I discussed Texas franchise tax nexus in a prior post, which can be found here. However, there is a different (albeit similar) set of rules for Texas sales and use tax nexus. As with Texas franchise tax nexus, a business must have nexus for Texas sales and use tax purposes in order to be subject to the requirement to collect, remit, and report Texas sales and use taxes. The differences between franchise tax nexus and sales tax nexus are largely related to the nature of how the Texas sales and use tax is computed and assessed. The current framework for determining whether a taxpayer has nexus for Texas sales and use tax is discussed below.
- Collection and Permit Requirements
As a general rule, any taxpayer who makes a sale of a taxable item or taxable service must collect Texas sales or use tax and remit that tax to the Texas Comptroller. [1] Additionally, any seller who is “engaged in business” in Texas must apply to the Comptroller and obtain a Texas sales and use tax permit. [2] These sellers must obtain a separate permit for each place of business in Texas, and one permit for all out-of-state places of business. [3]
The Comptroller will not enforce the permit or collection requirement for a “remote seller” who does not meet a specified revenue threshold. [4]
- Engaged in Business
Comptroller Rule 3.286(a)(4) provides a list of activities that constitute being “engaged in business” in Texas. [5] This list includes, among others:
- Maintaining, occupying, or using a kiosk, office, distribution center, etc. in Texas;
- Having any representative, agent, salesperson, canvasser, or solicitor conducting business in Texas;
- Deriving receipts from the sale, lease, or rental of tangible personal property located in Texas;
- “Otherwise conduct[ing] business” in Texas;
- Being formed, organized, or incorporated under the laws of Texas; and
- Engaging in regular or systematic solicitation of sales of taxable items in Texas
The phrase “otherwise conduct[ing] business” may give rise to some questions and issues, as it’s not really defined any further by the Tax Code or regulations. However, the activities listed in Rule 3.286(a)(4) are all examples of “physical presence nexus,” a concept discussed in my blog on Texas franchise tax nexus.
- Safe Harbor for Remote Sellers
Following the United States Supreme Court’s decision in South Dakota v. Wayfair, like Texas franchise tax nexus, sales tax nexus may also exist for out-of-state taxpayers if they have sufficient “economic nexus” with the State of Texas. [6] In this regard, the Tax Code and Comptroller’s regulations have carved out a safe harbor for “remote sellers” to assist in determining whether such a seller does, or does not, have economic nexus.
For Texas sales tax purposes, the permitting and collection obligations of a “remote seller” will not be enforced if the seller has “total Texas revenue in the preceding twelve calendar months” of less than $500,000. [7]. A “remote seller” is defined as a seller that is “engaged in business in this state whose only activity in the state is described in subsection (a)(4)(I) or (J) of this section.” [8] In turn, those subsections refer to the following activities:
- Subsection I – engaging in regular or systematic solicitation of sales of taxable items in this state by the distribution of catalogs, periodicals, advertising flyers, or other advertising, by means of print, radio, or television media, or by mail, telegraphy, telephone, computer data base, cable, optic, microwave, or other communication system for the purpose of effecting sales of taxable items; [9]
- Subsection J – soliciting orders for taxable items by mail or through other media including the Internet or other media that may be developed in the future. [10]
Any taxpayer engaged in only the above activities is a “remote seller.” To determine whether the remote seller will be subject to a permitting or collection obligation, the seller’s “total Texas revenue” must be computed. “Total Texas revenue” is defined to mean “the gross revenue from the sale of tangible personal property and services for storage, use, or other consumption in this state recognized under the accounting method used by the seller, and includes separately stated handling, transportation, installation, and other similar fees collected by the seller in connection with the sale.” [11]
If a seller has “total Texas revenue” exceeding $500,000 for any twelve-month period, they must obtain a permit and begin collecting Texas sales and use tax “no later than the first day of the fourth month after the month” in which they exceed that amount. [12]
There is also a separate set of rules for taxpayers who fall into the category of “marketplace providers” or “marketplace sellers.” This covers businesses like Amazon, eBay, or Etsy, as well as businesses who sell products on those sites. I’ll cover those rules in a post to follow.
[1] Tex. Tax Code §§ 151.051, 151.010; 34 Tex. Admin. Code § 3.286(d).
[2] 34 Tex. Admin. Code § 3.286(b)(1).
[3] Id.
[4] 34 Tex. Admin. Code § 3.286(b)(2)(B).
[5] 34 Tex. Admin. Code § 3.286(a)(4).
[6] South Dakota v. Wayfair, 585 U.S. 162 (2018).
[7] 34 Tex. Admin. Code § 3.286(b)(2)(B).
[8] 34 Tex. Admin. Code § 3.286(b)(2)(A).
[9] 34 Tex. Admin. Code § 3.286(a)(4)(I).
[10] 34 Tex. Admin. Code § 3.286(a)(4)(J).
[11] 34 Tex. Admin. Code § 3.286(b)(2)(C).
[12] 34 Tex. Admin. Code § 3.286(b)(2)(E).
[View source.]
