Wayfair Nexus Audits in Texas: How the Comptroller Proves You Owe Tax

In Texas, the obligation to pay sales tax is based on a business’s “nexus” with the state. Subject to certain exceptions, businesses with nexus are required to collect and remit sales tax, while businesses without nexus are not subject to Texas state sales tax compliance requirements.

The Texas Comptroller is responsible for enforcing state sales tax compliance. In doing so, it begins by assessing businesses’ nexus with the state. This is more straightforward in some cases than others. For example, if a business has an office, warehouse, or any other facility in Texas, it will have “physical nexus” and be subject to state sales tax compliance. However, if a business has no facilities in Texas, further analysis is required. In this scenario, the business may still have physical nexus based on its contacts with the state, or it may have “economic nexus” based on its in-state sales.

How the Texas Comptroller Can Prove Physical Nexus

We’ll cover physical nexus first. While having a facility in Texas is one way a business can have a physical nexus with the state, it is not the only way the Texas Comptroller can establish that a business is required to collect and remit sales tax. Businesses that have no facilities in the state can still have sufficient physical nexus to trigger Texas sales tax compliance obligations. Other ways that the Texas Comptroller can prove physical nexus include:

• Advertising (“entering Texas to purchase, place, or display advertising when the advertising is for the benefit of another and in the ordinary course of business”)
• Selling goods on consignment in Texas
• Performing a contract in Texas (“regardless of whether the taxable entity brings its own employees into the state, hires local labor, or subcontracts with another”)
• Delivering sold goods into Texas
• Having employees or representatives in Texas (who are “doing the business of the taxable entity”)
• Doing business “in any area within Texas” (including areas leased to or under the control of the federal government)
• Selling franchises in Texas
• Maintaining a place of business for a holding company in Texas (including “managing, directing, and/or performing services in Texas for subsidiaries or investee entities”)
• Having inventory in Texas (including “spot inventory for the convenient delivery to customers”)
• Leasing tangible personal property used in Texas
• Engaging in “loan production activities” in Texas (including “soliciting sales contracts or loans, gathering financial data, making credit checks, collecting accounts, repossessing property, or performing other financial activities”)
• Acting as a general partner in a general or limited partnership doing business in Texas

Even these are just examples. From “having a telephone number that is answered in Texas” to carrying passengers or freight, the Texas Comptroller can use various other business activities to establish physical nexus. Additionally, even if a business does not have a permanent or long-term physical location in Texas, entering the state to participate in shows, sales meetings, or other events can trigger physical nexus as well.

How the Texas Comptroller Can Prove Economic Nexus

Even if a business has no physical nexus with the state, it can still be subject to Texas sales tax compliance based on economic nexus. Under Texas law:

“For each federal income tax accounting period . . . a foreign taxable entity has nexus in Texas . . . even if it has no physical presence in Texas, if during that federal income tax accounting period, it had gross receipts from business done in Texas of $500,000 or more . . . .”

The law defines “gross receipts” as “all revenue reportable by a taxable entity on its federal return, without deduction for the cost of property sold, materials used, labor performed, or other costs incurred.”

This is the general rule for remote sellers, including online marketplaces and businesses that sell through online marketplaces. However, exceptions apply. For example, as the Texas Comptroller states, “[a]s a marketplace seller, you are not responsible for collecting and remitting sales and use tax on your sales through the marketplace if the marketplace provider has certified they are assuming these responsibilities.” For out-of-state businesses, ensuring Texas state sales tax compliance is essential if compliance is required. However, before investing in compliance, out-of-state businesses should consult with experienced local tax counsel to determine whether any exceptions apply.

Defending Against a Texas State Sales Tax Audit (Including Defending Against Nexus)

Let’s say your business is facing a Texas sales tax audit. What should you do?

As with any tax audit, an informed and strategic defense is essential when facing a Texas sales tax audit. Businesses can face unwarranted determinations of sales tax liability, which can pose substantial financial risks. If the Texas Comptroller determines that a business owes unpaid sales tax, the business can face liability not only for the sales tax owed, but for interest and penalties as well. This can even include criminal penalties in some cases.

Taking an informed and strategic approach to a Texas state sales tax audit starts with conducting an independent nexus assessment. If you disagree with the Texas Comptroller’s nexus determination, then challenging this determination will be the first step in the process. Whether this involves relying on the $500,000 in-state sales threshold for remote sellers or a statutory or regulatory exception will depend on the specific circumstances at hand. For businesses that have not collected Texas state sales tax, in particular, successfully challenging a nexus determination can be critical to avoiding substantial liability.

Request a Call with a Texas Sales Tax Audit Lawyer at Brown PC

If you need more information about the steps involved in defending against a Texas state sales tax audit—including challenging the Texas Comptroller’s nexus determination—we encourage you to contact us promptly. To request a call with an experienced Texas sales tax audit lawyer at Brown PC, call us at 888-870-0025 or request a confidential initial consultation online today.