Texas Adopts Economic Nexus Threshold for Franchise Tax

Last Updated on December 28, 2021

Texas has adopted an economic nexus threshold for its franchise tax. This means that a foreign (non-Texas) taxable entity might have franchise tax nexus even if it has no physical presence in the state. The new economic nexus threshold is set forth in an amended franchise tax rule. The amendments are in response to the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018). The comptroller’s office will apply the new economic nexus standard beginning with reports due on or after January 1, 2020. 

A foreign taxable entity will be subject to the franchise tax if it has gross receipts from business done in Texas of $500,000 or more. This will create franchise tax nexus even if the entity has no physical presence in the state. Also, Texas will presume that a foreign taxable entity has franchise tax nexus if it has a Texas use tax permit.

Thus, a foreign taxable entity will begin doing business in the state on the earliest of:

• the date it has a physical presence in the state;
• the date it obtains a Texas use tax permit; or
• the first day of the federal income tax accounting period in which it had gross receipts from business done in Texas in excess of $500,000.