The Texas State Office of Administrative Hearings (“SOAH”) found that the receipts of a non-nexus member of a combined group (Company A) “should be deleted” from the computation of the group’s gross receipts for purposes of apportioning revenue to the state. The group was in the business of franchising fast food restaurants. On audit, the Texas Comptroller of Public Accounts determined that Company A had nexus with Texas because the group’s Texas franchisees were required to purchase their food products and supplies from an unrelated distributor that purchased the same items from Company A. The Comptroller contended the distributor was acting as an agent for Company A in Texas and imputed the distributor’s nexus in Texas to Company A. SOAH disagreed with the auditor’s determination and concluded that an agency relationship did not exist between the distributor and Company A. An agency relationship only exists if: (1) one person acts for another, (2) both consent to the arrangement, and (3) the agent is under the principal’s control. SOAH determined that there was insufficient evidence that Company A controlled the distributor. In addition, Company A did not have nexus with Texas based on its own activities with Texas because it did not have physical assets or employees working in Texas.
