                                      May 27.   1970


Honorable   Robert S. Calve??                      Opinion        No. M-642
Comptroller    of Public Accounts
Capitol   Euildlng                                 Re :      The Interpretation      and
Austin,   Texas                                              application    of the
                                                             Franchise    Tax, Articles
                                                             12.01 et seq.,     V.A.T.S.,
                                                             as amended by Acts 1969,
                                                             61st kg.,     2nd Called
                                                             Session,    Ch. 1, A&. 7,
                                                             p. 5, 39, such amend-
                                                             ments to be effective
Dear Mr.    Calvert:                                         May 1, 1970.

         You have requested    our opinion     on three questions        lnvolv-
ing the lnterpretatlon       of Article    12.02,   Title   122A, Taxatl n-
General,    Vernon’s   Civil  Statutes,    of the Franchise       Tax Act, P
which defines     gross receipts    from business      done In Texas and
provides    for the determination       of the taxable     capital   of a
corporation    doing both in-state       and out-of-state      business.
These questions      were stated   In your request      as follows:

                "An out-of-state       corporation,    not authorized
       to transact       business    In this State,      and which has
       no inventory       or office     in this State regularly
       solicits     citizens     of this State by means of travel-
       ing sales representatives.              Goods ordered pursuant
       to purchase orders          obtained    by the traveling    sales-
       men are shipped directly            from out-of-state     to the
       purchaser      In this State.

               “Another out-of-state      corporation,     also not
        qualified     to transact    Texas business      and not own-
        ing any inventory      or office     in this State,     regularly
        solicits    citizens   of thls State by mall.          Goods
        shipped pursuant to sales orders            growing out of
        this solicitation      were shipped directly        from out-of-
        state to purchasers       in this    State.



1.   Acts   1969,      61st   Leg.,     2nd C.S.       Ch.   1,   ART. 7, p.   5, 39.
Hon.   Robert     S.   Calvert,        Page 2        (M- 642)



                “Please advise whether either    corporation
          Is doing business      In this State under the
          provisions    of Article   12.02.

                 “In this connection , please also advise
          whether this office       is legally     correct     In con-
          cluding    that a corporation      whose franchise         tax
          llablllty     is substantially      Increased     solely     by
          reason of the provisions        of Article       12,02(l)(b)(l)
          is entitled      to em loy the special       methods set
          out In Section      (2 P of Article     12.02 on the basis
          that the allocation       and apportionment         provlalona
          of the Section      (1) of the Article       do not fairly
          represent     the extent of its business          actlvlties.”

          The provisions          of   Article   12.02,   supra,   pertinent   to   this
opinion     are :

                 “(1)   (a)    Each corporation   liable    for
          payment of a franchise        tax shall determine       the
          portion     of Its entire    taxable  capital    taxable
          by the State of Texas by multiplying            same by
          an allocation      percentage    which shall    be the
          percentage     relationship    which the gross receipts
          from Its business        done in Texas bear to the
          total   gross receipts      of the ,+orporatlon     from
          its entire     business.

                   “(b)  For the purpose of                this Article,
          the term *gross receipts  from its               business
          done In Texas’ shall Include:

                       (1)   Sales of tangible     personal   property
          when the property      Is delivered    or shipped to a
          purchaser    within this State,     regardless    of the
          F.O.B.   point or other conditions       of the sale,    . .         .

                         . . .

                  “(2)     If the allocation   and apportionment       pro-
          visions      of Section   (1) of this Article    do not fair-
          ly represent       the extent of the taxpayer’s       business
          activity       in Texas, the taxpayer    may petition     for
          and the Comptroller        may permit    In respect    to all
          or any part of the taxpayer’s         iuslness   actiiity,
          If reasonable       : (Emphasis added. )




                                            -3068-
Hon.   Robert   S.   Calvert,      Page 3        (M- 642)



                     “(a 1      separate   accounting;

                    "(b)     the Inclusion  of one or more
        additional     factors   which will  fairly  repre-
        sent the taxpayer's       business  activity  in
        Texas;   or

                    "(c)        the employment of any
        other method to          effectuate   an equitable
        allocation     and      a portlonment   of the tax-
        payer's    capital.      t

        The franchise      tax Is levied      In Article     12.01,    Title    122A,
Taxation-General,        Vernon's    Civil   Statutes,     on the privilege       of
doing business       In Texas In the corporate          form: It Is measured
by the total      capital   structure      of the corporation.         Where a
corporation     Is engaged In both In-state            and out-of-state
business,    apportionment       of the tax base Is required           in order
to tax only that capital          attributed     to a corporation's         busl-
ness activities       In Texas.

