When does an out-of-state business owe Texas franchise tax with no Texas footprint?
Edvin Givargis Published 12 minute read
The short answer
Yes, and the trigger is revenue, not presence. Texas imposes its franchise tax on every taxable entity that either is chartered or organized in Texas or that "does business" in the state (Tax Code section 171.001(a)), and since rules adopted in the wake of South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018), "doing business" includes an out-of-state entity with no office, employee, inventory, or agent in Texas, so long as its gross receipts from business done in Texas reach $500,000 in the relevant period (34 Tex. Admin. Code section 3.586(f)). That threshold applies to franchise tax reports originally due on or after January 1, 2020, and it exists alongside, not instead of, the older physical presence rules in the same regulation, so an entity can have nexus under either test. Crossing the receipts threshold does not automatically mean tax is owed: Texas also has a separate no-tax-due exemption tied to total revenue, currently $2.47 million for report years 2024 and 2025, that lets many nexus-having entities file without paying. What changed in 2023 is that an entity under the no-tax-due threshold no longer files the report that used to say so. It still has other filing obligations, and the underlying nexus and registration exposure does not go away just because no check is due.
The nexus standard after Wayfair: doing business without a footprint
Before 2019, an out-of-state seller generally needed some physical connection to Texas, an office, inventory, employees, or an agent acting on its behalf, before the state would treat it as "doing business" for franchise tax purposes. Wayfair removed the federal constitutional objection to nexus based on economic activity alone, and Texas responded first for sales and use tax, adopting an economic nexus standard effective October 1, 2019, and then for the franchise tax, amending 34 TAC 3.586 effective December 29, 2019, to add an economic nexus provision applicable to franchise tax reports originally due on or after January 1, 2020. The statutory hook for both is the same: Tax Code section 171.001(a) taxes any entity that "does business" in the state, and section 171.001(b) states that the tax "extends to the limits of the United States Constitution and the federal law adopted under the United States Constitution," language the Comptroller has read as authorizing the agency to define "doing business" as broadly as the Commerce Clause allows following Wayfair.
The $500,000 threshold and how it is measured
34 TAC 3.586(f) provides that a foreign taxable entity, meaning an entity not chartered or organized in Texas, has nexus in Texas if it had gross receipts from business done in Texas of $500,000 or more, applicable to each federal income tax accounting period ending in 2019 or later. The threshold looks to gross receipts from business done in the state as computed for franchise tax apportionment purposes, not to net income or to margin, and it is not prorated for a short period the way some other state thresholds are. An out-of-state business that sells into Texas, whether tangible goods, services, digital products, or licensed intangibles, needs to track its Texas-sourced gross receipts against this figure the same way it already tracks Texas taxable sales for sales tax purposes, because the two thresholds share the same $500,000 figure and the same general Wayfair lineage even though they are governed by separate rules and separate reporting regimes.
Physical presence nexus did not go away
Economic nexus is additive. 34 TAC 3.586(d) still lists the traditional physical presence activities that independently create nexus for a foreign taxable entity, including maintaining a place of business in Texas, having employees or other representatives present in the state, owning or using property in the state, and a range of other in-state activities carried on for the purpose of profit. An out-of-state business that never crosses the $500,000 receipts threshold in a given period can still have nexus if it sends an employee into Texas, stores inventory in a Texas warehouse, or otherwise establishes a physical presence there, even briefly. Practitioners should run both tests independently for a business with a mixed footprint, since some of the 2020 discussion of the new economic nexus rule created a misimpression that physical presence nexus had been superseded. It was not; it was supplemented.
The foreign (non-U.S.) entity angle
Nothing in 34 TAC 3.586 or in Tax Code section 171.001 limits the economic nexus rule to businesses organized in other U.S. states. The rule applies to any "foreign taxable entity," a term the rule and the underlying statute define by reference to where the entity is chartered or organized, and an entity organized outside the United States is just as much a foreign taxable entity as one organized in another state. A non-U.S. business selling into Texas at a level that clears the $500,000 threshold, or that otherwise has a physical presence there, has the same franchise tax exposure as a Delaware or California entity in the same position. There is no treaty relief at the state level: U.S. income tax treaties bind the federal government and, with narrow exceptions negotiated into specific treaties, do not reach state-level taxes such as the Texas franchise tax, and the franchise tax's own governing statute does not carve out foreign commerce. A non-U.S. entity in this position faces the same registration and filing questions addressed below, generally without a U.S. taxpayer identification number already in hand, which in practice is the first procedural hurdle rather than the nexus analysis itself.
Why Public Law 86-272 does not provide cover
Public Law 86-272, codified at 15 U.S.C. sections 381 through 384, bars a state from imposing "a net income tax on the income derived within such State by any person from interstate commerce" where the only in-state activity is the solicitation of orders for tangible personal property that are approved and filled from outside the state (15 U.S.C. section 381(a)). The protection is defined narrowly by its own terms: section 383 states that "the term 'net income tax' means any tax imposed on, or measured by, net income." The Texas franchise tax is not computed on net income. It is computed on "taxable margin," a base built from total revenue reduced, at the taxpayer's election, by cost of goods sold, by compensation, by a flat 30 percent of total revenue, or through a simplified computation available to smaller taxpayers, then apportioned to Texas and taxed at 0.375 percent for entities primarily engaged in retail or wholesale trade or 0.75 percent for other entities (Tax Code section 171.002). The Comptroller's own description of the tax, on its current public guidance, characterizes it as a privilege tax on entities doing business in the state, not as an income tax. Because the federal statute's protection is expressly tied to a "net income tax," and the franchise tax is not administered or described as one, the prevailing position, reflected in the statutory text and the Comptroller's consistent characterization of the tax since its current form took effect, is that Public Law 86-272 does not limit the state's ability to reach an out-of-state seller whose only Texas activity is soliciting orders for tangible personal property. This is an area where no Texas appellate court appears to have issued a decision squarely deciding the question, so the conclusion rests on the statutory text and the agency's administrative position rather than on binding case law, and it should be revisited before being stated to a client as settled.
