Texas has now joined the growing ranks of states that have passed laws aimed at increasing tax collection from online retail transactions. Although Governor Rick Perry vetoed an earlier bill (H.B. 2403) providing that out-of-state retailers that have relationships with certain Texas “affiliated” entities will be deemed to be doing business in Texas for purposes of the sales and use tax, language virtually identical to that found in H.B. 2403 is included in S.B. 1, which was signed into law by Perry on July 19, 2011. The relevant language is found in Section 30.02 of the bill and will take effect January 1, 2012.
Driving Force Behind this Change
Most states, including Texas, impose a sales tax on the sale of a taxable good or service, and require retailers doing business in the state to collect and remit that tax. But under federal law, a retailer without sufficient contact with a state cannot be subject to state taxes. Consequently, states often impose a use tax, which requires consumers to pay the tax if an out-of-state retailer is not required to collect and remit the sales tax. Consumers, however, regularly fail to pay the use tax. This issue is often discussed in connection with online retailers because online transactions make up a large portion of these untaxed purchases.
Content of the Legislation
Section 30.02 of S.B. 1 addresses the issue described above by establishing that an out-of-state retailer will have sufficient contact with Texas and be subject to Texas taxes if that retailer has certain affiliated relationships in this state. Specifically, S.B. 1 provides that an out-of-state retailer will be deemed to be doing business in Texas, and, as a result, will be required to collect and remit sales tax if it holds directly, indirectly or through common ownership a substantial (at least 50%) ownership interest in, or is owned in whole or substantial part by, a person that either:
- Maintains a distribution center, warehouse, or similar location in Texas, and delivers property sold by the retailer to consumers; or
Maintains a location in Texas from which business is conducted, but only if:
- The out-of-state retailer sells the same or a substantially similar line of products as the person with the location in this state and sells those products under a business name that is the same or substantially similar to the business name of the person in this state; or
- The facilities or employees of the person with the location in this state are used to: (a) advertise, promote, or facilitate sales by the retailer to consumers; or (b) perform any other activity on behalf of the retailer that is intended to establish or maintain a marketplace for the retailer in this state including receiving or exchanging returned merchandise.
Not Just a Texas Issue; Expect Challenges
This issue is not unique to Texas. Every state, except for Alaska, Delaware, Montana, New Hampshire and Oregon, imposes some form of sales and use tax. Many states are facing budget deficits and are passing laws similar to Section 30.02 of S.B. 1 or other laws that use alternative approaches to increase sales and use tax collection, especially with respect to out-of-state retailers.
As stated above, all of these laws are subject to federal restrictions. Thus, some states’ laws are already being challenged in court based on claims that the statutes violate federal law (e.g., Colorado and New York’s laws). We will see if similar challenges result from the passage of S.B. 1 in Texas.