         The corporate    activities      referred     to in your request
will    be discussed    In the order presented           and referred     to respect-
ively    as ABC Corporation       and XYZ Corporation        In this opinion.
ABC Corporation      employs Its sales         representatives       In Texas to
solicit     sales and obtain purchase          orders for Its products
which are then shipped to purchasers               In Texas from out-of-state
locations.       Such destination      sales    constitute     interstate      com-
merce;     they would not have been considered             as business      done In
Texas before      the 1969 amendment to Article            12.02,    supra, which
provides     for the Inclusion       of "destination"       sales    in Sec-
tion (l)(b)(l).        The decision     in Hump Hairpin Manufacturing             Co.
v. tierson,      258 U.S. 290 (1922),        Illustrates      that interstate
business     may properly    be used In the measure of a state               tax.

        Even though an apportionment         formula may allocate        a
portion    of the proceeds      from Interstate     commerce to the State,
there must be also sufficient          contacts    or nexus between the
corporations      sought to be taxed and the state          seeking   to Impose
a tax before      the state will have jurisdiction          to tax the corpora-
tion.     National    Bellas  Hess, Inc. v. Department of Revenue of
the State of Illlnols,         3&b U. S. 753, (1967).        Before Article
12.02,    supra,    can apply to a corporation       this jurlsdlctlonal
requirement      must   be met.    What constitutes     sufficient    contacts
or nexus to give the state power to Impose Its taxing statutes
must be determined        from decisions    of the federal      and state
courts    applying    federal   law.   A violation    of the Due Process



                                       -3069-
Hon.    Robert   S.   Calvert,    Page 4          (M- 642)



Clause of the United States     Constitution    results    from an attempt
to impose a tax on a corporation       without  sufficient     nexus to
subject    it to the taxing jurlsdlctlon     of the State.      National
Bellas    Hess, Inc. v. Department of Revenue of the State of
 lllnois,    supra.

        ABC Corporation       has sufficient     nexus with the State of
Texas to bring     It within the jurisdiction           of the Texas taxing
statutes;   therefore,      Its sales of property        delivered    to pur-
chasers   in Texas amount to "business           done In Texas" within       the
terms of Article       12.02,   supra.     A recent   decision     of the U. S.
Supreme Court on taxing         jurisdiction     of a State supports      the
above conclusion.         In National     Bellas  Hess, Inc. v. Department
of Revenue of the State of Illinois,             supra,   the Court states:

                 "The case In this Court which represents                 the
         furtherest     constitutional        reach to date of a
         State's    power to deputize         an out-of-state       retailer
         as Its collection        agent for a use tax is Scrl to
         Inc. v. Carson,       362 U.S. 207.        There we he--I&d
               Ida could constitutionally           impose upon a
         GezEgia seller       the duty of collecting          a state     use
         tax upon the sale of goods shipped to customers
         In Florida.       In that case the seller          has '10
         wholesalers,      jobbers,      or "salesmen"     conducting
         continuous     local    sollcltatlon      In Florida      and fcr-
         warding the resulting           orders from that State to
         Atlanta    for shipment of the ordered            goods.'
         362 U.S.,     at 211."

          The facts    in Scripto,     Inc. v. Carson, 362 U.S.           207, (1962)
are    essentially     the same as those of the corDoration               referred
to    In the first     question    presented  by the Comptroller.

       Article   12.02(l)(b)(l)            Includes    receipts     from certain   types
of sales   In the definition          of     'gross   receipts    from business    done
In Texas":

                "(I)    Sales of tangible    personal     property
         when the property      Is delivered    or shipped       to a
         purchaser     within this State,    regardless       of the
         F.O.B.    point or other conditions      of the sale,
         reduced     by the deduction,    If applicable        allowable
         under Subsection      (c) of this Section      (l)."




