“We Don’t Have Nexus in Texas”—Famous Last Words in Sales Tax Audits

Nexus is a key issue for determining Texas sales tax liability. In fact, it is the key issue in many respects—particularly for businesses located in other states. While businesses with nexus are required to collect and remit sales tax, those without have no sales tax-related obligations.

“We don’t have nexus in Texas.”

This is a common reaction among out-of-state business owners and executives who have received audit notices from the Texas Comptroller’s Office. While these business owners and executives are correct in some cases, they are not in others. Failing to collect sales tax does not excuse businesses’ payment obligations; and, as a result, those that have made incorrect nexus determinations can face substantial liability exposure.

Failing to Collect Texas Sales Tax Can Have Serious Consequences

Failing to collect Texas sales tax as a result of making an incorrect nexus determination can have serious consequences. As companies make taxable sales, their liability will continue to accrue; and, in the event of an audit, they can be held directly liable for the tax they should have collected from their customers. The Texas Comptroller’s Office makes this clear in its Texas Sales and Use Tax Frequently Asked Questions, stating in response to the question, “What happens if I do not collect tax or collect the wrong amount?”:

“You are responsible for collecting and paying the correct amount to the Comptroller’s office. If you do not collect and remit the correct amount, you can owe additional tax, plus applicable penalties and interest.”

A five-percent penalty applies for the first 30 days that Texas sales tax is past due, and a 10-percent penalty applies for the remainder of a business’s delinquency. Interest begins to accrue after 60 days, and the Texas Comptroller’s Office charges an interest rate of prime plus one.

Businesses that owe Texas sales tax (plus interest and penalties) can be held liable through the audit process. The Texas Comptroller’s Office routinely audits out-of-state businesses suspected of making incorrect nexus determinations. When facing a Texas sales tax audit, a proactive and strategic approach is key for avoiding unnecessary consequences. While this is true in all scenarios, it is especially true for businesses that have not collected sales tax due to incorrect nexus determinations.

Does Your Out-of-State Business Have Nexus in Texas?

Taking a proactive and strategic approach to a Texas sales tax audit starts with accurately determining whether your business has nexus with the state. If your business has nexus with the state, the question becomes: When did it establish nexus?

For purposes of triggering state sales tax liability, there are two ways to establish nexus under Texas law. Out-of-state businesses can either have “economic nexus,” or they can have “physical nexus” based on their contacts with the state:

• Economic Nexus – An out-of-state business has economic nexus with Texas if its “total Texas revenue” in a year is $500,000 or more. If a business meets the revenue threshold for economic nexus, then no physical contacts are required.
• Physical Nexus – An out-of-state business can have physical nexus with Texas based on various contacts with the state. Many of these contacts are fairly minor—such as sending sales representatives into the state or having a phone number that is answered in Texas. If a business meets the requirements for physical nexus, then the revenue threshold for establishing economic nexus does not apply.

When facing a Texas sales tax audit, knowing whether your business has nexus is critical. Businesses should not rely on the Texas Comptroller’s nexus determination, but instead conduct an independent analysis taking into account all relevant factors. If your business is facing a sales tax audit and it does not have nexus with Texas, being prepared to affirmatively demonstrate your business’s lack of nexus will be key to avoiding unwarranted liability.

On the other hand, if your business is facing a sales tax audit and has nexus with Texas, this is a different scenario entirely. In this scenario, your business’s audit defense strategy will need to focus on mitigating its liability while protecting its ability to sell to customers in Texas. What this entails will depend on the specific circumstances, and it will be critical to begin making informed decisions quickly to achieve a favorable resolution.

Responding to a Texas Sales Tax Audit When Your Business Has Not Collected or Remitted Sales Tax

With all of this in mind, if your business is facing a Texas sales tax audit and it has not collected and remitted Texas sales tax, there are some important steps you should take promptly. These steps include (but are not limited to):

• Conduct a Nexus Assessment – As noted above, it is critical to promptly conduct an independent assessment of whether your business has nexus in Texas.
• Conduct an Assessment of Liability – If your business has nexus with Texas, it will then be critical to conduct an independent assessment of your business’s sales tax liability (including liability for interest and penalties).
• Formulate a Defense Strategy – Based on the outcomes of these assessments, you will need to formulate a defense strategy that is focused on the realities of the circumstances at hand.
• Engage Proactively with the Texas Comptroller’s Office – When facing a sales tax audit with the potential for substantial liability, proactively engaging with the Texas Comptroller’s Office can facilitate effective communication and a favorable resolution.
• Approach the Audit with a Specific Outcome in Mind – As you navigate the audit process, you should do so with a specific outcome in mind. Whether this involves seeking to avoid liability entirely or targeting a settlement with the Texas Comptroller’s Office will depend on the circumstances at hand.

Request a Call with a Texas Sales Tax Attorney at Brown PC

If you need more information about defending against a Texas sales tax audit when your business has not collected or remitted Texas sales tax, we encourage you to contact us promptly. To request a call with a Texas sales tax attorney at Brown PC, please call 888-870-0025 or contact us online today.