Texas Nexus: Physical Presence No Longer Required for Franchise Tax

Yes, It Rhymes!

Beginning in Texas for the year 2019 and forward, physical presence is no longer the minimum or only possibility of creating nexus for franchise tax in the state. Prior to 2019, Texas required out-of-state business to have a physical presence in the state to have franchise tax nexus.

Physical Presence No Longer Required for Franchise Tax

Texas does not have a standard net income tax for businesses with nexus in the state. The franchise tax is based on a taxable entity’s margin. The tax base is the entity’s margin and is computed in one of the following ways:

  1. Total revenue times 70 percent;
  2. Total revenue minus cost of goods sold;
  3. Total revenue minus compensation; or
  4. Total revenue minus $1 million

There are specific definitions and qualifications for the cost of goods sold and compensation, that may differ from the federal amounts. The margin is then apportioned to Texas using a single-factor apportionment formula based on gross receipts.

For tax years 2019 and forward, Texas has cast a larger net for out-of-state businesses considered to be doing business in Texas. A foreign taxable entity with no physical presence in Texas now has nexus if, during any federal accounting period, it has gross receipts from business done in Texas of $500,000 or more. Additionally, any taxable entity with a Texas use tax permit is presumed to have nexus and is subject to Texas franchise tax.

Businesses are Responsible for Determining Nexus

Many other states besides Texas have thresholds that create nexus for their income, franchise, gross receipts, or sales/use tax. As companies grow and become more global, it is important to review the gross receipts regularly throughout the year. Monitoring a “gross receipts by state” report will assist in determining potential nexus. Also having up to date information on these taxes and thresholds is also important because states are constantly changing their nexus requirements throughout the year and can be easily missed because there is no central reference point for businesses.

How DHJJ Can Help

If you have any further questions related to marketplace facilitator nexus and how this may apply to your company, please contact your DHJJ CPA  at (630)420-1360.