The Comptroller has told us they will appeal the decision.  If it’s upheld, it invalidates the franchise tax throwback rule in many instances.  Texas franchise tax taxpayers with out-of-state revenues that have been “thrownback” to Texas may be entitled to tax refunds and should take appropriate steps to prevent their potential claims from expiring under Texas’ four year statute of limitations.

Here’s a summary of the case:  Home Interiors & Gifts, Inc., a Texas corporation, sold home decorating products through independent representatives located in Texas and throughout the United States.  Home Interiors’ employees and operations were located wholly within Texas.  Home Interiors had no manufacturing, warehousing, or administrative facilities located outside of Texas. 

However, most of Home Interiors’ sales were made to customers located outside of Texas.  The Texas Comptroller applied the throwback statute to treat those non-Texas receipts as Texas receipts.  This caused Home Interiors’ apportionment factor for Texas to rise significantly, which, in turn, caused Home Interiors to pay substantially more franchise tax than it otherwise would have owed.  Home Interiors filed suit challenging the constitutionality of the throwback rule.

The throwback rule apportions out-of-state sales to Texas for the purpose of calculating the gross receipts factor of the Texas franchise tax.  Normally, sales of products shipped to customers in Texas are Texas receipts.  Conversely, product sales delivered out-of-state are generally not Texas receipts.  The throwback rule is an exception to this rule.  The throwback rule treats out-of-state sales as Texas sales when the seller/taxpayer does not have sufficient connection with the destination state to be subject to taxation there.

The Texas Court of Appeals considered whether the earned surplus throwback provision unconstitutionally burdened interstate commerce by requiring businesses, like Home Interiors to throwback to Texas out-of-state sales which are protected under Public Law 86-272.  Public Law 86-272 is a federal statute which protects out-of-state solicitation by prohibiting states from imposing “a tax on, or measured by, net income” on a business that limits its activities within the state to solicitation.

The Court reasoned that the throwback provision violated the Commerce Clause because the effect was internally inconsistent.  The throwback rule, when applied to corporations that make out-of-state sales protected by Public Law 86-272, causes them to pay more tax overall than corporations making sales only in Texas.  Considering two states with taxing schemes like that of Texas, the application of the throwback rule would cause a corporation with only intra-state receipts to pay less tax overall than a corporation with receipts from interstate sales.