Is Texas planning to implement Wayfair Economic Nexus for the Texas Franchise Tax?

Franchise Tax Update
Franchise Tax Update

I was surfing the web this hot Sunday afternoon because it’s just too hot to go outside and I found this gem of an update posted by KMPG in their TWIST podcast published on August 12, 2019. It’s a very short 1:54 podcast so I encourage you to go listen or read the transcript for yourself.

For those of you who aren’t familiar with Texas tax administration, the Texas Comptroller is given a lot of discretion in interpreting and applying tax laws in Texas. Their interpretations come out as rules published in the Texas Administrative Code. The TAC is published online by the Secretary of State and the Comptroller’s website has direct links to the relevant portions that contain the Comptroller’s rules for taxes they administer. The proposal is to Texas Administrative Code Sec. 3.586, which covers nexus issues for the margin tax.

According to KPMG’s post, the big change will be that foreign (non-Texas) taxable entities will be subject to Texas Franchise Tax if they have gross receipts of $500,000 or more from business done in Texas. The Comptroller’s office has historically maintained that Public Law 86-272 does not apply to the Franchise Tax so this means simply reaching this threshold of Texas based sales could/would give a non-Texas entity nexus for the Texas Franchise Tax.

I haven’t been able to find the proposed changes that are mentioned in the KPMG podcast so I emailed a contact at the Comptroller’s office to see how I can get a copy. I had intended to prepare a blog post about the proposed changes but I don’t want to speculate, so I’ll wait until I see the actual proposed changes. I’ll add a new blog post once the proposed changes are provided or when they’re published in the Texas Register.

I did find one mention of this on the Comptroller’s website in the sales tax FAQ related to the Wayfair decision. Under the last question: “Does the Wayfair decision make any changes to other Texas taxes?” the answer is:

Yes. We plan to amend appropriate rules to incorporate the decision in Wayfair for franchise tax returns due on or after Jan. 1, 2020. We expect to establish an economic nexus threshold and will follow our normal rule adoption process by seeking input from the public and our stakeholders.

Other taxes administered by the Comptroller will be addressed at a future date, and the tax responsibility will be prospective.

I’ll keep looking for more information and post updates as I find them.