Texas eyes remote sales tax revenue
- Jun 7, 2017 | Gail Cole
Is a sleeping giant about to enter the remote sales tax fray?
In recent years, state after state has enacted legislation or adopted policies to capture more sales and use tax revenue from remote sellers. This has proven to be challenging thanks in no small part to 1992 Supreme Court Decision, Quill Corp. v. North Dakota, which upheld a previous ruling that a state cannot impose a tax obligation on a business unless it has a substantial connection to the state, defined as a physical presence.
Numerous states looking to challenge Quill have instituted economic nexus policies, whereby a company establishes nexus (a connection to the state substantial enough to trigger a tax obligation) through its economic presence in the state. For example, in South Dakota, a remote seller has nexus if it makes at least 200 separate taxable sales transactions and has more than $100,000 in annual sales in the state. The South Dakota law is being challenged, as intended, and if state officials’ wishes come true, it will end up before the Supreme Court of the United States. Read more about what economic nexus means for remote sellers.
Taking a different approach, a handful of other states have instituted use tax notification and reporting requirements to bring in more revenue. Colorado led the way on this charge, defending its 2010 policy through state and federal courts and eventually winning when the Supreme Court declined to hear the case. Long on hold, Colorado’s use tax reporting requirement is scheduled to take effect July 1, 2017.
Texas considers use tax reporting requirements
To date, Texas has remained largely silent on the issue of taxing remote sales. Generally, the Lone Star State doesn’t require an out-of-state seller to collect and remit tax if it conducts business only via the internet, mail, or telephone — although ties to in-state businesses could create a tax obligation under its affiliate nexus law. But two measures introduced during the 85th Regular Session of the Texas Legislature threaten to bring Texas to the forefront of the fray.
Senate Bill 1713 would mandate the comptroller to “conduct a study of methods to increase compliance with sales and use tax collection and payment requirements” and consider “various possible methods” to increase compliance, including:
- Imposing information reporting requirements for retailers making sales subject to use tax
- Imposing registration or information reporting requirements on persons who refer purchasers in Texas to out-of-state retailers
- Requiring retailers to notify purchasers of use tax payment requirements
As all the above have been instituted by other states, SB 1713 requires the comptroller to examine and create a written report on how other states are working to increase their sales and use tax collections, as well as the effectiveness of their actions. The measure unanimously passed the Senate and was sent to the House Ways & Means Committee.
Texas considers taxing marketplace providers
House Bill 3875 goes further than the Senate bill, although it is similar to the first two versions of SB 1713. It seeks to impose a tax obligation on marketplace providers like Amazon, eBay, and Etsy. The measure defines a marketplace provider as one who:
- “Facilitates the sale, lease, or rental of the tangible personal property of a retailer that is not the person to a purchaser in [Texas] in any manner, including by the use of a catalog or an internet website;
- Directly or indirectly collects from a purchaser in [Texas] receipts derived from the sale, lease, or rental of the retailer’s tangible personal property to the purchaser and transmits those receipts to the retailer, other than any amount the person is authorized to retail as a fee for facilitating the sale, lease, or rental; and
- Is engaged in business in [Texas] by means of any of the activities listed in Section 151.107 (a).”
The Texas measure would hold marketplace providers liable for tax on a sale unless “the retailer for whom the marketplace provider facilitates the sale, lease, or rental collects the tax from the purchaser.” However, they would not be liable for collection errors “if, in determining the amount, the marketplace provider relies exclusively on information provided by the retailer” — unless they hold a substantial ownership interest in that retailer.
HB 3875 spent the session in the House Ways & Means Committee. Had it been enacted as written, it would have taken effect September 1, 2017.
This is new territory. In fact, Minnesota enacted the country’s first tax on marketplace providers just last week. HF 1, which became law without Governor Mark Dayton’s signature, imposes collection and remittance requirements on marketplace providers unless the retailer provides the marketplace provider with a copy of its registration to collect Minnesota sales and use tax, or the commissioner discloses (upon inquiry) that the retailer is registered to collect sales and use taxes in Minnesota. This new policy is set to take effect at the earlier of July 1, 2019, or when the Supreme Court of the United States modifies its decision in Quill Corp. v. North Dakota.
New York Governor Andrew M. Cuomo sought a similar tax on marketplace providers in his 2017–2018 Executive Budget, but the budget that was ultimately approved didn’t include that provision. Several other states, including Rhode Island and Washington, are also musing over taxing marketplace providers.
Don’t mess with Texas when it comes to taxes
If Texas does decide to impose a tax obligation on marketplace providers, it will need grit. Amazon, eBay, and a coalition of tech groups aggressively fought Gov. Cuomo’s plan, arguing it would raise prices for consumers and hamper the growth of tech companies in New York. There is good reason to believe they would fight other state’s efforts to tax marketplace providers.
Learn more about nexus and state efforts to capture remote sales tax revenue at the Avalara Resource Center nexus page.
photo credit: TSLAC Represents Texas at the National Book Festival (Washington DC) 9.21.13 via photopin (license)