E-Commerce Sellers and Texas Sales Tax Audits: Nexus Traps You Didn’t Know You Triggered

E-commerce sellers can face Texas sales tax audits whether they are based in Texas or elsewhere in the United States or around the world—and these audits can pose substantial risks. For e-commerce sellers that are not in compliance, these audits cannot only lead to substantial sales tax liability but also substantial liability for interest and penalties.

When facing a Texas sales tax audit, nexus is critical to determining whether an e-commerce seller is subject to state sales tax. If an e-commerce seller has nexus with Texas, it must comply with the state’s sales tax laws. If an e-commerce seller does not have nexus with the state, it is not required to comply—even if it has made in-state sales.

So, when does an e-commerce seller have nexus? Here is an introduction to what e-commerce sellers with Texas customers need to know:

Texas Sales Tax Nexus: An Introduction for E-Commerce Sellers

E-commerce sellers can establish nexus with Texas in various ways. In addition to “economic nexus” based on a seller’s volume of in-state sales, several factors can trigger “physical nexus” regardless of where an e-commerce seller is located. When an e-commerce seller has physical nexus, its volume of in-state sales is no longer relevant to the analysis (though, of course, it will still be relevant for determining the seller’s total sales tax liability).

When it comes to physical nexus, there are several “traps” that out-of-state e-commerce sellers should be aware of. These are minor contacts with Texas that can have major implications for a seller’s sales tax liability. For example, regardless of an e-commerce seller’s volume of in-state sales, the following can all potentially trigger the obligation to collect and remit Texas sales tax:

Having any employees or representatives in Texas, “doing the business of the taxable entity”
Maintaining a place of business in Texas, even if the place of business belongs to a holding company or is unrelated to the company’s e-commerce sales
Owning or leasing real estate in Texas
Providing any services in Texas, whether through employees or independent contractors
Responding to customer complaints in Texas
Sending materials to Texas, “to be stored awaiting orders for their shipment”
Using employees, independent contractors, or agents to promote the business’s products or services in Texas, “regardless of whether they reside in Texas”
Having a telephone number that is answered in Texas

Again, these are just examples. Other physical contacts can establish nexus for e-commerce sellers as well—and, again, any single relevant physical contact can be enough to trigger sales tax liability. Once an e-commerce seller establishes physical nexus with Texas, it will generally remain subject to Texas state sales tax compliance unless and until it eliminates all relevant physical contacts with the state.

As noted above, in addition to physical nexus, e-commerce sellers can also face Texas sales tax liability based on economic nexus. Economic nexus is based purely on sales volume, with the obligation to collect and remit sales tax applying to e-commerce sellers with more than $500,000 in annual in-state sales (or “total Texas revenue”). While an economic nexus is generally unavoidable for sellers that exceed this sales threshold, e-commerce sellers should note that they can stop collecting and remitting sales tax only after their sales volume falls below this amount, provided they affirmatively terminate their collection obligation with the Texas Comptroller.

What If Your E-Commerce Business Has Triggered Physical Nexus?

Let’s say your e-commerce business triggered physical nexus with Texas. Maybe your business sent representatives to a trade show in the state, or uses a Texas call center. What do you need to know, and how can your business eliminate its nexus to avoid the need to maintain Texas sales tax compliance going forward?

Preparing for the Possibility of a Texas Sales Tax Audit

If your e-commerce business has a physical nexus (or economic nexus) with Texas, it is important to ensure your business is prepared for a potential Texas sales tax audit. The Texas Comptroller regularly audits out-of-state e-commerce sellers, and such audits can result in liability for back taxes, interest, and penalties.

If your business is not currently in compliance with Texas’s sales tax laws, it will be important to take a proactive approach, if possible. While e-commerce sellers should be prepared to defend against Texas sales tax audits if necessary, they should also seek to avoid these audits, if possible. A proactive approach will almost always be best for resolving Texas state tax controversies involving unpaid sales tax liability.

Terminating Physical Nexus in Texas

If your e-commerce business has unnecessarily established a physical nexus in Texas, terminating it could help avoid additional sales tax liability going forward. When terminating their physical nexus, e-commerce businesses should ensure they terminate all relevant contacts and document these efforts to affirmatively demonstrate the elimination of their physical nexus to the Texas Comptroller.

Monitoring Total Texas Revenue for Purposes of Economic Nexus

When eliminating physical nexus, e-commerce sellers must continue to monitor their total Texas revenue to assess whether they have economic nexus with the state. No physical contacts are required for economic nexus. If an e-commerce seller’s total Texas revenue exceeds $500,000 in any year, then it will be subject to Texas sales tax compliance going forward until it formally terminates its collection obligation with the Texas Comptroller.

Schedule a Call with a Texas Sales Tax Attorney at Brown PC

If you need to know more about Texas’s nexus rules, the risks of facing a Texas sales tax audit, or how your e-commerce business can avoid Texas sales tax liability going forward, we invite you to get in touch. To schedule a call with an experienced Texas sales tax attorney at Brown PC, please call 888-870-0025 or tell us how we can reach you online today.

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