The Texas Comptroller recently adopted a change to its administrative rule dealing with the nexus requirements for sales tax permit registration and tax collection responsibilities of out-of-state sellers.1 The rule amendment eliminates the requirement that an out-of-state seller continue to be responsible for collection of tax from Texas customers for 12 months after the seller ceases to have nexus in Texas (i.e., trailing nexus). The amendment also clarifies when an out-of-state seller is considered to have ceased having nexus in Texas and specifies that the seller maintain documentation for at least four years showing the date the seller ceased to have nexus in the state. The policy change on trailing nexus is retroactive, so this may impact out-of-state sellers immediately and have implications for sellers under audit or seeking voluntary disclosure agreements with the Comptroller.
Texas and Trailing Nexus
Texas has historically claimed that for sales and use tax purposes, it takes very little activity to trigger a nexus determination. An out-of-state seller must be careful when doing business in Texas even when considering just the physical nexus threshold under the U.S. Supreme Court decision in Quill v. North Dakota.2 Texas recognizes no de minimis concept and a single employee or independent representative visiting Texas to solicit or otherwise conduct business for a seller may serve to create nexus in the state. For example, Texas equates the licensing of software to customers as a nexus-creating activity because receipts from such activity are being derived from the seller's tangible personal property located in the state. Texas also has an affiliate nexus statute that can require an out-of-state seller to register and collect Texas tax because of certain activities an affiliate performs in the state.3
Texas has used its trailing nexus policy, in conjunction with the minimal threshold for triggering nexus, as the basis for continuing to require out-of-state sellers to collect tax even after nexus technically has ceased. It is often difficult for sellers to try and prove a negative and any overlap of nexus-creating activities meant another 12-month period of tax collection responsibilities. The 12-month trailing nexus policy was not based on statute and was an administrative convention designed to require sellers to continue collecting tax long after they ceased to have nexus in Texas. The reasoning for using the 12-month period in the trailing nexus policy was loosely based on the occasional sale exemption in the Texas statute, in which a seller can have one or two exempt sales in a 12-month period without having to obtain a Texas sales tax permit and collect tax.4 Texas had the trailing nexus policy since at least 1985 based on the earliest letter ruling discussing it.5 Although long-standing policy, trailing nexus only appeared formally in an amendment to the administrative rule in 1996, and was stated as follows:
An out-of-state seller that has been engaged in business in Texas continues to be responsible for collecting Texas use tax on sales made into Texas for 12 months after the seller ceases to be engaged in business in Texas.6
The revised regulation eliminates the 12-month requirement and now explains that an out-of-state seller does not have nexus in Texas:
when the seller no longer has, and no longer intends to engage in activities that would create, nexus with this state. For example, an out-of-state seller who enters the state each year to participate in an annual trade show does not cease to have nexus with this state between one trade show and the next. In contrast, an out-of-state seller who discontinues the product line that it marketed and sold in this state, and who does not anticipate entering the state to solicit new business, has ceased to have nexus with this state.7
The revised regulation specifies that an out-of-state seller must maintain records and documentation required to verify the date on which the seller stopped having nexus in Texas, for at least four years after such date.8 The general statute of limitations period for taxes in Texas is four years from the date that the tax becomes due and payable.9
Interestingly, a taxpayer does not have nexus in Texas if the taxpayer has no connection with the state except the possession of a certificate of authority (as a foreign/nondomestic) taxpayer,10 nor is nexus created by the mere holding of a sales and use tax permit.11
The Comptroller has stated that the trailing nexus requirement, which is sometimes referred to as "deemed nexus," is contrary to the physical presence test articulated in Quill v. North Dakota.12 The elimination of the trailing nexus requirement by Texas on a retroactive basis provides businesses an opportunity to revisit when Texas sales and use tax nexus may have ceased. Businesses that have been collecting (and remitting) Texas sales tax may decide it is best to continue to do so since the nexus trigger for Texas has not changed and the exposure for ceasing to collect tax while later re-establishing nexus without collecting tax anew remains. Businesses choosing to cease tax collection need to be aware that they must maintain documentation for at least four years showing when nexus ceased in Texas. Businesses that have properly collected tax from customers on their sales in Texas due to lingering nexus should not have a refund opportunity since Texas regards the tax collected as legally due by the purchaser that paid the tax. Businesses that have not collected Texas tax when they had nexus may have opportunities to reduce their exposure for periods under audit or when considering voluntary disclosure agreements with Texas.
1. 34 TEX. ADMIN. CODE § 3.286, amended effective June 3, 2015.
2. 504 U.S. 298 (1992).
3. TEX. TAX CODE ANN. §§ 151.008; 151.107.
4. TEX. TAX CODE ANN. § 151.304(b)(1).
5. Texas Letter Ruling 8503L0663E12, Sep. 3, 1985.
6. 34 TEX. ADMIN. CODE § 3.286(b)(2), amended effective Dec. 12, 1996.
7. 34 TEX. ADMIN. CODE § 3.286(b)(2), amended effective June 3, 2015.
9. TEX. TAX CODE ANN. § 111.201.
10. 34 TEX. ADMIN. CODE § 3.286(a)(7); Rylander v. Bandag Licensing Corp., 18 S.W.3d 296 (Tex. App. 2000).
12. 504 U.S. 298 (1992).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.