The Comptroller of Public Accounts adopts 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), without changes to the proposed text as published in the September 27, 2019, issue of the Texas Register (44 TexReg 5605). This rule will not be republished.

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 comptroller received comments regarding subsection (e) from Martens, Todd, Leonard & Ahlrich. The comment stated that proposed subsection (e) could be a potential constitutional violation if the comptroller presumes that a foreign entity has nexus solely because it obtains a use tax permit. The comptroller has considered the comment and concluded that subsection (e) is appropriate because an entity may rebut the presumption.

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 received comments regarding subsection (f) from Martens, Todd, Leonard & Ahlrich. The comment proposed that the comptroller add an exception in subsection (f) that excludes receipts that are sourced to Texas solely because of the legal domicile of the seller. The comptroller has considered the comment and concluded all receipt-producing activities should be included in the economic nexus analysis, including receipts sourced to Texas based on the location of payor rule. See, Humble Oil & Refining Co. v. Calvert, 414 S.W.2d 172, 175 (Tex. 1967). The comptroller declines to make changes to the section based on this comment.

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.

This amendment is adopted 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).