A draft of proposed amendments to Comptroller’s Rule 3.286 (the “Draft Regulation”) have been circulated by the Texas Comptroller in response to the U.S. Supreme Court’s decision in South Dakota v. Wayfair. In Wayfair, the Court overruled its long standing precedent that precluded a state from imposing a use tax collection obligation on a remote seller with respect to sales it makes to residents of a state unless the seller has a physical presence in the state. As previewed in the memorandum issued by the Comptroller on July 5th regarding the implementation of Wayfair, the Draft Regulation proposes a fairly robust sales-based safe harbor for out-of-state sellers and a generous prospective effective date for collection and reporting obligations for such sellers.
The Draft Regulations were distributed to the Comptroller’s Business Advisory Group and Tax Advisory Group and, once the Comptroller receives comments from these two groups, the Draft Regulation will be published in the Texas Register, which will begin the 30-day comment period.
Highlights of the Draft Regulation
Engaged in Business Definition to Include “Remote Sellers”: Consistent with Wayfair, the Draft Regulation amends the definition of “engaged in business” in Comptroller’s Rule 3.286(a)(4) to include the “engaged in business” activities listed in Texas Tax Code § 151.107 (Retailer Engaged in Business in This State) that do not require a physical presence in Texas.
- Specifically, the provisions of Texas Tax Code §§ 151.107(a)(4) and (a)(5) providing that a person is engaged in business in Texas if it systematically solicits sales in Texas through various types of communication systems or solicits orders from Texas customers by mail or other media would be listed among the activities set forth in Comptroller’s Rule 3.286(a)(4) as constituting “engaged in business” in Texas.
- Sellers whose activities are limited to these activities are defined as “remote sellers” in the Draft Regulation.
- These activities are currently omitted from Comptroller’s Rule 3.286(a)(4) due to the physical presence rule of Quill.
Safe Harbor Nexus Determination: The Draft Regulation deletes the current generic provisions of Comptroller’s Rule 3.286(b)(2) regarding the determination of whether an “out-of-state seller” has nexus with Texas and replaces it with an annual gross revenue based safe harbor for “remote sellers.”
- The proposed safe harbor provides that the Comptroller will not impose the statutory permit and collection responsibilities on remote sellers whose total revenue from Texas sales in the preceding twelve calendar months is less than $500,000.
- A remote seller whose total revenue exceeds that threshold amount will be required to obtain a sales and use tax permit and begin collecting sales and use tax no later than the first day of the fourth month after the month in which a remote seller exceeds the safe harbor amount.
- The initial twelve-month period for determining whether a remote seller’s total revenue from Texas sales exceeds the safe harbor threshold amount will be July 1, 2018 through June 30, 2019, and the permitting and collection obligations would not begin until October 1, 2019.
- The Draft Regulation also provides guidance regarding the ability of a remote seller to terminate its collection and reporting obligations if its annual revenues fall below the safe harbor threshold or it ceases to make sales of taxable items in Texas.
Compliance With Wayfair Case: The Draft Regulation represents a concerted effort by the Comptroller to bring the nexus provisions of Comptroller’s Rule 3.286 into conformity with Wayfair.
- Language in the Draft Regulation’s preamble indicates that the Comptroller believes that the Draft Regulation both conforms to the substantial nexus test announced in Wayfair (i.e., has the taxpayer availed itself of the substantial privilege of carrying on business in the State) and the Supreme Court’s pronouncement that, notwithstanding its elimination of the Quill physical presence test for establishing nexus, the law must not discriminate against or constitute an undue burden upon interstate commerce.
- In Wayfair, the Supreme Court pointed to three features of the South Dakota statute at issue that “appear designed to prevent discrimination against or undue burdens on interstate commerce.” Those features were:
- a safe harbor for those who transact only limited business in South Dakota,
- no retroactive application of the new law, and
- South Dakota had adopted the Streamlined Sales and Use Tax Agreement (“SSUTA”), which standardizes taxes to reduce administrative and compliance costs.
- The Draft Regulation’s $500,000 annual revenue safe harbor and the October 1, 2019 effective date are more generous than the first two features of the South Dakota law.
- The obvious question that remains unanswered by the Draft Regulation is what effect will the fact that Texas has not adopted the SSUTA have on its ability to subject remote sellers to Texas sales and use tax reporting and collection obligations.
- While adoption of SSUTA by Texas is unlikely to be a prerequisite for the Draft Regulation passing constitutional muster, the Comptroller (or, more likely, the Texas Legislature) will have to address the administrative and compliance burdens that will be imposed upon remote sellers (and especially small businesses) as a result of their becoming subject to collection and reporting obligations.
- The compliance concern sure to raise the most concern for remote sellers is how to comply with the vast number of local sales and use tax jurisdictions in Texas and their varying rates. Resolution of the local sales and use tax collection responsibilities of remote sellers will be necessary if the Comptroller is to fully achieve the goal stated in the preamble to the Draft Regulation of “eliminating the need to litigate on a case-by-case basis whether the statutory collection obligation is unduly burdensome.”
A more detailed description and discussion of the Draft Regulation can be found here.