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Texas claims an out-of-state corporation had an obligation to collect sales tax

  • Jan 15, 2018 | Gail Cole

 Texas says out-of-state corporation had nexus through its relationship to in-state contractors and customers.

An out-of-state corporation that provided repair and maintenance services to customers in Texas through in-state contractors was found by the Texas Comptroller of Public Accounts to have an obligation to collect and remit Texas sales tax.

The facts are explained in a ruling issued by the Comptroller. During the period in question (Feb. 2010–Feb. 2013), the corporation (Petitioner) was based in Ohio. It had no employees in Texas but did have customers in the Lone Star State: “large retail chains with corporate offices outside of Texas and store locations across the United States, including Texas.”

The Petitioner maintained contracts with these chains for a variety of services, including electrical lighting repair and maintenance, HVAC, and plumbing services. Work was completed by a network of local independent contractors. Equipment, provisions, and tools used to complete the work were provided by the independent contractors, while repair and maintenance parts were provided by the Petitioner.

Despite being based in Ohio, the Petitioner maintained a good degree of control over the work performed in Texas. It oversaw the jobs, from initial contact to taking bids, resolving disputes, and ensuring the contractor’s timely completion of work. The Petitioner identified “the work to be performed, the date the work must be performed, and the limit on the amount the contractor could charge the Petitioner for the work.” While local contractors scheduled the service directly with the retail stores, during the job their work orders required them to contact the Petitioner upon arrival at and departure from the stores.

Upon completion of the job, the independent contractors invoiced the Petitioner for the work performed, and the Petitioner paid them. The Petitioner invoiced its customers (the retail stores) for the independent contractors’ fees, as well as its own fee. According to the terms of the contract with the contractors, the Petitioner wasn’t required to pay a contractor’s invoice until after the customer had paid the Petitioner’s invoice.

Does the out-of-state corporation have nexus with Texas?

The Petition insists it did not have nexus (a connection triggering an obligation to collect tax) with Texas because it lacked “the minimum contacts and substantial nexus with Texas required by the Due Process and Commerce Clauses of the United States Constitution.” To support its case, it cited several United States Supreme Court rulings, including Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

The Comptroller disagrees. It maintains that while a physical presence in the taxing state is required to establish nexus under the Commerce Clause (as interpreted by Quill), nexus under the Due Process Clause “could be satisfied by economic presence alone.” It explains, “Quill held that a foreign corporation’s ‘physical presence’ may be manifested in the taxing state through the performance of activities there by franchisees, licensees, or independent contractors acting on the corporation’s behalf.”

Accordingly, the Comptroller found the Petitioner to have nexus with Texas through its ties to the retail stores and independent contractors. On top of the tax due, it assessed the Petitioner with a 10 percent late-filing penalty and interest. For additional details, see SOAH Docket No. 304-17-3994.26, CPA Hearing No. 111,156.

Quill to come under scrutiny

Texas is not the only state to look to Quill for guidance on how to tax sales by out-of-state entities. While in this case, the Comptroller found Quill to support its efforts to tax a remote seller, the physical presence precedent upheld by Quill has thwarted many states’ attempts to tax remote sales.

Accordingly, several states have created laws that directly challenge Quill. On Friday, Jan. 12, 2018, the court agreed to consider one such case: South Dakota v. Wayfair, Inc. If, as expected, the court decides on the case by late June, the way states tax remote sellers could significantly change. Learn more.

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Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.