Fulfillment Centers, Inventory Storage, and Hidden Texas Nexus

For out-of-state businesses that sell to Texas customers, nexus is a key issue. If an out-of-state business has nexus with Texas, it must collect and remit sales tax. However, if an out-of-state business does not have nexus with Texas, then state sales tax compliance isn’t required.

In most cases, out-of-state businesses focus on economic nexus. If an out-of-state business has $500,000 or more in “total Texas sales,” it has economic nexus, and it is required to collect and remit sales tax. But, there are also some “hidden” issues that can trigger physical nexus—even for businesses that don’t meet the $500,000 threshold.

“Hidden” Contacts that Can Establish Physical Nexus for Purposes of Texas Sales Tax Compliance

Contacts that can establish physical nexus for out-of-state businesses are listed in Section 3.586(d) of Title 34 of the Texas Administrative Code. While maintaining a place of business in the state is one way that businesses can establish physical nexus and trigger the obligation to collect and remit Texas sales tax, there are many other ways as well.

These are commonly referred to as “hidden” contacts, because they aren’t as obvious as maintaining a place of business in the state. If out-of-state businesses aren’t aware of these potential nexus triggers, they can find themselves in noncompliance with Texas’s sales tax laws, and this can potentially lead to a high-risk sales tax audit from the Texas Comptroller.

So, what are the “hidden” contacts for physical nexus? Each of the following can trigger the obligation to collect and remit sales tax under Texas law:

• Maintaining Inventory in Texas – Under Section 3.586(d), “having an inventory in Texas or having spot inventory for the convenient delivery to customers, even if the bulk of orders are filled from out of state,” is enough to trigger the obligation to collect and remit Texas sales tax.
• Sending Materials Awaiting Purchase – Along with maintaining inventory in Texas, “sending materials to Texas to be stored awaiting orders for shipment,” also establishes physical nexus under state law.
• Delivering Products to Texas Customers – Even if a retailer operates its business in another state, if the retailer “delivers into Texas items it has sold,” this can be enough to trigger Texas sales tax liability.
• Assembling Goods in Texas – If a retailer does not deliver products to customers itself but sends employees or contractors to assemble (or otherwise “process”) its products in Texas, this can be enough to trigger Texas sales tax liability as well.
• Selling Goods on Consignment – “[H]aving consigned goods in Texas” is also sufficient to establish physical nexus for purposes of Texas sales tax compliance.
• Leasing Tangible Property – “[L]easing tangible personal property which is used in Texas,” is sufficient on its own to establish physical nexus. This can include leasing equipment for short-term use when meeting with or providing services to customers.
• Providing Advertising Services – Providing advertising services in Texas can also establish a physical nexus. Specifically, the law provides that “entering Texas to purchase, place, or display advertising when the advertising is for the benefit of another and in the ordinary course of business” is enough to establish physical nexus.
• Providing Other Services to Customers – Along with advertising services, offering various other services to customers can also establish a physical nexus. These services include, but are not limited to, maintenance and repair, installation and assembly, technical assistance, and the resolution of customer complaints.
• Owning Any Real Estate in Texas – “[H]olding, acquiring, leasing, or disposing of any property located in Texas,” is enough to establish physical nexus, even if the property is not directly involved in a business’s retail operations.
• Having a Texas Phone Number – “[H]aving a telephone number that is answered in Texas,” is another common “hidden” contact that can establish physical nexus and trigger the obligation to collect and remit Texas sales tax.

These are just examples. Section 3.586(d) makes clear that contacts that can establish physical nexus “are not limited to” those listed in the statute. As a result, if a business has any connection to Texas beyond accepting orders from Texas customers (in which case the state’s economic nexus rule applies), it will be worth making an informed decision about whether Texas sales tax compliance is required.

Understanding the Consequences of Failing to Collect and Remit Texas Sales Tax When Required

If a business is required to collect and remit Texas sales tax and fails to do so, what are the consequences? Even if a business’s failure to collect and remit sales tax is inadvertent, its failure can still lead to significant liability. Under Texas law, businesses that have not collected and remitted sales tax as required can face liability for:

• Back Taxes – Even if a business has not separately collected sales tax, it is still liable for the tax owed.
• Interest – Interest on unpaid sales tax begins to accrue after 60 days.
• Penalties – A 5-percent penalty applies immediately, and a 10-percent penalty applies after 30 days.

Criminal penalties also apply in some cases. If a business’s owners or executives are accused of knowingly or intentionally failing to remit sales tax as required by law, they can face possible fines and prison time.

Due to the risks of failing to collect and remit Texas sales tax, all businesses need to take an informed approach to compliance. For out-of-state businesses, this includes assessing any potential “hidden” contacts that may establish physical nexus. Once an out-of-state business establishes physical nexus, it is responsible for collecting and remitting sales tax until it no longer has any physical contacts with the state.

Need to Know More? Contact Us to Request a Confidential Consultation

If you need to know more about Texas’s nexus rules and the types of contacts that can establish physical nexus for out-of-state businesses, we invite you to get in touch. To request a confidential consultation with a Texas sales tax attorney at Brown PC, call us at 888-870-0025 or tell us how we can reach you online today.