AMAZON.COM AGREEMENT AND CITY SALES TAXES
On April 27, State Comptroller Susan Combs and Internet retailer Amazon.com reached an agreement regarding the future collection of sales and use taxes on online sales by Amazon. According to Combs’ office, Amazon will begin collecting sales and use taxes on online sales made in Texas beginning on July 1, 2012, and also agreed to make capital investments of $200 million and to create 2,500 new jobs in the state over the next four years. In exchange, the state will drop its efforts to collect $269 million in sales and use taxes that the state claimed should have been remitted based on a warehouse operation in the City of Irving from 2005 to 2009.
The agreement comes after the legislature passed legislation in 2011 clarifying that Amazon had established a “nexus” in the state for purposes of collecting sales and use taxes. The comptroller’s office has indicated to TML that the agreement will provide for the collection of local sales and use taxes due on online purchases from Amazon. The following Legal Q&A addresses the issue of collecting local sales and use taxes on purchases from online retailers like Amazon, both under current law and when a retailer enters into a voluntary agreement with the state.
State law refers to a “local sales and use tax.” Is there a difference between local sales taxes and local use taxes?
Yes and no. The rates of local sales taxes are the exact same as the rates for local use taxes. Tex. Tax Code §§ 151.101(b) and 321.104(a). The state sales and use tax rate is 6.25 percent and cities, along with certain other local governments, may adopt general and dedicated sales and use taxes up to an additional two percent for a maximum combined sales and use tax rate of 8.25 percent. Tex. Tax Code §§ 151.051 and 321.101. In this sense, local sales and use taxes can be seen as one and the same.
But there is a means of distinguishing between local sales taxes and use taxes. Sales taxes are defined as taxes on each sale of taxable items in this state. See Tex. Tax Code § 151.051. Use taxes are defined as taxes imposed on the storage, use, or other consumption in this state of a taxable item purchased from a retailer. Tex. Tax Code §§ 151.101(a) and 321.205(a). City sales tax or city use tax can apply to a purchase from an online retailer, depending on the situation, but not both. See Tex. Tax Code § 321.101(f). While sales tax collections are typically based on the location of the seller’s place of business, use tax collections are based on the customer’s location. In this sense, the use tax can be seen as complementary to the sales tax.
When must local sales taxes be collected on online retail sales? How about local use taxes?
The answer to this question depends on a number of factors, including whether or not the retailer has a place of business in Texas, and where the place of business is located. Local sales taxes are collected based on the location of the seller’s place of business in the state. A “place of business” is defined by state statute as “an established outlet, office, or location operated by the retailer or the retailer’s agent or employee for the purpose of receiving orders for taxable items and includes any location at which three or more orders are received by the retailer during a calendar year.” Tex. Tax Code § 321.002(a)(2). A warehouse operated by a retailer in the state would be considered a “place of business” if at least three orders per calendar year are received by the warehouse. Id.
The Supreme Court of the United States has held that a business may not be required to collect and remit sales and use taxes to a state if it has not established a physical presence in that state. Quill Corp. v. North Dakota, 504 U.S. 298 (1992). However, state law does provide that a purchaser is responsible for paying local use taxes on purchases from an out-of-state retailer if the purchased item is used in a city that had adopted a local sales and use tax (see answer to the next question). Tex. Tax Code § 321.205(c); 34 Tex. Admin. Code § 3.375(e). Additionally, local use taxes would be owed if a retailer maintained a place of business in the unincorporated area of a county in Texas, but delivered the purchased item to a customer located in a Texas city that had adopted local sales and use taxes. Tex. Tax Code § 321.205(b).
Are the sourcing rules the same for local sales taxes and local use taxes?
No. The “sourcing” of local sales and use taxes, or the determination as to which local taxing jurisdiction receives sales and use tax revenue on a given purchase, differs between local sales taxes and local use taxes. The laws relating to sales and use tax sourcing are used by the Texas Comptroller to determine how to allocate tax revenue.
Sales tax sourcing is generally determined based upon where the sale of goods is consummated. Tex. Tax Code § 321.203(a). This type of sourcing is known as “origin sourcing.” The sourcing determination depends largely on how many places of business the retailer maintains in the state. For example, if an online retailer only has one place of business in the state, the sale is consummated at the place of business and sales taxes are sourced to the jurisdiction where the place of business is located. Tex. Tax Code § 321.203(b).
The sourcing of local use taxes is determined according to where the use of the goods is consummated. Tex. Tax Code § 321.205. Under state law, the location where the purchased item is first stored, used, or consumed is considered to be the location where the use is consummated. Id. This type of sourcing is known as “destination sourcing.”
Unlike the collection of local sales taxes, where the retailer must collect and remit all sales taxes to the comptroller to be allocated, retailers are only responsible for collecting local use taxes if they are considered to be “engaged in business” in a taxing city. 34 Tex. Admin. Code § 3.375(c). Administrative rules adopted by the Texas Comptroller provide that a seller is engaged in business in a city if the seller: (1) maintains, occupies, or uses an office or other place of business in the city; (2) has a representative, agent, or salesperson operating in the city under authority of the seller for purposes of selling, delivering, or taking orders for a taxable item; (3) promotes a flea market, trade day, or other event involving the sale of taxable items; (4) uses independent salespersons in direct sales of taxable items; (5) derives receipts from the lease of tangible personal property located in the city; (6) allows a franchisee or licensee to operate under its trade name if the franchisee or licensee is required to collect city sales or use tax; or (7) conducts business in the city through employees, agents, or independent contractors. 34 Tex. Admin. Code § 3.375(a)(1).
