Economic Nexus in Texas: It’s Not Just Revenue Thresholds

Out-of-state sellers may be subject to Texas sales tax liability under various circumstances. For those required to collect and remit sales tax (including state and local sales tax), compliance must be a priority. Not only can noncompliant sellers face liability for back taxes, interest, and civil monetary penalties, but, in some cases, noncompliance can also lead to criminal tax charges.

For out-of-state sellers, determining whether they have “nexus” with the state of Texas is the first step toward assessing their potential sales tax liability. Following the U.S. Supreme Court’s decision in South Dakota v. Wayfair, there are two ways to establish nexus with the state: physical nexus and economic nexus. While these are entirely separate—a business can have physical nexus without economic nexus, and vice versa—out-of-state sellers must be careful to avoid establishing in-state contacts that subject them to sales tax liability even if their in-state sales fall below the economic nexus revenue threshold.

Economic Nexus and the $500,000 “Total Texas Revenue” Safe Harbor

Strictly speaking, the economic nexus is primarily tied to Texas’ $500,000 revenue threshold. However, as discussed below, if out-of-state businesses aren’t careful, they can establish physical nexus even if their in-state sales don’t meet the threshold amount.

For purposes of Texas sales tax compliance, the concept of economic nexus is addressed in Section 3.286(b) of the Texas Administrative Code’s Tax Administration chapter. Section 3.286(b) addresses three key concepts:

• “Sellers” that Are Subject to Texas Sales Tax Compliance – Any “sellers” doing business in Texas must obtain a sales tax permit and collect and remit sales tax in accordance with Texas law—unless an exception or safe harbor applies.
• “Remote Sellers” that Are Subject to Texas Sales Tax Compliance – Out-of-state businesses that sell to customers in Texas are defined as “remote sellers,” and they are generally subject to the same rules as in-state “sellers.”
• The Safe Harbor for Remote Sellers with Less Than $500,000 in “Total Texas Revenue” – Remote sellers are not required to obtain a sales tax permit or collect sales tax if their “total Texas revenue in the preceding twelve calendar months is less than $500,000.”

Section 3.286(b) also includes a safe harbor for remote sellers that are, “temporarily storing tangible personal property in Texas to be used for fulfillment at a facility of a marketplace provider that has certified that it will assume the rights and duties of a seller with respect to the tangible personal property.” However, this safe harbor is “not applicable” to remote sellers that have more than $500,000 in total Texas revenue.

Physical Contacts that Can Establish Nexus for Remote Sellers

Even if a remote seller does not have economic nexus with Texas because its annual total Texas revenue is less than $500,000, it could still have nexus based on its physical contacts with the state. While the following non-exclusive list comes from the state’s franchise tax statute, the same considerations generally apply when it comes to establishing physical nexus for purposes of sales tax compliance:

• Delivering sold items into Texas;
• Having employees or representatives in Texas doing business on behalf of the company;
• Maintaining a place of business in Texas (even if this location is not involved in sales or fulfillment);
• Acting as a general partner in a general partnership or limited partnership that is doing business in Texas;
• Holding or leasing real estate in Texas;
• Providing any services in Texas (even if these services are unrelated to the company’s products sold in the state); and,
• Having a telephone number that is answered in Texas.

With these potential physical contacts in mind, when isn’t an out-of-state business subject to physical nexus? To qualify as a remote seller without physical nexus, a business’ exclusive contacts with Texas must involve:

• “[Engaging] in regular or systematic solicitation of sales of taxable items in this state by the distribution of catalogs, periodicals, advertising flyers, or other advertising, by means of print, radio, or television media, or by mail, telegraphy, telephone, computer data base, cable, optic, microwave, or other communication system for the purpose of effecting sales of taxable items;” and/or,
• “[Soliciting] orders for taxable items by mail or through other media, including the Internet or other media that may be developed in the future.”

As you can see, out-of-state businesses seeking to avoid Texas sales tax compliance under the $500,000 “total Texas revenue” safe harbor must be extremely careful to avoid establishing any physical presence in the state. Once a business establishes physical nexus, the business will generally be subject to state sales tax compliance, and noncompliant businesses can face substantial liability in sales tax audits conducted by the Texas Comptroller.

Making Informed Decisions About Texas Sales Tax Compliance

With all of this in mind, what can (and should) remote sellers do to ensure that they are making informed decisions about Texas sales tax compliance?

As with all aspects of state and federal tax compliance, businesses need to focus on their specific circumstances to assess their Texas sales tax compliance obligations and risks. While the main focus is often on whether a business’ “total Texas revenue” exceeds the annual $500,000 threshold, even minor and isolated contacts with the State of Texas can trigger physical nexus regardless of a business’ sales volume in the state.

Recordkeeping is essential—not only for accurately assessing companies’ compliance obligations, but also for being prepared to demonstrate compliance to the Texas Comptroller if necessary. If you have questions or concerns, we recommend speaking with an experienced Texas sales tax attorney promptly.

Request a Confidential Call with a Texas Tax Attorney

At Brown P.C., we help business owners and executives across the United States make informed decisions about Texas sales tax compliance. If you need to know more about the nexus rules that can trigger state sales tax liability, we invite you to get in touch. To request a confidential call with one of our experienced Texas tax attorneys, call us at 888-870-0025 or contact us online today.