                                       -3070-
Hon. Robert      S.   Calvert.         Page 5         (M- 642)



         The type of transaction             referred     to may Include         both
intra-state       and Interstate        business.        Where a corporation          Is
subject     to the taxing        jurisdiction       of this State,         that portion
of Its Interstate          business     reflected      by its receipts         frcm
"destination        sales"    into Texas are properly            allocable       to Texas
as business       done In this State.            Smoot Sand and Gravel Core. v.
District      of Columbia,       261 F.2d 758 (D.C.Clv.            ly3tl),    cert denied,
   9 U S 968 (19m            . Lever Bros. Co. v. District               of Columbia,
i953,'9i     U.S.App.      D:C. 147, 204 F.2d 39              Th "De tl natlcn
Sales" factor         Is one of the factors           prescrlbzd      ln'the     Unlfcrm
Division     of Income for Tax Purposes Act adopted in 1957 and
approved by the American Bar Association.                      It Is also one of
the factors        prescribed      by the Multistate         Tax Compact, adopted
by Texas as Article           7359a, Vernon's         Civil   Statutes,       used to
apportlon       income to the various           states.2

        As stated above,      ABC Corporation,        employing   salesmen.ln
the State of Texas, has sufficient             "nexus" with this State to
subject   It to the taxing       jurisdiction      of the State and to the
terms of Article     12.02(l)(b)(l).          Therefore,    It Is "doing
business    In Texas" within       the terms of Article       12.02.

         One further      observation      regarding      this corporation       employ-
ing sales representatives            In Texas Is warranted          by the decision
of the Court of Civil           Appeals,    In Ramsey v. Investors           Diversl-
fled Services,        248 S.W.2d 263 (Clv.App.            1952, n.r.e.J.        The
corporation       in that case employed commission agents                 In Texas
but did not have any other contacts                 wlth~the    State.     The court
held that the corporation            was doing business         in Texas and that
the sales negotiated           and loans solicited         by said agents were
local    activities      amounting to "business           done In Texas".        The
Court relied        substantially      on the fact that the local            actlvltles
of the agents were the lnltlal               steps of the transactions            that
resulted      In the consummation of the sales and loans Involved.
The Court,       In effect,     held that the negotiation           and solicitation
were the substance          of the transaction        and the business        was lccal
In nature rather         than Interstate        business.      The decision      also
relied     heavily    on the general       rule that a corporation           perfcrm-
lng a substantial         part of its business          In a state,      continuous
In character,        Is doing,     carrying     on, or engaging       in business
therein.       20 C.J.S.      Corporations      B 1829, page 46.



2.    Art.   7359a,     Art.     IV,    subd.   16,   V.C.S.




                                           -3071-
Hon. Robert   S. Calvert,      Page 6         (M- 642)



        The Ramsey case,     supra,     supports our view that a corpora-
tion that employs sales        representatives     In Texas under the
stated conditions,       is subject     to its taxing jurisdiction.     It
also supports     the position      that sales made to Texas purchasers
by foreign    corporations     may be considered     as "business   done in
Texas".    This definition      of Texas business     is now expressly
included   as "business     done In Texas" as we have noted above.
Article   12.02 (l)(b)(i),      supra.

       The second question,  restated,    also involves   "doing
business   in Texas" under Article   12.02 with reference     to XYZ
Corporation:

               "Another out-of-state      corporation,     also not
       qualified     to transact    Texas business      and not own-
       ing any Inventory        or office  In this State,      regular-
       ly solicits     citizens    of this State by mall.         Goods
       shipped pursuant       to sales order growing out of this
       sollcltatlon     were shipped directly        from out-of-state
       to purchasers      In this State."

        Article  12.02 applies   only to corporations      subject         to
taxation    In Texas within   the jurlsdlctlonal    llmltatlons           dls-
cussed above.

       The facts of XYZ CorporatIonIs  business In Texas are the
same as those presented  In National  Bellas Hess, Inc. v. The
Department of Revenue of the State of Illlnols,    supra, wherein
the Court held:

             "In order to uphold the power of Illlnols
       to Impose use tax burdens on National              in this
       case, we would have to repudiate           totally    the
       sharp distinction       . . . between mall order
       sellers    with retail    outlets,   aollcltors,      or
       property     within a State,     and those who do no
       more than communicate with customers             In the
       State by mall or common carrier          as part of a
       general    Interstate    business.    But this basic
       distinction,      which until    now has been generally
       recognized      by the state taxing     authorities,        Is
       a valid one, and we decline         to obliterate       It.”

        It la clear that the corporation without any connection
with   Texas other than through the use of the mall and common




                                    -3072-
Hon.   Robert   S. CalVert,     Page 7          (M- 642)



carriers     does not have sufficient     "nexus" to confer    the state's
jurisdiction      to apply its tax laws to that corporation       In any
manner.      Therefore,   Article  12.02 does not apply to the business
of this corpcratlon       and this corporation    Is not "doing   buslness
In this State"       under the provisions   of Article  12.02.

