Business owners should know that conducting a business outside of the boundaries of their company’s home state can create nexus or sufficient connection with other states. If a company did establish nexus in another state, the company may trigger an income tax filing and/or a sales and use tax filing, as well as remittance of applicable taxes to that state.
Activity engaged by businesses
Businesses engage in a variety of activities to promote their products and to run operations. Sellers use agents, representatives, independent contractors or salespersons who operate under the authority of the seller to sell, deliver, or take orders. Businesses use catalogs, periodicals, and advertising flyers to sell taxable items. Franchisors allow franchisees, who require collecting sales or use tax, to operate under franchisor’s name. Sellers attend trade shows to introduce and demonstrate products to sell them.
The above-mentioned activities are enough to trigger sales tax nexus in Texas. Additionally, Texas has affiliate nexus provisions. This provides that when an out-of-state retailer is affiliated with a retailer maintaining a place of business in Texas and the in-state affiliate engages in certain activities in the state then the out-of-state retailer can be liable for sales tax responsibilities. Furthermore, Texas has the economic sales tax nexus provisions. This provides that if a remote seller has total Texas revenue of $500,000 or more in the 12 months period, that remote seller is required to obtain a permit and collect use tax.
With respect to income tax, Texas imposes franchise tax on corporations, most partnerships, limited liability companies, and other entities with a sufficient nexus with the state. A sufficient nexus in Texas can be established by a physical presence or an economic nexus. Companies can create physical presence in Texas through engaging in a variety of activities.
List of activities:
- Entering Texas to purchase, place, or display advertising when the advertising is for the benefit of another and in the ordinary course of business;
- Performance of a contract in Texas regardless of whether the taxable entity brings its own employees into the state, hires local labor, or subcontracts with another;
- Delivering sold items into the state;
- Having inventory in the state;
- Providing services in the state;
- Having employees, independent contractors, agents, or other representatives in Texas, regardless of whether they reside in Texas, to promote or induce sales of the out-of-state taxable entity’s goods or services.
The Texas franchise tax economic nexus provisions began on January 1st of 2019. An out-of-state entity has an economic nexus in Texas if gross receipts from business done in Texas are $500,000 or more. This is even without a physical presence in the state.
Furthermore, an entity’s treatment for federal income tax purposes does not determine its responsibility for Texas franchise tax. Therefore, each taxable entity that is organized in Texas or doing business in Texas is subject to franchise tax. Moreover, a disregarded entity for federal income tax purposes may find itself subject to franchise tax in Texas.
Texas has many state and local tax provisions which can trigger filing and collecting state taxes for businesses that have a connection with the state.
References:
- TTC Title 34, Part 1, Chapter 3, Subchapter O, Sec. 3.286
- Letter No. 202205004L, Texas Comptroller of Public Accounts
- TTC Title 2, Subtitle F, Chapter 171, Subchapter A, Sec. 171.0001
- TTC Title 34, Part 1, Chapter 3, Subchapter V, Sec. 3.586
