SALT Blawg – State and Local Tax Blog
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The Texas Comptroller recently ruled in Hearing No. 100,984 that where an out-of-state seller authorizes Texas retailers to provide warranty service, such authorization constitutes sufficient nexus for sales and use tax purposes in Texas.
The seller was an out-of-state wholesaler of medical and general use scales. On April 1, 2006 it started making direct retail sales through its web site. During the period at issue, it informed customers who purchased its products from Texas stores to return defective products to the Texas stores for warranty service. This notice was not directed towards warranty service for the Internet sales to Texas customers. While the sales by the seller to the Texas stores were exempt from sales and use tax due to the sale-for-resale exemption, the Comptroller claimed that the Internet sales to Texas customers were subject to Texas sales and use tax. The Comptroller pointed at two factors showing nexus: (i) 1099s for persons in Texas and (ii) the warranty statement on the Seller's web site.
Regarding the 1099s, the Seller claimed that such persons merely provided training . However, the Comptroller concluded the taxpayer did not provide sufficient evidence that the services provided were so limited. As to the warranty service, the Comptroller found that, by authorizing Texas customers of its products to return defective goods to the Texas retailers for warranty service, there was sufficient evidence to hold that the Seller was providing warranty services of its goods through Texas retailers and that the Seller, therefore, had sufficient nexus. .
Ultimately, it was the Seller's own web site that provided the evidence upon which the Comptroller relied to establish nexus. The Comptroller's ruling that providing services to Texas customers through a third party is sufficient to deem that nexus is established should be a warning to all wholesalers making retail sales to Texas customers via the Internet risk being drawn into Texas for sales and use tax collection responsibility. Finally, a 1099 is not enough to avoid the Comptroller from linking activities of the contractor to the out-of-state vendor. One must also establish the exact nature of services that are being provided by that contractor, and be wary of the rules in which even a third-party contractor can establish a sufficient link to the out-of-state vendor to establish nexus.