If the retailer is not engaged in business in the city where the use of an item is consummated, local use taxes must be remitted to the comptroller by the purchaser of the item, instead of by the retailer. 34 Tex. Admin. Code § 3.375(e). It may come as a surprise for many that a Texas resident who purchases goods from an online retailer is, in most cases, responsible for collecting state and local use taxes and remitting those taxes to the state comptroller. However, as a practical matter, the state comptroller generally does not audit individuals to ensure that use taxes are paid on online purchases upon which state and local use taxes are owed.
If an online retailer has at least one place of business located within a city in Texas, how is sourcing of local sales and use taxes determined?
If an online retail company has only one place of business in Texas, located in a city that has adopted local sales and use taxes, sales taxes on all online purchases made by Texas residents from the company would be sourced to the city, and any local sales taxes adopted by the county or a transit or special purpose district would be sourced to those entities. In other words, the city and other local jurisdictions in which the place of business exists would receive local sales taxes on all online purchases shipped to Texas mailing addresses, regardless of the location in Texas to which the goods are shipped.
If the online retailer has multiple places of business located in various cities throughout the state, local sales taxes for online purchases are sourced to the location from which the goods are shipped. Tex. Tax Code § 321.203(c-1). However, if an online retailer has multiple places of business in the state but does not ship goods from any of those locations, sales would be consummated at the place of business in the state where the online orders are received and processed. Tex. Tax Code § 321.203(d). In none of these scenarios would city use taxes be collected, since city sales taxes would be collected by the retailer because it maintains at least one place of business in a Texas city.
If an online retailer does not have a place of business in the state, how is the sourcing of local sales and use taxes determined for sales to city residents in Texas?
Because the retailer does not maintain a place of business anywhere in Texas, much less in a city that has adopted a sales and use tax, no state or local sales taxes would be collected. Instead, state and local use taxes would be due on the purchases made from the online retailer. Under current law, if the retailer is considered to be “engaged in business” within the city where the purchased item is delivered, the retailer must collect local use taxes. See 34 Tex. Admin. Code § 3.375(c). The revenue collected would be remitted from the comptroller to the city where the purchased item is delivered.
If the online retailer is not “engaged in business” within the city where the purchased item is delivered, the purchaser technically is responsible for collecting state and local use taxes and paying those taxes to the state comptroller. 34 Tex. Admin. Code § 3.375(e). As mentioned earlier, purchasers rarely pay use taxes on goods purchased online. This means the city to which the item is delivered would see little, if any, use taxes if the online retailer is not engaged in business in the city.
In an instance where an out-of-state retailer enters into an agreement with the state to collect sales and use taxes, the administrative rules adopted by the comptroller could potentially be a barrier to cities fully benefitting from the agreement. While a retailer cannot be required to collect sales and use taxes if it does not have a physical presence in the state pursuant to the Quill decision, nothing would prevent the retailer from agreeing to do so voluntarily. But the out-of-state retailer could—depending on the language in the agreement—argue that, because it is not “engaged in business” in the state under the state administrative rules, it need not collect and pay local use taxes.
If an online retailer has a single place of business in the state, located in the unincorporated area of the county, how is the sourcing of local sales and use taxes determined for purchases made by city residents in Texas?
Because the online retailer has a place of business in the state, the retailer would collect state and local sales taxes on any purchase. But because the place of business is located in the unincorporated area of the county, the only local sales taxes to be collected on the purchase would be those adopted by the county and/or any transit or special district operating in the area, if applicable. Local use taxes adopted by the city where the purchased item is delivered would be collected for the remaining amount left within the two-percent allotment for local sales and use taxes. See Tex. Tax Code § 321.205(b). The retailer would be responsible for the collection of the local use taxes only if it is considered to be “engaged in business” in the city to which the item was delivered. 34 Tex. Admin. Code § 3.375(c).
Just as with the previous scenario, the relevant provision in the Texas Administrative Code may limit city sales and use tax collection in the instance of an online retailer agreeing with the state to collect sales and use taxes. Even if the retailer agreed with the state that it would collect sales and use taxes, the possibility may exist that it could shift the burden of local use tax collection and payment to a purchaser by contending that it is not “engaged in business” in the city where the purchased item is first used.
If an online retailer has entered into an agreement with the State of Texas to collect sales and use taxes, will cities see an increase in local sales and use tax revenue as a result?
Not necessarily. Again, the answer to the question depends on a few factors, including whether the retailer maintains any places of business in the state, and where those places of business are located. Absent some changes to the administrative rules adopted by the comptroller that require a purchaser to collect local use taxes if a seller is not “engaged in business” in the city where the purchased item is used, a retailer may be able to avoid collecting local use taxes under current law if it can show that it isn’t engaged in business in a city, even if the retailer has agreed to collect sales and use taxes generally. In recent communications with League staff, the office of the comptroller has indicated that it is aware of the potential impact of its administrative rules upon local sales tax collection, and may soon propose an amendment to its rules to provide that if a retailer is responsible for collecting state tax it is also responsible for collecting any local tax within the state.