Following the monumental 2018 U.S. Supreme Court ruling in South Dakota v. Wayfair Inc. which made it constitutional for states to tax sales made by vendors that have no in-state physical presence, Texas has rolled out new economic nexus standards that require out-of-state businesses to register for, collect, and remit sales tax. By amending Rule 3.286, Texas extended its jurisdiction to tax by broadening the definition of “doing business” and instituting a safe harbor for remote sellers whose sales do not exceed $500,000. The amendments took effect on January 1, 2019. Remote sellers will be required to register for sales tax permits and begin the collection, filing, and remittal process on October 1, 2019.
The Sales Threshold
Businesses that are situated outside of Texas whose Texas receipts exceed the prescribed threshold of $500,000 will be required to 1) register for a sales tax permit, 2) charge customers sales tax, and 3) file sales tax reports and remit the appropriate sales tax to the Texas Comptroller. In calculating whether receipts exceed the $500,000 bar, businesses will be required to look back 12 calendar months, with a backstop date of July 1, 2018. In other words, in assessing whether they will have a sales tax obligation on October 1, remote sellers would calculate their sales between July 1, 2018, and June 30, 2019. If sales (both taxable and nontaxable) for that 12 month period exceed $500,000, then the seller should register for a sales tax permit on or before October 1. Thereafter, they will be required to register on the first day of the fourth month after the month in which sales exceed the safe harbor threshold.
Single Tax Rate
Aware of the difficulties surrounding remote sellers identifying the correct localities and associated tax rates, the Texas legislature enacted H.B. 2153, which will give remote sellers the option, via election, to use a single local tax rate, as an alternative to combining local tax rates with the statewide 6.25%. Taxpayers must notify the Texas Comptroller in order to take advantage of this election.
Economic Nexus’ Impact on Texas Franchise Tax?
While there have been questions about whether registering for sales tax in Texas would create a Texas Franchise Tax filing obligation for out-of-state permit holders, the Comptroller has responded stating that it intends to address these concerns by making the appropriate rule changes for Franchise Tax returns due on or after January 1, 2020, and after receiving feedback from the public on proposed amendments.
Businesses with no physical presence in Texas should be aware of these important changes and begin analyzing their Texas sales receipts within the initial 12-month time frame explained in this article. If the $500,000 economic threshold has been exceeded, then Texas sales tax permits should be obtained on or before October 1, and a system for collecting sales tax from customers and paying it to Texas should be established. Additionally, sellers should notify their Texas customers, who may or may not be aware of these law changes, that collection of sales taxes will soon be required and that they should expect to see this change on their invoices. Taxpayers should also consider electing for the single tax rate per H.B. 2153 on or before October 1, 2019.
With contributions from: Justin Foster and Hillin Warren
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