SALT Blawg – State and Local Tax Blog
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To ring in the New Year, the Texas Comptroller announced needed guidance to remote sellers and marketplace facilitators regarding sales and use tax obligations for businesses that do not have a physical presence in Texas but sell or facilitate sales to Texas customers.
In 2018, the US Supreme Court decided the case, South Dakota v. Wayfair, in which the Court altered the decades-long standard that prevented states from imposing sales tax obligations on businesses unless they had a physical presence in the state. In Wayfair, the Court replaced the physical nexus standard with an economic nexus standard (that is, it allowed states to tax out-of-state business if they have sufficient economic activity in the state, even if they have no physical presence in the state).
Following Wayfair, the 50 states (and DC) have enacted a patchwork of laws that obligate remote sellers and marketplace facilitators/providers to collect and remit sales taxes. This menagerie of sales tax laws that Wayfair spawned has vexed businesses and complicated compliance with state tax laws that claim to have jurisdiction to impose an obligation on out-of-state businesses to collect and remit sales tax.
Texas’ rules regarding tax collection responsibilities for out-of-state sellers, marketplace facilitators and marketplace providers in response to the Supreme Court’s Wayfair decision went into effect in October 2019. Understandably, out-of-state businesses that must contend with different nexus rules in many different states may have difficulty understanding what any particular state’s laws, in this instance Texas’, require.
As part of its ongoing effort to bolster compliance and make Texas’ new rules understandable, the Texas Comptroller on January 5, 2023, rolled out additional guidance on select topics for use taxes (which also apply to sales taxes), some of which are summarized with added commentary here.
Starting with the basics, there is a safe harbor for remote sellers (which Texas defines, basically, as any out-of-state seller whose only activity in Texas is the remote solicitation of sales). The safe harbor provision provides that a remote seller is not required to obtain a tax permit and collect sales and use taxes, if its total Texas revenue is less than $500,000 in the previous 12 calendar months. The dollar amount is based on gross revenue from sales of all taxable and nontaxable tangible personal property and services into Texas. The amount includes separately stated handling, transportation, installation, and other similar fees collected by the seller. The Comptroller clarified that it also includes sales for resale and sales to exempt entities.
Many out-of-state clients, however, are concerned that if they begin to collect and remit Texas sales and use taxes under the new economic nexus standards they may place a target on their backs for the Texas Comptroller to audit pre-safe harbor, pre-economic nexus periods. The Comptroller generally should not seek pre-October 1, 2019 taxes when the remote seller rules went into effect if the remote seller was not engaged in business in Texas, such as by maintaining an office or property in the state or having representatives in the state who take orders or make sales or deliveries. But for many sellers, this may not be a black-or-white proposition. There may be some activity on which there could be disagreement whether it crosses the line. Out-of-state sellers with concerns should consult a tax professional to evaluate their exposure and options for transitioning into compliance with the Texas sales tax laws. Simply not complying, and hoping the Comptroller doesn’t audit, is never a good option.
The guidance further answers a bunch of important questions that arise for remote sellers once the nexus rules of put into practice. Frankly, from questions we get from remote sellers, there are a lot of layers to this onion. The guidance covers questions like: When does a seller’s Texas sales and use tax collection responsibilities terminate? If the seller sells exclusively through a marketplace and the marketplace collects taxes, what are the remote seller’s obligations / does the remote seller need to obtain a Texas sales tax permit? Do sales via a marketplace count towards the $500,000 safe harbor amount? There is more, as well as some guidance for Texas vendors selling out-of-state.
The guidance from the Texas Comptroller is genuinely helpful in answering or partially answering some of the many questions we receive from remote sellers. What it does not do, or understandably attempt to do, is address the larger fundamental challenges caused by Wayfair and beyond the Texas Comptroller’s unilateral control. Remote sellers will still consternate with the varying sales and use tax laws that span the country, unless there is federal or multistate action to provide a uniform set of rules. There are such legislative projects in the works, but it will take an unusual consensus across diverse and competing constituents for any of those efforts to succeed.
Peter A. Lowy, a shareholder in Chamberlain Hrdlicka’s Houston office, is best known for his tax controversy work and deep experience in the energy sector. He also advises corporations and other taxpayers in a broad spectrum of ...