The Comptroller of Public Accounts proposes amendments to §3.586, concerning margin: nexus, in response to the United States Supreme Court decision in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).

The comptroller adds titles to subsections and improves readability throughout the section.

The comptroller adds the word "Texas" in front of "franchise tax" throughout the section to maintain consistency.

The comptroller amends subsection (a) to allow effective dates in this section other than the effective date of January 1, 2008. Specifically, the amendment is in response to the decision in Wayfair affecting franchise tax reports due on or after January 1, 2020.

The comptroller adds new subsection (b) to provide that a foreign taxable entity is a taxable entity that is not chartered or organized in Texas. Subsequent subsections are relettered.

The comptroller amends relettered subsection (c) concerning nexus to provide that nexus is determined on an individual taxable entity level.

The comptroller amends relettered subsection (e) to provide that a foreign taxable entity with a Texas use tax permit is presumed to have nexus and is subject to Texas franchise tax. This presumption codifies existing practice. Information formerly in subsection (d) concerning exemptions for trade show participants is now in new subsection (h).

The Wayfair opinion held that constitutional nexus may result from substantial sales activity in a state even if an entity has no physical presence in a state. The opinion is incorporated into Texas law through Tax Code, §171.001(b), which provides that the franchise tax extends to the limits of the United States Constitution. To simplify tax administration for both the agency and taxpayers, subsection (f) proposes an economic nexus threshold of $500,000 in annual Texas receipts for foreign taxable entities that do not have physical presence in the State. This threshold eliminates the need to determine on a case-by-case basis whether revenue-generating activities in the State constitute substantial nexus. The comptroller's office will apply this economic nexus provision beginning with reports due on or after January 1, 2020. Information formerly in subsection (e) concerning Public Law 86-272 is now in new subsection (i)

The comptroller adds new subsection (g) to identify the criteria for determining the beginning date when a foreign taxable entity begins doing business in this state.

Tom Currah, Chief Revenue Estimator, has determined that during the first five years that the proposed amendment is in effect, the amendment: will not create or eliminate a government program; will not require the creation or elimination of employee positions; will not require an increase or decrease in future legislative appropriations to the agency; will not require an increase or decrease in fees paid to the agency; will not increase or decrease the number of individuals subject to the rules' applicability; and will not positively or adversely affect this state's economy. This proposal amends a current rule.

Mr. Currah also has determined that for each year of the first five years the rule is in effect, proposed amendment would benefit the public by updating the rule to clearly state comptroller interpretation of law and to provide clear guidance to taxpayers by eliminating the need to determine on a case-by-case basis whether revenue-generating activities in the state constitute substantial nexus. This rule is proposed under Tax Code, Title 2, and does not require a statement of fiscal implications for small businesses. The proposed amendment would have no significant fiscal impact on the state government, units of local government, or individuals. There would be no significant anticipated economic costs to the public.

Comments on the proposal may be submitted to Teresa G. Bostick, Director, Tax Policy Division, P.O. Box 13528, Austin, Texas 78711-3528. Comments must be received no later than 30 days from the date of publication of the proposal in the Texas Register.

This amendment is proposed under Tax Code, §111.002 (Comptroller's Rules; Compliance; Forfeiture), which provides the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of the provisions of Tax Code, Title 2.

This amendment is in response to the United States Supreme Court decision in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).