Texas Franchise Tax Nexus Rule Proposal

The U.S. Supreme Court, in South Dakota v Wayfair, overturned the requirement that a seller have in-state physical presence before being required to collect a sales tax, and instead requires “substantial nexus.” Texas recently adopted a “safe harbor” $500,000 gross revenue threshold in determining which foreign entities must collect and remit sales tax. The Comptroller is proposing changes to Franchise Tax Rule 3.586 to apply the same nexus standard to collection of the franchise tax. The rule draft states that “a foreign taxable entity with gross receipts from business done in Texas of $500,000 or more has nexus, even if the entity has no physical presence in Texas.” If adopted, the Comptroller’s office would apply this new nexus provision beginning with reports due on or after January 1, 2020. The net effect of the proposed rule change will be to increase the Texas apportionment factor for some filers. For other companies, it could create nexus in Texas where none existed before. We are aware that other states are adopting similar changes to their business tax nexus standards, drawing from the Wayfair decision. Source: Texas Taxpayers and Research Association (TTARA)

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