Texas Adopts $500,000 Gross Receipts Franchise Tax Economic Nexus Threshold

On Dec. 20, 2019, the state of Texas amended its franchise “margin” tax nexus rule (34 TAC Section 3.586) to assert that Texas franchise tax economic nexus for foreign corporations is established by exceeding the brightline threshold of $500,000 of sales into the state1. The amendment relies upon the Supreme Court’s 2018 Wayfair decision by asserting that constitutional nexus may be created without physical presence.

Furthermore, a taxpayer with a Texas use tax permit is presumed to have nexus and is subject to Texas franchise tax. The amendment will impact Texas margin reports due on or after Jan. 1, 2020, which would generally include limited liability business entities’ filing federal income tax returns for their 2019 calendar year end.

Texas nexus is established on the first date that a taxpayer surpasses $500,000 of Texas sourced gross receipts in a federal income tax return accounting year, or the date that a Texas use tax permit is obtained, or on the date that physical presence in the state is established. Texas nexus continues to be determined on an individual entity level. Therefore, taxpayers that file a Texas combined report will need to evaluate if any entities previously treated as non-taxable meet the amended Texas nexus standards for Report Year 2020.

DHG anticipates that first time filings will be required for Report Year 2020 for taxpayers that previously asserted there was no Texas nexus due to a lack of physical presence if Texas activities exceed the new nexus thresholds. Additionally, the Texas apportionment factor will increase for combined report taxpayers that excluded sales from the sales factor numerator for non-taxable members if the non-taxable members surpass the new nexus standards.

DHG notes that other states and cities that have recently implemented economic nexus gross receipts thresholds for their income/franchise/gross receipts taxes in light of the Wayfair decision, including the following jurisdictions*:

  • Massachusetts - $500,000 sales
  • Pennsylvania - $500,000 sales (effective for tax years beginning on or after Jan. 1, 2020, and only applicable to C corporations)
  • Hawaii - $100,000 sales or 200 or more business transactions (effective for tax years beginning on or after Jan. 1, 2020)
  • Philadelphia Business Income & Receipts Tax - $100,000 (effective for tax years beginning on or after Jan. 1, 2019)

Footnote

  • *This non-inclusive list does not include several jurisdictions that already have bright-line economic nexus thresholds in place with respect to their income, franchise and gross receipts tax regimes.

Source

  1. Full text available at https://www.sos.state.tx.us/texreg/pdf/backview/0927/0927prop.pdf#page=145