Texas to tax remote sales starting October 2019

Update 2.27.2019: The Texas Legislature may dramatically simplify sales tax compliance for remote sellers by allowing them to collect and remit a single tax rate for all sales into the state. Lawmakers are also considering measures that would require marketplace facilitators to collect and remit tax on behalf of third-party sellers starting September 1, 2019. See SB 890 and HB 1525 for additional details.

Out-of-state businesses with at least $500,000 in Texas sales during the preceding 12 calendar months will be required to register with the Texas Comptroller of Public Accounts and collect and remit sales tax starting October 1, 2019.

This is big. After California, Texas is the second most populous state in the country. An enormous amount of people and businesses will be impacted once these two giants start taxing remote sales; the Comptroller’s announcement comes mere weeks after the California Department of Tax and Fee Administration revealed remote sellers will be required to collect and remit California sales tax starting April 1, 2019.

The freedom to tax remote sales is new for states: For decades, they could only tax sales by businesses with a physical presence in the state. Yet on June 21, 2018, the physical presence limitation was overruled by the Supreme Court of the United States in South Dakota v. Wayfair, Inc. The court determined a remote business could establish sales tax nexus through “economic and virtual contacts” with the state.

With the physical presence restriction removed, states are free to require out-of-state sellers to collect and remit sales tax. Texas is the 31st state (plus Washington, D.C.) to do so. Read on to learn more about what to expect in Texas.

Who will have to collect Texas sales tax?

Like all other states that impose a sales tax collection obligation on remote sellers, Texas is providing an exception (safe harbor) for small sellers. The new collection requirement applies only to remote sellers whose total Texas revenue exceeds $500,000 in the preceding 12 calendar months.

“Total Texas revenue” is defined as “the gross revenue from the sale of tangible personal property and services for storage, use, or other consumption in [Texas].” It includes taxable, nontaxable, and tax-exempt sales. It also includes separately stated handling, transportation, installation, and similar fees collected by a seller in connection with a sale.

When will remote sellers have to start collecting Texas sales tax?

The new remote seller sales tax collection requirements are due to amendments to 34 Texas Administrative Code §3.286, which take effect January 1, 2019. However, the earliest remote sellers will have to start collecting and remitting sales tax is October 1, 2019.

The initial 12 calendar months for calculating remote sales tax revenue is July 1, 2018, through June 30, 2019. Remote sellers whose sales into the state exceed $500,000 during that period will have to register with the Texas Comptroller of Public Accounts “no later than the first day of the fourth month after the month” in which the $500,000 threshold is exceeded. That would be October 1, 2019.

Will remote sellers be held liable for tax on past sales?

Like other states taxing remote sales in the wake of Wayfair, Texas will only hold businesses liable for sales made on or after the effective date of the new requirement (October 1, 2019). It will not seek to enforce remote sales tax compliance retroactively.

How long do remote sellers have to collect Texas sales tax?

Remote sellers must continue to comply with Texas sales and use tax laws so long as their sales into the state during the preceding 12 calendar months exceed the $500,000 small seller exception.

Should their sales into the state drop below the threshold during the preceding 12 calendar months, remote sellers must notify the comptroller (in a yet-to-be determined prescribed manner) and may cease sales tax collection following the comptroller’s guidelines.

However, non-collecting remote sellers must continually monitor their sales into Texas and resume collection of Texas sales tax on the first day of the second month following any 12 calendar months in which their total Texas revenue exceeds $500,000. For example, if a remote seller exceeds the threshold during the period January 1, 2020, through December 31, 2020, it must resume collection on February 1, 2021.

Remote sellers that cease to collect Texas sales tax because their sales drop below the $500,000 threshold are required to maintain records verifying their sales into the state. For additional details, see §3.281 (relating to Records Required; Information Required) and §3.282 (relating to Auditing Taxpayer Records), or contact the Texas Comptroller.

What about other taxes?

In removing the physical presence requirement, the Wayfair decision may impact other taxes in addition to sales and use tax.

The Texas Comptroller is currently updating franchise tax rules in response to Wayfair, “to provide details about remote seller tax responsibilities.” It assures that “any new responsibilities will be prospective,” applicable to franchise tax returns due on or after January 1, 2020. More details are available in Rule 3.286 – Seller’s and Purchaser’s Responsibilities

How can businesses keep up with remote sales tax requirements in other states?

Remote seller sales tax rules vary by state, so businesses that sell into multiple states have a big job.

First, businesses need to continually assess whether they have nexus in Washington, D.C., and the 31 states with remote seller sales tax policies. Once nexus has been established in one or more states, businesses need to register with the state tax authorities and comply with all relevant sales and use tax laws.  

Check your nexus in states with remote seller sales tax laws with Avalara’s state-by-state guide to sales tax nexus rules.