Nexus, Franchise Tax, Sales Tax Implications
We were recently approached by a newspaper reporter asking us to address the franchise and sales tax ramifications of an out-of-state consulting firm sending an employee into Texas to conduct political consulting. The consultant has visited Texas on multiple occasions and bills between $50,000 and $100,000 in fees on an annual basis.
We reviewed and researched the limited facts presented and advised that the Texas franchise tax is a privilege tax and nexus is created under the Texas Nexus Rule 3.586. Nexus is created by any of the revenue producing activities cited in that ruling if the imposition of nexus does not violate the due process clause of the US Constitution.
Based on the limited facts presented, the person coming to Texas for political consulting would fit under that rule. If nexus exists, and if it involves a taxable entity (i.e., certain exceptions apply), then the franchise tax responsibility would exist, and the person or entity should comply with the law accordingly. This would include registering with the Secretary of State’s office and the filing of franchise tax reports.
Each taxable entity doing business in Texas must file and pay applicable franchise tax. These entities include:
- limited liability companies (LLCs), including series LLCs;
- state limited banking associations;
- savings and loan associations;
- S corporations;
- professional corporations;
- partnerships (general, limited and limited liability);
- professional associations;
- business associations;
- joint ventures; and
- other legal entities.
If the entity has total revenues in 2016 or 2017 of less than $1,110,000, no tax would be due.
As a general rule, political consulting services are not taxable unless they are connected to the sale of tangible personal property (i.e., printed materials, political signs or stickers, etc.) or one of the unique and often vague taxable services (Tax Rule 3.342 – Information Services and Tax Rule 3.330 – Data Processing Services) – see below.
Unrelated consulting services which are the expert or professional opinions of the political consultant are not taxable when they are separately stated and not connected in any way to the sale of a taxable item (tangible personal property or service).
For example, separately stated charges for general political consulting or professional services, such as management consulting, issue identification and policy decisions and public relations which are not related to a taxable item or service being sold would be considered nontaxable consulting services.
We addressed some services that may be provided by a political consultant and the sales tax implications of each, such as:
Tax Rule 3.342 – Information Services
Taxable information Services as set out in Rule 3.342(a)(6)- Information Services would include: Information that is gathered, maintained, or compiled and made available by the provider of the information service to the public or to a specific segment of the industry for a consideration is subject to sales tax. Examples of taxable information services include, but are not limited to, the following:
- mailing lists (which represents names of persons located in Texas are taxable);
- non-exempt demographic information
- news clipping services and wire services;
Examples of nontaxable information services include:
- Opinion Polls and Consultant Reports – are excluded as taxable information services under Rule 3.342 (a)(5)(A).
Tax Rule 3.330 – Data Processing Services
Data Processing. Political Consultants may provide their clients with data such as, voter lists, voting history by precinct, political party preference by zip code or precinct, etc. A charge by the consultant for the compilation, information storage, manipulation or data entry would be taxable as data processing services if performed with the use of a computer. Rule 3.330 Data processing services.
In summary, an out-of-state firm conducting political consulting on a recurring basis for consideration is likely engaged in business in Texas and must register for franchise tax reporting. Depending on the specific services provided in Texas, the consulting firm may be responsible for collecting and reporting sales taxes if it is also providing sales of taxable items or services.