Lone Star State jumps on bandwagon: Texas looks to tax remote sales in 2019

Update 12.21.2018: Texas will enforce economic nexus starting October 1, 2019. Additional information. 

Texas was one of the first states in the Union to bring the online sales tax debate to the public forum. It’s moving more cautiously in the wake of the Supreme Court of the United States decision in South Dakota v. Wayfair, Inc., which repealed the physical presence rule, granting states the authority to tax sales by out-of-state sellers.

But let’s back up.

Trailblazing Texas

In 2010, an auditor from the Texas Comptroller handed Amazon a bill for almost $269,000 in back sales tax owed. The Washington-based company had never collected or remitted Texas sales tax, despite having a large distribution center in the Lone Star State.

Amazon initially fought the assessment and threatened to close its facility. Eventually, however, an agreement was reached: Texas would forgive an undisclosed portion of the tax due, and Amazon would create jobs and improve infrastructure in the state. And there was much rejoicing.

Texas was a trailblazer in this area. In subsequent years, similar scenarios played out in several states: A state would move to tax sales by Amazon; the company would play hard ball, fight the tax, and eventually agree to collect and remit; there would be much rejoicing.

Since Amazon agreed to collect and remit Texas sales tax, the state has largely stood by as other states fought to increase remote sales tax collection. Efforts in 2017 to expand the state’s tax authority died.

Now that it has the authority to tax remote sales, Texas is proceeding with caution.

South Dakota spearheads economic nexus

South Dakota took up the mantle. In 2016, it adopted an economic nexus law that bases a sales tax collection obligation on economic activity in the state. An out-of-state business must collect and remit South Dakota sales tax if, in the current or previous calendar year, it has gross sales into South Dakota exceeding $100,000, or 200 or more separate transactions into the state.

On June 21, 2018, the Supreme Court allowed this law to stand (remanding it to state court for further proceedings), thus repealing the decades-old physical presence rule. Since the ruling, a steady stream of states have adopted or decided to enforce similar policies. Texas is not among them.

Texas takes its sweet time

Taking some time to make an informed decision doesn’t mean the state isn’t interested in taxing more remote sales. Texas Comptroller Glenn Hegar explains: “It’s up to my office to implement [the principles of the Wayfair decision] in the way that best serves the state of Texas, our citizens and the businesses operating here. We’re going to make sure we do this carefully, deliberately and with ample input from the public, the Legislature and the business community.”

One thing is clear: The state will not seek retroactive enforcement of any new tax on remote sellers with no physical presence in Texas. Once it establishes a new remote sales tax policy, it will enforce it from its effective date forward. South Dakota’s economic nexus law also prohibits retroactive enforcement.

To facilitate compliance, Texas is also considering a flat sales tax rate for remote sellers. Currently, the state has approximately 1,500 local taxing entities, and local sales tax rates are subject to change quarterly. A flat rate could be a tough sell to local governments, who rely on local tax revenue to fund essential services, but Bennett Sandlin of the Texas Municipal League says his group will discuss it.

The Comptroller says it’s started reviewing rules that may need to be amended in light of the Wayfair ruling. It expects to be able to enforce rule amendments in “early 2019,” but concedes, “that could change pending issues that arise during the rulemaking process.” Read the Comptroller’s initial guidance on the Wayfair decision for more on the state’s plans.

To learn more about South Dakota v. Wayfair, Inc. and its potential impact on remote sellers — and to see a list of states with South Dakota–style economic nexus laws — check out this Avalara resource page.