         Your third question  Involves          the application       of   Section    (2:
cf   Article  12.02; the question    Is:

                "In this connection,       please also advise whether
        this office     Is legally     correct   In concluding      'that  a
        corporation     whose franchise       tax llablllty    Is sub-
        stantially     Increased    solely    by reason of the pro-
        visions    of Article    12.02 (l)(b)(l)      Is entitled      to
        employ the special       methods set out In Section           (2)
        of Article     12.02 on the basis that the allocation
        and apportionment       provisions     of the Section     (1) of
        the Article     do not fairly      represent     the extent    of Its
        business    activities     In Texas."

         The statutory     language     of Article  12.02,   supra,    Indicates
the legislative       Intent   to tax only that portion        of the ca ltal
structure     that Is represented         by (or may be attributed       to P the
corporation's     business     activities     In Texas.    Section    (1)   attempts
tc measure the extent         of a corporation's      Texas business       by the
gross receipts      from such business        and defines   certain    activities
and transactions       that are to be considered         as "business     done In
Texas" In the application           of the apportionment     formula provided
therein.

         Section     (2) provides      for the use of alternative          methods
of measuring       the extent      of a corporation’s       business    activities
In Texas, If the formula provided               In Section     (1) does not fairly
re resent      the extent     of such activities         In the State.       Section
      does not set out any particular               type of formula other than
!E! possible       use of "separate        accounting",     which is a method of
Isolating      the activities        of a corporation      within the State and
determining       the "receipts"       attributable      to such activities.
Skelly    Oil Co. v. Comm'r. of Taxation,               269 Mlnn. 351, 131 N.W.2d
632 (1934)        T        0. v. Cooper,       236 La. 380, 107 So .2d 676
 (1959);-Ma~~EJ           etroleum
                              9        Co. v. Oklahoma Tax Comm'r.,           190 Okia.
172,    121 P 2         08 (1 42) .      Other than "separate       accounting"       the
statute     does not Indicate         any special      method of determing        the
extent of business         activities       In Texas, other than general           state-
ments that the methods used should be fairly                   representative        and
equitable.




                                       -3073-
Hon.   Robert    S.   Calvert,    Page 8           (M-642)



         The third question       thus asks If a corporation           Is entitled
to special      methods of apportionment        provided    In Article       12.02(2),
when Its tax llablllty         Is substantially      Increased    by Article
12.02(l)(b)(l),         which Includes  destination      sales   (I.e.     sales
of goods shipped to purchasers          In Texas) In the statutory             deflnl-
tlon of gross receipts         from business     done In Texas.          The
question      specifically    asks If the Comptroller        Is legally       correct
In concluding        that such a corporation       Is entitled     to use the
special     methods of apportionment       In Article     12.02(2),       which pro-
vides In part:

                "If the allocation      and apportionment    pro-
        visions     of Section    (1) of this Article     do not
        fairly     represent   the extent    of the taxpayer's
        business      activity  In Texas,    the taxpayer may
        petition      for and the Comptroller     may permit
         . . . If reasonable:         . . ."

       Whether the Section    (1) formula does not fairly      represent
the proportionate   amount of the taxpayer's     business   activity     In
Texas Is the question    that must be decided    before   the special
methods allowed   In Section    (2) may be used.

         The franchise     tax llablllty         of a corporation       will be
Increased     by Section     (l)(b)(l)       where It makes Interestate              sales
Into Texas and delivers           the property       to purchasers      In this
State.      Does this fact alone require             a legal    conclusion       of
unfairness      of the Section         (1) formula?      We think not.         The
legislative       Intent  shown by the language of Section                (l)(b)(l),
was to Include        such sales      In the "gross      receipts    from buslness
done In Texas".Tls             Intent     cannot be harmonized with a con-
clusion     that Section     (l)(b)(l)       creates   an unfair     representation
of the extent of "business              done In Texas",      thus allowing         the
taxpayer     to use an alternative           method under Section         (2).

          The provision     of Article    12.02(l)(b)(l)        does not create
an unfair method of apportionment             merely because It results         In
a substantially        higher   franchise    tax.       A taxpayer   Is not en-
titled     to use the provisions        of Section            whenever Its tax
llabllltv       Is Increased    by Section     (l)(b)         or any other pro-
visions     bf the Section       (i) apportl&u&f‘f&nula,-without-a
showing of the unfairness            or Inequity      as authorized     In this
Section      (2).   In our opinion      these are sufficient         standards.
 "Unfair or Inequitable'          has been upheld by the Supreme Court of
the United States.           See IBvls'    Administrative       Law Treatise,
Sec. 2.03.        See also Jordan v. Rate           Board of Insurance,




