The Texas comptroller has issued proposed regulations that would apply an economic nexus standard to the state franchise tax.
Under the regulations, which are in response to the U.S. Supreme Court’s decision in South Dakota v. Wayfair Inc., a foreign taxable entity with a Texas use tax permit is presumed to have nexus with the state and is subject to the franchise tax. The presumption “codifies existing practice,” according to the proposal.
The regs would establish a threshold of $500,000 in annual gross receipts to establish nexus in the state for foreign taxable entities. That threshold would simplify tax administration and eliminate the need to determine whether in-state revenue-generating activities constitute substantial nexus on a case-by-case basis, the proposal states.
The proposed rules largely adhere to their draft version, which was circulated in August. However, two new provisions would clarify the definition of a foreign taxable entity as a “a taxable entity that is not chartered or organized in Texas” and would establish that “nexus is determined on an individual taxable entity level.”
“This does not change how we will calculate the franchise tax or treat the franchise tax,” Chris Bryan, spokesman for the comptroller’s office told Tax Notes September 27. “There may be some impact on when you have a combined entity; the nexus may impact the apportionment. This brings it in line with physical nexus, which we establish on an individual-entity level as well.”
Under the regs, a foreign taxable entity begins doing business in the state on the earliest of: establishing physical nexus, obtaining a use tax permit, or 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.
Tom Currah, the office's chief revenue estimator, has determined that the regs would not positively or adversely affect the state economy for the first five years they are in effect.
The economic nexus provision would apply to reports due on or after January 1, 2020.