Over the summer, the United States Supreme Court ruled in South Dakota v. Wayfair that no longer is a physical presence required for a state to mandate a seller to collect sales tax. Instead, states are now allowed free reign to require a seller to collect sales tax if the seller sells a certain dollar amount of sales into the state or a minimum number of transactions. Since the ruling, our firm noticed many states seizing on this newfound opportunity.

Texas is one of these states. According to the Comptroller of Public Accounts (“Comptroller”), Texas is aiming to issue a new regulation (called a “rule”) discussing the topic. The target for the new rule was originally to be sometime early 2019.

However, the Comptroller published an update to Rule 3.286 on October 19, 2018. The Rule, which discusses when a seller has nexus in Texas, was published in the Texas Register. The Comptroller will be soliciting comments on the Rule. The comment period concerning the Rule will last for a total of thirty days from October 19, 2018. A copy of the proposed Rule is included at the end of this article.

In short, the proposed rule calls for a seller, who is not physically present in Texas but rather makes sales into Texas (i.e., a remote seller), to register to collect sales tax IF the total Texas revenue exceeds $500,000 in the preceding twelve calendar months. Revenues include handling, transportation, installation, or other similar fees related to the sale. It further broadly defines total revenue to be “gross revenue from the sale.” In other words, Texas is creating a “safe harbor” for businesses not meeting the $500,000 of gross revenues into Texas by not requiring these sellers to become registered with Texas to collect sales tax from Texas customers.

If you meet the above criteria, then when do you have to obtain a permit and begin collecting sales tax? The proposed Rule states no later than the first day of the fourth month after the month in which the seller exceeds the above-mentioned criteria. The proposed Rule provides an example. If a seller meets the total revenue threshold for the timeframe of July 1, 2018, through June 30, 2019, then the seller must obtain a permit by October 1, 2019, and begin collecting sales tax by said date.

In instances in which a seller who is registered later has gross revenues dip below $500,000 in the preceding twelve calendar months, the seller may terminate his or her collection responsibilities. However, and this is a big catch, if the $500,000 threshold is later exceeded over a twelve-month period, the seller must begin collecting sales tax again on the first day of the month following the twelve-month period exceeding the threshold. The Comptroller makes it the seller’s responsibility to maintain records to support any termination of the collection responsibilities.

Finally, the proposed Rule states it will subject these remote sellers to the Rule beginning October 1, 2019. The initial twelve-month period for determining the revenue threshold will be July 1, 2018, through June 30, 2019.

Assuming Texas implements this economic nexus standard, which it is almost guaranteed to do, what does this mean for you? You should look at the final economic nexus requirements Texas puts out very carefully, as the final version may be different from the proposed Rule included with this article. Since Wayfair was decided toward the end of June 2018, states have been adopting economic nexus standards in all shapes and sizes. A careful review of the threshold is imperative to determining whether your business must now collect sales tax on sales into Texas. The most common standard adopted is the standard similar to South Dakota – $200,000 in sales or 100 transactions.

Individuals required to register for sales tax collection responsibilities may face an uncontemplated surprise – a registration requirement for franchise (“income”) taxes in Texas. For instance, if your limited liability company (“L.L.C.”) delivers the items it has sold into Texas, then the L.L.C. has franchise tax nexus with Texas. There are, of course, other specific activities in Texas that would trigger franchise tax nexus. If you find yourself with franchise tax nexus, you must register for franchise tax purposes. Just because you register for franchise tax does not mean you automatically pay franchise tax. Texas has multiple ways to calculate how much franchise tax your company owes. The best part is you get to choose the method that produces the lowest amount! For instance, you can choose the method that allows you to not pay franchise tax on the first $1,000,000.

In conclusion, businesses must carefully analyze their sales into Texas to determine whether a requirement to collect sales tax will be met. If so, businesses should begin building in to their Texas sales an amount attributable to franchise taxes in Texas to soften the income tax blow that will be dealt. With proper planning over the next several months, your business can mitigate these upcoming costly surprises.

ADDITIONAL ARTICLES

Texas Sales & Use Tax Guide for Aircraft, published November 24, 2018, by David J. Brennan, Jr., Esq.

Texas Updates Sales Tax Rules for Computers & Software, published September 24, 2018, by David J. Brennan, Jr., Esq.

What to Expect During A Texas Tax Audit, published August 7, 2018, by David J. Brennan, Jr., Esq.

Wayfair Puts Quill’s Physical Presence Test for Sales and Use Tax Collection to Bed, published June 26, 2018, by Jerry Donnini, Esq.

About the author: David Brennan is an associate attorney with Moffa, Sutton, & Donnini, P.A. His primary practice area is multistate tax controversy. David received a B.S. in Accounting and Finance, with a minor in Computer Science, from Florida State University. He worked as an accountant for a CPA firm before attending law school at Regent University. He received his Juris Doctor in 2013 and was licensed to practice law in Florida in the same year. In 2015, David earned his Masters of Laws in Taxation from Boston University. David worked for the Florida Department of Revenue as a Senior Attorney before entering private practice. You can read his BIO HERE.

Posted in Multi-state sales and use tax, Texas Sales Tax