Ten Business and Tax Issues for Businesses Moving to Texas

Businesses and workers are moving to Texas in swarms. In 2021, more than 500,000 people relocated to Texas for the seventh year in a row, according to the 2021 Texas Relocation Report, which is based on information compiled by Texas Realtors from the U.S. Census Bureau. Elon Musk moved the headquarters of Tesla and The Boring Company from California to Texas.

This is an ongoing trend. According to recent census reports, 4.2 million people have moved to Texas since the prior census in 2010, which is a growth of 16.4%, placing Texas just behind the 17.4% population growth rate of Utah. Businesses have moved from California, Florida, Illinois, New York and Oregon since 2019, with the vast majority of business relocating from California to Texas. The most popular destinations have been Austin, Dallas, Houston and Fort Worth, with Austin being the most popular.

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Businesses moving to Texas should be aware of the unique state and local tax environment into which they are venturing. The Texas Constitution prohibits a state income tax on individuals without a referendum by Texas voters; however, there is a unique Texas franchise tax imposed on businesses conducting operations in Texas not only based on physical presence but also for businesses making sales of at least $500,000 to Texas customers. In addition, Texas imposes its sales and use tax responsibilities not only on sellers of goods but also service providers, with 1,544 local taxing jurisdictions that may impose tax on any particular sale, depending on the sellers’ and purchasers’ locations. The Texas Workforce Commission also takes a unique view of who is an employee for purposes of the state unemployment tax, which businesses having workers in Texas must report and pay on a quarterly basis.

1 – Transferring a Business in Texas

Businesses transferring to Texas may or may not be able to transfer from their home states’ jurisdictions. Check the laws of the state you are leaving to see if those state laws allow for entity conversion. It is much more common for businesses to form a new entity and reorganize if they want to be domiciled in the state to which they are moving. Many organizations choose jurisdictions based upon established law, such as Delaware corporations, rather than forming in the state where they will be conducting business.

2 – Formation in Texas

The Texas Business Organizations Code governs the entity types that may be formed in Texas. Available forms of business include for-profit corporations, nonprofit corporations, professional corporations, professional associations, limited liability companies, professional limited liability companies, limited partnerships, uniform unincorporated nonprofit associations, series LLCs and others.

3 – Registering a Business in Texas

The Texas secretary of state’s office requires both domestic (Texas) and foreign (non-Texas) entities to register if they are doing business in Texas. The Texas Comptroller’s office also has registration requirements for businesses, but the criteria are different for each.

4 – Knowing when a Business Has Left its Home State

State and local tax nexus in Texas, for both franchise and sales and use tax obligations, is based upon a combined physical presence and economic nexus standard. Having employees or other workers in Texas can establish physical presence nexus even if sales into Texas do not exceed the $500,000 per year threshold for economic nexus. Even if a business has not relocated its headquarters or even its offices to Texas, it might have state tax reporting and payment obligations.

There appear to be no universal standards addressing the extent or duration of nexus. Therefore, it’s difficult for taxpayers to determine how long they must continue collecting and remitting tax on sales of taxable goods and services once physical presence no longer exists or keep paying a business activity tax because nexus was established. State rules vary widely. Until mid-2015 Texas law considered nexus to apply for a 12-month period. Other states, such as Washington, have historically required taxpayers to continue collecting and remitting tax for as long as five years.

Under the version of Comptroller Rule 3.286(b)(2)(F), effective Jan. 1, 2019, “a remote seller that is required to be permitted in Texas may only terminate its collection obligation after twelve consecutive months in which the seller’s total Texas revenue for the preceding twelve months is below [$500,000].”

For businesses moving to Texas from California, a remote retailer must remain registered with the California Department of Tax and Fee Administration and continue to collect state use tax throughout any calendar year its sales in California exceed the $500,000 economic nexus threshold, “and during the following calendar year.” A remote retailer is not required to remain registered on Jan. 1 of any subsequent year if, during the preceding calendar year, its sales (and sales by all related persons) of tangible personal property in the state didn’t exceed the $500,000 economic nexus threshold.

