it has no physical presence in Texas, if during that federal income tax accounting period, it had gross receipts from business done in Texas of $500,000 or more”
Additionally, according to the finalized rule, a taxable entity will be deemed to be “doing business” in Texas on the earliest of:
1. the date the entity has physical nexus
2. the date the entity obtains a Texas use permit
3. the first day of the federal income tax accounting period in which the entity had gross receipts from business done in Texas in excess of 500,000
Considerations
Taxpayers should consider the potential increase to Texas receipts for taxable entities that previously excluded those receipts under the ‘Joyce’ rule (i.e., only the sales of entities with Texas nexus are included in the Texas sales factor numerator) as they may now be considered Texas sourced, even if it doesn’t create a physical presence in Texas.
If you have any questions, please call us at 312.332.2900.