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Texas Comptroller Issues Guidance Franchise Tax Refund Qualifications

November 27, 2007

Response to “Home Interiors” Case Clarifies Rules on Taxes Paid on Out-of-State Sales Receipts

The Texas Comptroller of Public Accounts recently issued guidance explaining the conditions under which certain franchise-tax payers may qualify for a refund of taxes paid on out-of-state sales.  The guidelines, published in the October 2007 issue of the Comptroller’s Tax Policy News, are the result of a decision by the Texas Third Court of Appeals in Home Interiors & Gifts, Inc. v. Strayhorn, 175 S.W.3d 856 (Tex. App.--Austin 2005, pet. denied), in which the “throwback” rule for the earned surplus component of the state franchise tax was determined to be unconstitutional.

The following guidelines issued by the Comptroller explain how potentially affected franchise taxpayers may file a refund claim based on the Home Interiors decision.

Who Qualifies?

A taxpayer qualifies for a refund if it:

  • sold tangible personal property that was shipped from Texas to purchasers in one or more other states;
  • was protected by P.L. 86-272 (from a tax on net income in those states); and
  • reported sales to those states as throwback sales to Texas for apportioning earned surplus.

How Will Claims be Evaluated?

The Comptroller will use the following criteria to evaluate any claims for a refund:

  • Home Interiors refunds are applicable to the earned surplus component only.
  • Merely holding a certificate of authority in another state is not sufficient evidence of nexus in another state.
  • Proof of payment of taxes paid to another state is not sufficient evidence of nexus in another state, since tax may be voluntarily paid without having nexus there.
  • If solicitation under P.L. 86-272 guidelines occurred in other states, supporting documentation must exist and be presented to substantiate solicitation in another state. Specifically, actual documentation for expenses and receipts are required, not just the reimbursement of the expenses.
  • The supporting documentation of the selling corporation or limited liability company must have occurred during the accounting year upon which the report year tax is based.
  • If no nexus exists in other states, sales will continue to be reported as Texas receipts (thrown back to Texas) using the same criteria as used for taxable capital.