From 1,500 to one: Texas considers flat sales tax rate for remote sellers
- November 1, 2018 | Gail Cole
Update 11.13.2018: Texas lawmakers are pursuing the single local tax rate for remote sellers discussed below. Senate Bill 70, introduced by Senator Jane Nelson on November 12, would allow remote sellers to elect to collect the "single local use tax rate" determined by the Texas Comptroller rather than "the combined rate of all applicable local use taxes." The bill will be discussed during the upcoming legislative session, which starts January 8, 2019.
There are more than 1,500 local sales and use tax jurisdictions in Texas, and each has its own sales and use tax rate. Recently, the Texas Comptroller of Public Affairs proposed replacing the 1,500+ local sales and use tax rates with a single, flat rate for remote sellers. This would greatly facilitate sales and use tax compliance for out-of-state sellers doing business in Texas.
According to Texas law, nonresident persons engaged in business in the state can be required to collect and remit sales and use tax only “to the extent authorized by federal law.” Until quite recently, federal law prohibited states from taxing sales by businesses with no physical presence in a state.
However, on June 21, 2018, the Supreme Court of the United States overruled the physical presence requirement in its decision in South Dakota v. Wayfair, Inc. The court ruled that a tax collection obligation (nexus) can be established through a business’s “economic and virtual contacts” with a state. All states, including Texas, now have the authority to require out-of-state sellers to collect and remit sales tax.
Close to 30 states have imposed new sales tax collection obligations on remote sellers since Wayfair, basing a sales tax collection obligation on economic activity in the state (economic nexus) rather than physical presence. The Texas Comptroller intends to do the same, but promised to proceed “carefully, deliberately, and with ample input from the public, the Legislature, and the business community.” The fact that this enormous state has 1,500+ local sales tax jurisdictions is one good reason to do so: As the Texas Comptroller has noted, “The Court also reiterated that ‘States may not impose undue burdens on interstate commerce.’”
Texas has astoundingly complex sales and use tax sourcing rules, as explained in 94-105, Local Sales and Use Tax Collection – A Guide for Sellers (PDF). For local sales tax, the rate is generally based on the origin of the sale, which is a seller’s place of business in the state. In Texas, “place of business” is defined as “an established outlet, office, or location operated by the retailer … for the purpose of receiving orders for taxable items” — provided the retailer receives at least three orders at that location during a calendar year. Tex. Tax Code § 321.002(a)(2).
For brick-and-mortar sellers, that’s typically the store where the sale occurred. For a seller with a warehouse but no retail store in Texas, the sales tax rate is generally based on the location of the warehouse, the ship-from address. For remote sellers with no physical presence in Texas, the rate would typically be the ship-to address (i.e., the location of the consumer). That’s where the 1,500+ local rates come into play.
Texas will require certain remote sellers to collect and remit tax on their Texas sales starting October 1, 2019. To be in step with the Wayfair decision, the comptroller will strive to avoid placing “undue burdens” on remote sellers by prohibiting retroactive enforcement, and providing a small-seller exception for remote sellers whose total Texas revenue in the preceding 12 months is less than $500,000. It may also create a single local tax for remote sellers.
The Texas Comptroller has drafted legislation (hat tip to Bloomberg BNA) that would allow remote sellers to collect and remit a “single local tax in lieu of local use taxes.” Remote sellers wishing to take advantage of this option would have to notify the comptroller of their intent to do so “prior to collecting and remitting the tax.” Remote sellers who fail to elect to collect and remit the single local tax rate would be responsible for collecting and remitting all applicable local sales and use taxes.
The single local tax rate would be the estimated average of all local sales and use tax rates in effect during the preceding state fiscal year, and it could change from year to year. The comptroller has proposed an initial rate of 1.75 percent, though that’s subject to change.
Additional information about the proposed plan is available in the October 19 Texas Register.
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