Wayfair and Texas Sales Tax Nexus: What Remote Sellers Get Wrong

The U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair had a major impact on remote sellers’ sales tax obligations nationwide. While it has now been nearly a decade since the Supreme Court’s decision, many remote sellers still do not have a clear understanding of their sales tax-related obligations—and this means that these remote sellers are at risk of facing penalties due to noncompliance.

The risks are particularly high in states like Texas, where remote sellers can face substantial penalties if they fail to collect and remit sales tax in compliance with the law. The Texas Comptroller prioritizes remote seller compliance, and because it provides guidance on its website, it has a very low tolerance for remote sellers failing to pay what they owe.

The Definition of a “Remote Seller” Under Texas’ Sales Tax Laws

We’ll begin by taking a look at Texas’ definition of a “remote seller.” This term is defined in Section 3.286(b)(2)(A) of the Texas Administrative Code’s Tax Administration chapter, which states:

“For purposes of this paragraph, a remote seller is a seller engaged in business in this state whose only activity in the state is described in subsection (a)(4)(I) or (J) of this section.”

Sections (a)(4)(I) and (J) provide that an out-of-state business constitutes a “remote seller” in Texas if the business either:

• “[E]ngages 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;” or,
• “[S]olicits orders for taxable items by mail or through other media, including the Internet or other media that may be developed in the future.”

In other words, if your out-of-state company advertises and sells to customers in Texas, this means that your company qualifies as a remote seller. This includes online advertising—even if your company’s ads do not directly target Texas residents. Essentially, if your company is located in a different state and conducts business with Texas residents, your company is a remote seller under Texas law.  

Importantly, however, Section 3.286(b)(2)(B) establishes two “safe harbors” for remote sellers. These safe harbors apply to: (i) remote sellers “whose total Texas revenue in the preceding twelve calendar months is less than $500,000;” and, (ii) 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.” Regarding the second safe harbor, Section 3.286(b)(2)(B)(ii) clarifies that it is, “not applicable to those remote sellers who are above the safe harbor amount under clause (i) of this subparagraph.”

For purposes of determining whether a remote seller qualifies for the first safe harbor based on having “total Texas revenue” of less than $500,000 during the preceding twelve months, the law states that this term includes “taxable, nontaxable, and tax-exempt sales.” Thus, even if a company has less than $500,000 in taxable sales, it may still be subject to sales tax compliance requirements.

“Economic Nexus” vs. “Physical Nexus”

Another key aspect of Texas’ nexus rule for remote sellers is the fact that “economic nexus” and “physical nexus” are entirely separate. Both types of nexus can independently subject companies to Texas sales tax compliance. This means that no amount of physical presence is required to establish nexus under Texas law—a rule that is consistent with the U.S. Supreme Court’s decision in South Dakota v. Wayfair.

5 Mistakes That Can Lead to Unexpected Texas Sales Tax Liability

With these general principles in mind, remote sellers must be careful to avoid mistakes that could lead to unexpected Texas sales tax liability. The Texas Comptroller regularly audits businesses for sales tax compliance, and Texas sales tax audits can expose noncompliant remote sellers to substantial liability for back taxes, interest, and penalties. Some examples of potentially costly mistakes include:

1. Failing to Track “Total Texas Revenue”

Remote sellers that sell to customers in Texas must track their “total Texas revenue” on an ongoing basis. As noted above, a business’ total Texas revenue from the prior twelve months is a key factor for determining the business’ state sales tax compliance obligations.

2. Failing to Obtain a Texas Sales Tax Permit When Required

Remote sellers that are required to collect and remit Texas sales tax must obtain a Texas sales tax permit. Failure to obtain a permit when required can lead to penalties regardless of a business’ overall sales tax liability.

3. Failing to Terminate Remote Seller Tax Responsibility When Necessary

Remote sellers that are no longer collecting Texas sales tax due to a decrease in their in-state sales must file a form to notify the Texas Comptroller. Failure to file this form can lead to unnecessary consequences as well.

4. Failing to Keep All Necessary Documentation

Remote sellers subject to the Texas Comptroller’s oversight must retain all documentation required by Texas law. Not only can failure to keep required documentation lead to penalties, but it can also increase the risks of facing a Texas sales tax audit.

5. Failing to Be Prepared for the Possibility of Facing a Texas Sales Tax Audit

All businesses that sell to customers in Texas should be prepared to face a Texas sales tax audit. Even those that are relying on one of the two safe harbors discussed above should be prepared to affirmatively demonstrate compliance when necessary.

Request a Confidential Consultation with a Texas Sales Tax Attorney at Brown P.C.

If you need to know more about Texas’ sales tax requirements for remote sellers, we invite you to get in touch. To request a confidential consultation with an experienced Texas sales tax attorney at Brown P.C., please call 888-870-0025 or inquire online today.