Texas Required Physical Presence for Franchise Tax Nexus

A taxpayer that did not have a physical presence in Texas was not subject to the Texas franchise tax. Texas has not moved away from the physical presence requirement for franchise tax nexus at this time.

Lack of Sufficient Contact With Texas

A Texas rule lists some activities that will cause a taxpayer to have sufficient contact with Texas to subject the taxpayer to the franchise tax. Here, the taxpayer did not engage in any of the listed activities. Based on the facts provided, the taxpayer did not do business in Texas that would subject it to the franchise tax. The taxpayer did not:

  • have any employees in Texas;
  • send any representatives to Texas for any purpose
  • have servers located in Texas; or
  • own, rent, or otherwise hold any real or tangible personal property in Texas.

Also, it did not retain a license or other ownership interest in the digital products it purchased from developers and sold to end-users in Texas. It did retain an ownership interest in software that it licensed to developers, and subscribing developers could exercise that license from locations in Texas. However, having ongoing rights in software used in Texas, by itself, was not sufficient to create a physical presence in Texas for franchise tax purposes.

Letter No. 201809005L, Texas Comptroller of Public Accounts, September 7, 2018, ¶404-389

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All stories by: CCHTaxGroup