Have you been following the online sales tax debate? Congress hasn’t been able to come up with a solution at this point, so states are taking matters into their own hands. This series showcases how various legislatures across the country are approaching the issue. So far we’ve covered Colorado, Alabama and Washington. This week we take a look at Texas.
A Summary of Texas’ Online Sales Tax Legislation
Although the 1992 court case, Quill Corp. v. North Dakota, set precedent that companies need to collect sales tax from customers in states where the business has a physical presence (or nexus), many states – including Texas – interpret that to mean that they can collect sales tax if your enterprise has established nexus in their state by other than just physical presence. This is often referred to as economic nexus.
Texas Tax Code provides various definitions of nexus; as Nolo.com explains, these two statutory definitions* specifically apply:
- Definition 1: Maintaining a place of business in the state directly, or indirectly or through a subsidiary or agent.
- Definition 5: A catch-all that states that a retailer who solicits orders by mail or other media can be required to collect and pay sales tax if permitted by federal law.
In cases that don’t require the online retailer to collect sales tax, the customer is supposed to pay the tax; this makes it a use tax rather than a sales tax. However, many residents are unaware of this law and don’t ultimately self-remit the taxes (note that many states, including California, offer residents a place on their individual income tax returns to report out of state, online sales for which use tax is due. However, Texas does not have an individual income tax, so there’s no easy way to encourage compliance and collect the use tax).
*Other definitions in the code spell out what it means to be a direct sales organization, in disaster or emergency-related work, engaged in business or a place of business, a kiosk, a seller, etc. Although they don’t specifically relate to online sales tax, they are important to be aware of if your business falls within their parameters so you can ensure you’re following any laws that apply to your organization.
Texas’ Potential Upcoming Sales Tax Legislation
In April, an ‘Amazon Law’ bill was introduced to the Texas state Senate Finance Committee. San Antonio Senator Carlos Uresti introduced SB 1713 to the committee; it would mean that any retailer with more than $500,000 in sales or 1,000 transactions from Texans each year would need to collect and remit sales tax to the state. Uresti estimates the bill, “Could bring in anywhere between $250 million to over a billion dollars a year in sales tax revenues, based on a number of studies.” SB 1713 is still pending in the committee.
Ramifications of Texas’ Online Sales Tax Legislation
If SB 1713 passes, online retailers will need to pay attention to sales made in yet another state, as they could be liable for sales tax even if they haven’t established nexus.
As more states approach internet sales tax with this type of legislation, it becomes vital for companies to be aware of fees they’re responsible for paying. Stay tuned for our next post in the series – a look at Arizona. In the meantime, please also contact us if you have questions about how this type of legislation or any other multi-state tax issues may affect your business!
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects. To learn more, contact us today at www.MilesConsultingGroup.com.
