June 16, 2011
eCommerce Sales Tax Issue in Texas
Both Houses in the Texas legislature have opted to pass a bill that repeals the controversial regulation that has caused many problems to eCommerce vendors and web hosting providers located in the state. In Quill v. North Dakota, a state can only collect sales tax from a firm if that organization has a substantial physical presence, known as a nexus, within that state.
The Old Law
Until July 2010, the use of only a server located in a specific state, without any other presence was not considered a substantial nexus. This is due to the federal ruling that forbids sates from collecting a sales tax on a company that only uses a computer server in that specific state.
An Amendment to the Old Law
However, the Texas Comptroller’s Office amended the regulation stating that even the use of a computer server in the state is adequate to establish a nexus for collecting sales tax. Therefore, any eCommerce vendor who utilized a web hosting provider located in Texas was required to collect sales tax from their customers, even though they did not have any other physical presence.
Results of the Amendment
As a result, the new regulation caused major problems with web hosting providers that had servers in Texas. The companies were concerned they would lose business from eCommerce retailers that did not want to forego the obligation of taxing their customers.
A Statement by the Texas Comptroller’s Office
Recently, the Texas Comptroller’s Office backpedaled on their regulation stating that the “use of a computer server” within Texas does not mean exactly what it says. Therefore, the administration concluded that the use of a server does not establish a nexus. Unfortunately, this was only binding on the taxpayer that used this private ruling causing doubt on the issue.
Passing HB 1841
As a result, the Texas State Legislature has rescued these web hosting providers and eCommerce companies by passing HB 1841 which states, “A person whose only activity in this state is conducted as a user of Internet hosting is not engaged in business in this state.” It is important to note that if an eCommerce business has sales representatives or contractors located n the state, this would satisfy the physical requirement for sales tax.
The new law will eliminate any questions regarding usage of servers in Texas that could result in the enforcement of sales tax on eCommerce customers. This is in the best interest of Texas since the state has worked hard to develop into an epicenter for technology.
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