The Biggest Lies Businesses Believe About Texas Sales Tax Nexus
Under Texas law, businesses are only required to collect and remit sales tax if they have “nexus” with the state. Businesses that do not have nexus have no Texas state sales tax obligations.
However, Texas’ nexus rules are broader than many people realize, and, unfortunately, a lot of misinformation about these rules has proliferated online.
So, as a business owner, executive, or in-house lawyer, what do you need to know? The most important fact to know is that a comprehensive and custom-tailored approach to Texas state sales tax compliance is essential. Businesses cannot afford to make assumptions about their compliance obligations. Both in-state and out-of-state businesses can face invasive audits from the Texas Comptroller’s Office; and, for noncompliant businesses, these audits can lead to substantial liability for back taxes, interest, and penalties.
5 Common Misconceptions About Texas’ Sales Tax Nexus Rules
With the importance of effectively managing Texas sales tax compliance in mind, here are five common misconceptions about Texas’ sales tax nexus rules that can expose businesses to substantial liability:
Misconception #1: A Physical Presence in the State is Required to Establish Sales Tax Nexus
Reality: Out-of-state businesses can have “economic nexus” based exclusively on the volume of their in-state sales.
While having a physical presence in Texas is one way to establish sales tax nexus (referred to as “physical nexus”), out-of-state businesses can have nexus with the state as well. Out-of-state businesses can have a physical nexus based on their in-state contacts, or an “economic nexus” based on their in-state sales.
To be subject to Texas’ sales tax requirements based on economic nexus, an out-of-state business must have at least $500,000 in “total Texas revenue.” As discussed below, this does not necessarily mean that an out-of-state business must have at least $500,000 in taxable in-state sales. If an out-of-state business that has economic nexus with the state fails to collect sales tax as required by law, it can still be held liable for the amount owed (plus applicable interest and penalties).
Misconception #2: Out-of-State Businesses Only Have to Be Concerned About Economic Nexus
Reality: Out-of-state businesses can have various types of contacts with Texas that trigger a physical nexus, regardless of the volume of their in-state sales.
Another common misconception regarding out-of-state businesses is that they only have to be concerned with economic nexus. This is not the case. As noted above, out-of-state businesses can also have physical nexus based on their in-state contacts. Some examples of contacts that can trigger physical nexus for out-of-state businesses include:
- Acting as a general partner in a general or limited partnership doing business in Texas
- Handling or “assisting in resolving” customer complaints in Texas
- Sending goods to Texas to be stored, awaiting orders for shipment
- Sending representatives to Texas “to promote or induce sales”
- Having a telephone number that is answered in Texas
If an out-of-state business has physical nexus, the “total Texas revenue” threshold does not apply. An out-of-state business only needs to have either physical nexus or economic nexus—it does not need both.
Misconception #3: Only Taxable Sales Count Toward Texas’ Economic Nexus Threshold
Reality: For out-of-state businesses, economic nexus is determined based on their “total Texas revenue.” This includes both taxable and non-taxable sales.
For out-of-state businesses that have no physical contacts with the state, whether they are obligated to collect and remit sales tax depends on their “total Texas revenue.” While businesses only have to collect and remit sales tax on their taxable sales, “total Texas revenue” is not calculated solely from taxable sales. Under Section 3-286 of the Texas Tax Code:
“Total Texas revenue means the gross revenue from the sale of tangible personal property and services for storage, use, or other consumption in [Texas] . . . and includes separately stated handling, transportation, installation, and other similar fees collected by the seller in connection with the sale . . . . Total Texas revenue includes taxable, nontaxable, and tax-exempt sales.”
As Section 3-286 also makes clear, “[a] remote seller shall include in total Texas revenue[] the aggregate sum of all sales made on all mediums, including all marketplaces and the remote seller’s own website.” Thus, online retailers need to be particularly careful to ensure they are not underestimating their “total Texas revenue” and making an uninformed decision about their Texas sales tax compliance obligations.
Misconception #4: Businesses Only Need to Be Concerned About State Sales Tax
Reality: In-state and out-of-state businesses may be required to collect and remit local sales taxes as well, and these tax requirements vary by jurisdiction.
Businesses that are required to collect and remit Texas state sales tax may also be required to collect and remit local sales tax. Local tax rates vary, and for remote sellers, their applicability is generally determined by the customer’s location.
Misconception #5: Businesses that Prioritize Texas Sales Tax Compliance Are in the Clear
Reality: From Texas’ franchise tax to the state’s fuel taxes and hotel occupancy taxes, businesses may have a variety of other state tax obligations as well.
Finally, even though Texas does not have a state income tax, in-state and out-of-state businesses may have a variety of other state tax obligations. Some examples of other state and local taxes that may apply include:
- Aircraft sales and use taxes
- Corporate franchise tax
- Hotel occupancy taxes
- Motor vehicle and motor fuel taxes
- Oil and gas industry taxes
Again, these are just examples. Texas state tax compliance is complex, and while this complexity makes it challenging, the Texas Comptroller’s Office expects all businesses to devote the necessary resources to maintaining compliance on an ongoing basis. The Comptroller’s Office uses its audit authority to assess compliance, and it uses its authority to impose liens and levies to enforce compliance when necessary.
Request a Call with a Texas Sales Tax Lawyer at Brown PC
If you have significant questions or concerns about Texas state tax compliance, 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 online today.