For businesses moving from New York, a business is presumed to be regularly or systematically soliciting business in the state if, for the immediately preceding four sales tax quarters: (1) the cumulative total of the gross receipts from sales of tangible personal property delivered into the state exceeded $500,000, and (2) the business made more than 100 sales of tangible personal property delivered in the state. A business with no physical presence in New York State that still meets the requirements outlined above must remain registered as a New York state vendor.

The state of Washington has a policy that states: “A person who stops the business activity thatcreated nexus in Washington now continues to have nexus for the remainder of that calendar year, plus one additional calendar year.”

For Texas franchise tax and some business taxes, a final “exit tax” report is due when a business is leaving the state. For other state and local tax reports, a final report is required to notify the state taxing authority that no additional reports are expected to be filed.

5 – Maintaining Business Records

Even after a business has left the state or has ceased operations, it must maintain business records in case of audit by the state taxing authority. For federal tax audits, the statute of limitations for assessment is three years, or six years for substantial understatements and criminal matters. For Texas state tax audits, the statute of limitations for assessment is four years from the date the tax is due and payable or the report is filed, whichever is later. There are exceptions for substantial understatements and for fraud. The statute of limitations may also be extended by agreement, which is common during a state tax audit to avoid a jeopardy assessment. Taxpayers should be wary that for jeopardy assessments the petition for redetermination is due to be received by the comptroller within 20 days of the notice, as compared with regular assessments, which have a 60-day deadline.

Purchasers of businesses should maintain records as well, because if they do not obtain a certificate of no tax due at the time of purchase, they may be liable for up to and including the purchase price of the business under the successor liability provisions. There are also fraudulent transfer provisions that may apply in certain circumstances, causing even greater liability for a predecessor entity’s taxes.

6 – Establishing Texas Franchise Tax Compliance

Business entities with physical presence or economic nexus in Texas are required to file annual franchise tax reports, generally due by May 15 each year. In addition to the franchise tax report, businesses are also required to file a public information report or owner information report identifying the officers, directors or owners of the business entity. Combined reporting is required for affiliated entities engaged in a unitary business. Businesses that fail to maintain franchise tax compliance may lose corporate privileges, making the officers and directors of the business jointly and severally liable for any debts incurred during the forfeiture period.

7 – Obtaining a Texas Sales and Use Tax Permit

Sellers of taxable goods or services that sell more than three items within a 12-month period, or that solicit orders for sales of taxable items, must obtain a sales and use tax permit. A permit is required for each “place of business.” Rule 3.334(a)(16) defines “Place of Business” as “[a]n established outlet, office, or location operated by a seller for the purpose of selling taxable items to those other than employees, independent contractors, and natural persons affiliated with the seller, where sales personnel of the seller receive three or more orders for taxable items during the calendar year. The term does not include a computer server, Internet protocol address, domain name, website, or software application.”

Although there are 1,544 local taxing jurisdictions, the reporting is consolidated in one report that is filed with the Texas Comptroller. Beware, however, that in addition to audits by the Texas Comptroller, the local taxing jurisdictions sometimes hire their own independent auditors to evaluate whether local taxes are properly being collected, reported and allocated. Litigation is presently ongoing against the Texas Comptroller related to proposed changes in local taxes, which would make internet sales destination-based rather than sourcing them to the seller’s place of business.

8 – Registering with the Texas Workforce Commission

Texas employers must register with the Texas Workforce Commission, obtain a TWC employer number and report and remit use tax quarterly. Texas unemployment tax reporting requirements are activated when an employer pays $1,500 or more in total gross wages in a calendar quarter, or has at least one employee during 20 different weeks in a calendar year regardless of the amount of wages. The employee does not have to be the same person for the entire 20 weeks. It is not relevant if the employee is full time or part time. Beware that TWC treats LLC members as employees for unemployment tax purposes.

9 – Property Tax Obligations

Businesses operating in Texas should also consider property tax obligations. Local taxing jurisdictions impose both tax on real property and on business personal property tax renditions, which are due to be filed annually.

10 – Negotiating Tax Incentives

Large businesses relocating to Texas may be able to negotiate local tax incentives by obtaining property tax exemptions related to local taxes that are expected to be generated by making sales in the local taxing jurisdiction. Approved projects may be eligible for the “The Texas Enterprise Zone Program.” There are also state sales tax exemptions for qualified data centers, qualifying research and development projects and other tax incentives.