Texas: A different approach to collecting taxes from online purchases

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We recently discussed New York’s attempt to tax online purchases by requiring online marketplaces with more than $100 million in annual sales to collect the state’s sales tax from customers who are New York residents, regardless of whether the seller is located in or outside of New York. Even though the measure was estimated to bring in $275 million in fiscal year 2018-19, a robust campaign to kill it was successful.

Other states continue trying with their own measures. In Texas, Senate Bill 1713 (SB 1713) is now making its way through the law-making process, having been introduced in March. It passed out of the Senate in mid-May, by a vote of 31 to 0, and is now pending with the House Ways and Means Committee. Though its only effect is to study methods that would increase sales and use tax collections, it floats the possibility of subjecting third party “persons who refer purchasers in [Texas] to out of state retailers” to registration or information reporting requirements.

It also calls for consideration of subjecting online retailers to Colorado-style obligations, under which out-of-state internet retailers that are not subject to sales tax and remittance obligations to notify purchasers of [their] use tax payment requirements, and report sales that are subject to use taxes. Similar rules were hotly litigated in Colorado, but were ultimately upheld.

A companion bill in the House, HB 3875, also pending before the House Ways and Means Committee, creates definitions that expand the universe of sellers that would be responsible for collecting sales and use taxes. For example, it defines a “marketplace provider” as a person who:

  1. Facilitates the sale, lease, or rental of goods for a third party seller.
  2. Collects payments from the buyer and transmits them to the retailer.
  3. Is engaged in business in Texas pursuant to its laws defining what it means to be a retailer.

An entity that satisfies these conditions is considered to be “making a sale” and therefore subject to statutory sales and use tax collection requirements, unless the third party seller collects.

As an example, the third party vendors that are accessible to Amazon buyers via its website would be classified as marketplace providers, and unless Amazon collects the taxes due, the third party vendor would be required to collect.

Minnesota is the first state to actually pass such a scheme, by way of H.F. 1. A late May 2017 bill summary that Bloomberg posted online reveals that the definition of a “retailer maintaining a place of business in the state” was modified to include “having a storage facility in the state, employing a state resident who works from a home office in the state, or having a marketplace provider or other third party operating in the state under the retailer’s authority to facilitate or process sales in the state.”

In addition, the Minnesota law defines a marketplace provider as a “person who facilitates sales for a retailer through any forum. This includes internet-based sales sites.” Retailers making less than $10,000 of taxable sales in Minnesota, “if their sole physical connection to the state is through a marketplace provider,” are exempt from sales tax collection and remittance requirements.

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