Common Nexus Errors That Inflate Texas Sales Tax Assessments

Texas sales tax audits can expose in-state and out-of-state businesses to substantial liability. If the Texas Comptroller determines that a business has underpaid state sales tax, it can impose liability not only for the unpaid tax owed, but also for interest and penalties. Allegations of willful sales tax evasion can also lead to criminal charges in some cases.

As a result, when facing Texas sales tax audits, businesses need to be very careful. Among other things, this includes assessing whether they have made any mistakes that could lead to trouble during the audit process. There are several mistakes that both in-state and out-of-state businesses need to avoid—and, when it is too late to avoid these mistakes, targeted businesses need to be prepared to defend themselves effectively.

5 Common Errors That Can Cause Trouble During Texas Sales Tax Audits

What are the mistakes that businesses need to avoid in order to maintain Texas state sales tax compliance? Here are five all-too-common errors that can lead to unexpected (and potentially substantial) liability during a Texas sales tax audit:

1. Failing to Avoid Physical Nexus

Businesses must collect and remit Texas state sales tax when they have either “physical nexus” or “economic nexus” with the state. While having a business location in Texas is one way to establish physical nexus, businesses can do so in many other ways as well. Some of these are fairly unexpected, and businesses that aren’t careful can establish a physical nexus despite never physically entering Texas.

For example, each of the following “contacts” can be sufficient to establish physical nexus for purposes of triggering the obligation to maintain Texas sales tax compliance:

• Acting as a general partner in a general or limited partnership doing business in Texas
• Investigating, handling, or “assisting in resolving” customer complaints in Texas
• Sending materials to Texas to be stored, awaiting orders for shipment
• Sending representatives to Texas “to promote or induce sales” (i.e., at a trade show)
• Having a telephone number that is answered in Texas

These are just examples. Out-of-state businesses can establish physical nexus in various other ways as well—and, generally speaking, once physical nexus has been established, this cannot be undone (though a business may be able to terminate its physical nexus to avoid additional sales tax liability going forward). Failing to avoid physical nexus is a common mistake that subjects many out-of-state businesses to Texas sales tax, even though they do not meet the “economic nexus” requirements that otherwise apply to remote sellers.

2. Failing to Track Total Texas Revenue

For out-of-state businesses that avoid establishing physical nexus, the obligation to comply with Texas’s sales tax requirements is determined based on economic nexus. While exceptions apply, the general rule is that an out-of-state business has economic nexus if it has annual in-state sales of $500,000 or more.

This is referred to as the business’s “total Texas revenue.” To avoid sales tax liability, businesses that have less than $500,000 in annual total Texas revenue must be able to affirmatively demonstrate that their in-state revenue falls below this threshold. If an out-of-state business cannot affirmatively demonstrate that its in-state revenue falls below this threshold, it could find itself facing Texas state sales tax liability that it could—and should—have avoided.

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

3. Failing to Timely Remit Texas Sales Tax

Businesses required to collect Texas state sales tax must also remit all collected sales tax in a timely manner. Whether a business is required to remit sales tax monthly, quarterly, or annually depends on the amount owed.

In all three cases, there are strict due dates, and failing to remit Texas sales tax by the due date can trigger both interest and penalties. Businesses that fail to file on time may be more likely to face audits. Failing to timely remit Texas sales tax is a mistake that can be easily avoided, yet businesses far too often fail to do so.

4. Failing to Collect Texas Sales Tax

Of course, failing to timely remit the Texas state sales tax can also have serious consequences. If a business is required to collect sales tax and fails to do so, it is still required to pay the Texas Comptroller. Interest and penalties apply in this scenario as well, and the Texas Comptroller is likely to assess whether criminal prosecution may be warranted.

While businesses (and business owners) that have inadvertently failed to pay Texas sales tax should not be at risk of facing criminal charges, inadvertent noncompliance is not an excuse for nonpayment. As a result, this is a high-risk scenario under any circumstances, and a strategic and effective defense will be essential to avoid unnecessary consequences.

5. Failing to Terminate the Obligation to Collect Texas Sales Tax

Finally, if an out-of-state business’s total Texas revenue falls below the $500,000 threshold, the business must formally terminate its collection obligation in order to avoid ongoing liability. This is made clear in the Texas Administrative Code, which states that a business, “shall continue to collect unless it terminates its collection obligation . . . .” Thus, if a business fails to terminate its obligation to collect Texas sales tax, this can lead to unnecessary liability as well.

Contact Us if Your Business is Facing a Texas Sales Tax Audit

If you need more information about the risks of facing a Texas sales tax audit, we invite you to get in touch. Call 888-870-0025 or contact us online to request a confidential consultation with a Texas sales tax audit lawyer at Brown PC.