Defending Against “Click-Through” and Affiliate Nexus Claims in Texas

Several states have adopted “click-through” nexus rules that apply specifically to out-of-state businesses working with in-state affiliates and influencers. These rules require out-of-state businesses to collect and remit sales tax based on their commercial relationships with in-state promoters, even though these in-state promoters are not the business’s employees. In these states, the thresholds for compliance are often fairly low (e.g., $10,000 in in-state sales), meaning many out-of-state businesses may find themselves unexpectedly owing sales tax if they are not familiar with the law.

Texas is not one of these states.

However, out-of-state businesses can still find themselves unexpectedly owing Texas state sales tax if they are not careful. Texas relies on its “physical nexus” and “economic nexus” rules to impose sales tax compliance obligations on out-of-state sellers. While Texas’s nexus rules do not apply to all out-of-state sellers, they apply more often than many businesses realize, and businesses that aren’t careful can often find themselves facing sales tax liability in scenarios similar to those in which “click-through” nexus applies in other states.

When Out-of-State Businesses Can Face Sales Tax Compliance Obligations in Texas

While Texas does not specifically have a “click-through” or affiliate nexus statute, out-of-state businesses can still face sales tax compliance obligations based on their affiliations with in-state promoters. In fact, there are a handful of ways in which a Texas-based affiliate’s or influencer’s promotional efforts can lead to Texas state sales tax liability. Here are some examples:

Representatives

Texas’s physical nexus rules appear in 34 Tex. Admin. Code Section 3.586. Under Section 3.586(d)(5), an out-of-state business can have physical nexus based on “having employees or representatives in Texas doing the business of the taxable entity.” Affiliates and influencers can qualify as representatives in appropriate circumstances, and, in such circumstances, working with an affiliate or influencer engaged in promotional activities on behalf of the business may trigger sales tax liability.

Conducting Training Classes, Seminars, or Lectures

Under Section 3.586(d)(16)(D), a business can also establish physical nexus with Texas if it “conducts training classes, seminars, or lectures in Texas.” Here too, this is true whether the classes, seminars, or lectures are conducted by an employee or representative. Thus, if affiliates or influencers use any of these as promotional methods to attract in-state sales, this could trigger Texas state sales tax liability.

Solicitation

Under Section 3.586(d)(19), the Texas Comptroller can impose sales tax compliance obligations based on an out-of-state business’s in-state solicitation of customers. This includes “having employees, independent contractors, agents, or other representatives in Texas, regardless of whether they reside in Texas, to promote or induce sales of the foreign taxable entity’s goods or services.” For many out-of-state businesses, this will be the most direct way for the Texas Comptroller to impose sales tax liability based on the business’s use of affiliates or influencers in the state.

Economic Nexus

Even if an out-of-state business does not have physical nexus based on an affiliate’s or influencer’s promotional efforts in Texas, the business could still be subject to Texas state sales tax compliance based on the concept of economic nexus. Under Texas law:

“or each federal income tax accounting period . . . a foreign taxable entity has nexus in Texas . . . even if it has no physical presence in Texas, if during that federal income tax accounting period, it had gross receipts from business done in Texas of $500,000 or more . . . .”

This applies specifically (but not exclusively) to retailers that sell online through their websites and social media platforms. It also applies to out-of-state businesses that sell to Texas customers through online marketplaces, though these online marketplaces will be responsible for maintaining sales tax compliance in many (but not all) cases.

Defending Against Nexus Claims Based on In-State Affiliates and Influencers During Texas Sales Tax Audits

Let’s say your out-of-state business is facing a Texas sales tax audit based on its use of in-state affiliates or influencers. What do you need to know? What do you need to do in order to avoid unnecessary liability? Here are some key considerations:

Does Your Business Have Economic Nexus?

If your business is facing a Texas sales tax audit, a key first step is to assess whether it has economic nexus with the state. If your business has an economic nexus, then its physical contacts, if any, are irrelevant.

As discussed above, the economic nexus is determined by an out-of-state business’s in-state sales. Specifically, if an out-of-state business has annual “total Texas revenue” of $500,000 or more, then it is subject to Texas state sales tax compliance.

Does Your Business Have Physical Nexus?

If your out-of-state business does not have economic nexus, then the next step is to assess your business’s physical contacts with the State. This includes (but is not limited to) any physical contacts involving its use of Texas-based affiliates or influencers.

When out-of-state businesses have physical nexus with Texas, the $500,000 in-state revenue threshold for economic nexus does not apply. Regardless of sales volume, having a single Texas-based affiliate or influencer could be enough to trigger Texas sales tax liability.

If Your Business Has Nexus, Can You Prove Your Business’ In-State Sales?

If your business has either economic nexus or physical nexus, then rather than defending against the Texas Comptroller’s efforts to establish nexus, it may be necessary to focus on ensuring an accurate assessment of your business’s Texas sales tax liability. This starts with proving your business’s taxable in-state sales. When facing a Texas sales tax audit, thorough documentation is key, as the Texas Comptroller will err on the side of assuming non-compliance and will not hesitate to impose penalties when warranted.

Need to Know More? Request a Call with a Texas Sales Tax Lawyer at Brown PC

If you need more information about Texas’s nexus rules as they pertain to in-state affiliates and influencers, we invite you to get in touch. To request a call with a Texas sales tax lawyer at Brown PC, please call 888-870-0025 or contact us confidentially online today.