                                       -3074-
Hon.    Robert   S. Calvert,     Page 9          (M-642)



160 Tex. 506, 334 S.W.2d 278 (1960);     Texas Pipe Llne Co. v.
Anderson,   100 S.W.2d 754 762-3 (Tex.i71     A    1937    error   ref.,
cert.  den.    302 U.S. 7241, upholding  a ~;a%&     of'tax    apportlon-
ment of "fair,    just,  and equitable"; accord:   Alaska Steamship
Co. v. Mullaney      108 F.2d 805 (9th Clr. 1950); 1 Am.Jur.     927-
 26, Admlnistrailve     Law, Sec. 119.3

         Article    12.02(l)(b)(l)       can only     serve to increase    the
amount of business         allocable     to Texas     and will  therefore   ln-
crease      the franchise     tax due in every        case where It applies.
If the formula       In Article      12.02(l).  Is    deemed unfalr    whenever
this tax Increase         Is substantial,      then    Its Inclusion    makes
the formula unfair whenever It applies                 to a corporation's
activities.

          For the above reasons,           our opinion       Is that a mere sub-
stantial     Increase    in franchise        taxes resulting        from Section
(l)(b)(l)      does not per se result           In an unfair      or Inequitable
representation        of the extent of business              done In Texas.       A
taxpayer     whose tax llablllty           is substantially       increased     be-
cause of the Inclusion          of this provision            In the allocation
formula,     Is not, therefore,          entitled      to use the special       methods
provided     In Section      (2) In the absence           of BhOWing that the
application       of Section     (l)(b)(l)      to his buslnese        operations
presents     an unfair     or Inequitable         allczatlon     and apportionment
of Its capital        to Texas.



3.     We are Informed that similar         provisions     as to standards
       analogous   to these In Article        l2.C2(2)    were contained      In
       the second preliminary       report    of the Committee on Tsx
       Sltus and Allocation      of the National        Tax ASBOCiatlOn In
       1950, and In the Uniform Division           of Income for State
       Tax Purposes Act drafted       by the National        Conference    of
       Commissioners    on Uniform State Laws In 1959.             Further,
       we are reliably    Informed that more than 2g_States             of the
       Union now have similar       provisions     as to their     standards
       In their   state laws.      An adequate      standard   Is held to
       be an allocation    which fairly      appcrtlons      to the state net
       income reasonablv     attributable       to business    done within
       the state.     El &ado      011 Works v. Mc&lRan,          34 Cal.2d
       731, 215 p.2a 4 (1950)               ldlsm.      71.3 6 t. 52, 340
       U.S. 801, reh.den.     71 k.“c??93,        340 U.S.'885.
       The standards   of Section    2 of Article    12.02 are very
       similar  to those of Article      IV, subdivision   18 of Article
       735ga. Vernon's   Civil   Statutes,   which la the Multistate
       Tax Compact adopted by the Texas Legislature.

                                    -3075-
Hon.   Robert    S.   Culvert,   Page 10        (M- 642)



                                 SUMMARY

               It Is the opinion      of this office      that a
        corporation      whose only contacts      or nexus with
        the State of Texas are the presence            and sollcl-
        tatlon    activity    of Its employees within        this
        State,     Is within the State's      tax jurlsdictlon
        and Is subject       to the terms and conditions          of
        the State tax statutes        otherwise    validly    imposed
        on said corporation.         A corporation     without any
        contacts      or nexus with this State other than the
        use of the United States mall and common carriers
        within     this State,    Is not subject    to the tax
        jurlsdlctlon       of thls State or to Its tax laws.

                The mere fact that a corporation        Incurs
        a substantial     tax llablllty    as a direct     result
        of the Inclusion     of "destination"     sales as
        business    done In Texas within      the terms of
        Article    12.02 of the Franchise      Tax Act, does
        not entitle     It to use other methods of apportlon-
        ments that may be allowed       by Section     (2) of that
        Article.

                                             Yours   very   truly,



                                             CRAWFORDC. MARTIN
                                             Attorney General of Texas




tiepared    by    Wardlow Lane
Assistant       Attorney General




                                    -3076-
Hon.   Robert   S.   Calvert,   Page 11     (M- 642)



APPROVED:
OPINION COMMITTEE

Kerns Taylor,      Chairman
W. E. Allen,      Co-Chairman

J. H. Broadhurst
2. T. Fortescue
Rex White
Robert Glddlngs

MEADEF. GRIiFIN
Staff Legal Assistant

ALFRED WALKER
Executive Assistant

NOLA WHITE
First Assistant




                                   -3077-