The no-tax-due threshold: owing nexus without owing tax
Nexus and liability are separate questions. Tax Code section 171.002 exempts an entity from paying franchise tax, though not from having nexus or from every filing obligation, if its total revenue from its entire business is at or below a threshold amount, or if the tax as computed is less than $1,000. That threshold is $2.47 million for report years 2024 and 2025, following the increase enacted by Senate Bill 3 (Acts 2023, 88th Legislature, 2nd Called Session, chapter 2), effective January 1, 2024, and it adjusts every two years under Tax Code section 171.006, which directs the Comptroller to revise the figure on January 1 of each even-numbered year based on the change in the Consumer Price Index over the preceding state fiscal biennium, rounded to the nearest $10,000, with the Comptroller's determination final and not subject to appeal. An out-of-state business that clears the $500,000 economic nexus threshold but stays under the no-tax-due threshold has nexus and, depending on its specific filing obligations, may owe nothing, but nexus is what creates the obligation to be in the system in the first place.
The 2024 filing overhaul: no filing obligation, then a different one
Before report year 2024, an entity under the no-tax-due threshold satisfied its franchise tax filing obligation by filing a No Tax Due Report. Senate Bill 3 eliminated that report for report years 2024 and later; the Comptroller no longer accepts or requires it. That change removed a form, not the underlying obligation to be registered and accounted for. An entity at or below the no-tax-due threshold is still required to file either the Public Information Report (Form 05-102), for corporations and other entities with that structure, or the Ownership Information Report (Form 05-167), for entities such as most LLCs and partnerships, disclosing officers, directors, managers, or members as applicable. A narrow exception exists for a qualifying new veteran-owned business, which under Tax Code section 171.0005 is not subject to the franchise tax and is not required to file either report during its first five years, provided it continues to qualify. Outside that exception, an out-of-state business with Texas economic nexus that assumes no tax due means no filing obligation at all is mistaken.
Registration and the cost of doing nothing
Two separate compliance questions arise once an out-of-state business has franchise tax nexus, and they are easy to conflate. The first is registration with the Texas Secretary of State as a foreign entity transacting business in the state, governed by the Business Organizations Code, not by the franchise tax statute. Chapter 9 of that code requires a foreign entity transacting business in Texas to register, but section 9.251 lists activities that do not by themselves constitute transacting business for that purpose, including transacting business in interstate commerce and maintaining a bank account, so an entity can have franchise tax economic nexus under the $500,000 revenue test without necessarily being required to register as a foreign entity, and the two tests should be analyzed separately rather than assumed to move together. The second question is registering with the Comptroller for franchise tax purposes and filing whatever the entity's revenue level requires, which follows directly from having nexus under Tax Code section 171.001 and 34 TAC 3.586, independent of whether Secretary of State registration also applies.
The consequence of ignoring either obligation runs through the franchise tax forfeiture provisions. If a taxable entity does not file a required report or does not pay a tax or penalty within 45 days after the Comptroller mails or otherwise provides notice of forfeiture, or does not permit the Comptroller to examine its records, the Comptroller forfeits the entity's corporate privileges, or, for a noncorporate taxable entity, its right to transact business in Texas, under the same procedures (Tax Code sections 171.251 and 171.2515). Forfeiture denies the entity the right to sue or defend in a Texas court (Tax Code section 171.252) and exposes directors, officers, and certain other responsible parties to personal liability for debts of the entity created or incurred after forfeiture (Tax Code section 171.255). Reviving forfeited privileges requires filing every delinquent report, paying the tax, penalty, and interest due, and having the forfeiture set aside (Tax Code sections 171.312 and 171.313). None of this requires the entity to have owed any actual franchise tax; an entity that had nexus, never registered, and would have owed nothing under the no-tax-due threshold can still face forfeiture for failing to file the information report its revenue level required.
Practice notes
The recurring failure pattern is an out-of-state business that tracks its Texas sales tax obligations carefully, because the $500,000 figure is visible and familiar from the sales tax side, but never separately evaluates franchise tax nexus because it assumes a business with no Texas office cannot owe a Texas tax called a franchise tax. The two thresholds share a number but not a filing system, and clearing the sales tax threshold is a useful trigger to also check the franchise tax analysis, not a substitute for it. For a business genuinely near the line, the calculation should be run on a period-by-period basis against actual Texas-sourced gross receipts as computed for apportionment purposes, not against a rough national-revenue estimate, since a business with modest Texas sales relative to its total revenue can still owe nothing once the no-tax-due threshold is applied even after nexus is established. Where nexus is established and the entity falls at or below the no-tax-due threshold, the safest course is still to register and file the Public Information Report or Ownership Information Report on schedule, since the cost of that filing is far lower than the cost of unwinding a forfeiture, and for a non-U.S. entity, obtaining the U.S. taxpayer identification and other procedural prerequisites early avoids compounding a substantive nexus question with an administrative one.
This article states the law as of September 19, 2026
Statutes, rates, thresholds, and agency practice change, and a different set of facts can change the answer. Before acting on anything discussed above, contact G&G State Tax Group to confirm what has changed since this was written and how the rules apply to a specific situation.
G&G State Tax Group, LLC is a state and local tax advisory firm. The firm provides state and local tax consulting and representation in state and local tax controversies. G&G does not prepare or file tax returns, perform attest services, or provide bookkeeping, and is not a CPA firm.