2019-058 Sales Tax on Remote (Internet) SalesDate: March 22, 2019 Report No. 2019-058
INFORMAL STAFF REPORT
TO MAYOR AND CITY COUNCIL
SUBJECT
Provide information regarding sales taxes on remote (internet) sales.
BACKGROUND
During the March 19, 2019 City Council meeting, Council Member Briggs requested information
about recent court action and upcoming legislation regarding sales tax collections related to remote
(internet) sales and their distribution to local governments, including the City of Denton.
In June 2018, the U.S. Supreme Court in South Dakota v. Wayfair held that a South Dakota law
requiring certain remote sellers to collect sales taxes on goods shipped to customers living in South
Dakota is constitutional. In doing so, the Court overturned decades of legal precedent and set the
stage for sales tax changes in Texas.
In response to the Supreme Court decision, the Texas Comptroller’s Office released a memo
(Attachment 1) stating how the Wayfair decision could be applied to Texas and its local
jurisdictions. The Comptroller’s Office noted that in the decision, the Supreme Court paid special
attention to aspects of the South Dakota law that were designed to prevent discrimination against
or undue burdens on interstate commerce. The Supreme Court noted South Dakota’s small seller
exemption, the proactive effectiveness of the law, and South Dakota’s membership in the
Streamlined Sales and Use Tax Agreement (Texas is not a member).
Because of the Supreme Court’s treatment of the South Dakota law, the Comptroller indicated that
there were many aspects of implementation that would need to be carefully considered in Texas
prior to the collection of sales taxes from remote sellers. The Comptroller’s Office immediately
began reviewing agency rules related to the establishment of the business/economic nexus in sales
and how to create a safe harbor for small sellers. The Comptroller’s Office also noted that,
whatever changes or legislation is necessary, the law would not be retroactively applied.
In the memo, the Comptroller also noted that, while some rule or legislative changes are necessary
to fully implement the Wayfair decision, “[w]ith appropriate notice, and prior to legislative action,
Tax Code § 151.107(a)(5) (Retailer Engaged in Business in the State) could be imposed on remote
sellers to the extent they “[solicit] orders for taxable items by mail or through other media,”
meaning, for example, sellers who solicit sales in Texas through catalogs and emails.” The
Comptroller also made specific requests to the Legislature regarding areas of the Texas Tax Code
that would need to be amended.
The 86th Texas Legislature has already taken up bills related to the implementation of the Wayfair
decision. HB 1525, introduced by Representative Burrows (Attachment 2), and SB 890,
introduced by Senator Nelson, outline the administration and collection of sales taxes involving
remote sellers. These bills make the necessary changes in law to define a marketplace seller, set
the seller’s duty to collect taxes, and determine the location of the sale as the location the items
are to be delivered.
Date: March 22, 2019 Report No. 2019-058
While those bills focus on tax administration, HB 2153, introduced by Representative Burrows
(Attachment 3), and SB 70, introduced by Senator Nelson, directly impact how the Wayfair
decision affects local governments in Texas. HB 2153/SB 70 would amend Chapter 151 of the Tax
Code to provide for a single local use tax rate in lieu of combined local tax rates to sales of taxable
items collected by certain remote sellers. The bills call on the Comptroller to set a single local use
tax rate that remote sellers can use instead of using the specific tax rate of a given jurisdiction.
Distribution of local tax revenue remitted by remote sellers would be made by the Comptroller to
eligible taxing units in the same percentage shares as those taxing units receive of allocations of
other local sales and use tax revenues. The bills require the Comptroller to adopt any rules
necessary for implementation by Oct. 1, 2019 and does not require a remote seller to collect local
taxes on sales of taxable items before Oct. 1, 2019. The bill’s fiscal note (Attachment 4) estimates
that the combined local rate will be 1.75% based on FY 2018 data.
HB 1525 and HB 2153 were heard in the House Ways and Means Committee on March 13 and
committee substitute bills were voted favorably out of Committee on March 20. As of March 21,
action on SB 70 and SB 890 is pending in the Senate Finance Committee. Staff anticipates that
HB 1525, HB 2153, SB 70, and SB 890 will pass and be signed into law by Governor Abbott.
DISCUSSION
The bills, as currently written, should have a positive impact on the City of Denton’s sales tax
collections. The Comptroller’s Office estimates that these bills will generate a combined $40
million in new revenue for Texas cities in 2020 (fiscal note from HB 1525, Attachment 5), with
that revenue increasing in future years. Because the distribution of the revenues will be based on
the percentage of total sales tax revenues that a city contributes, Denton should see an increase in
sales tax collections after the bill goes into effect. The exact value of an increase will depend on
the volume of taxable items purchased and Denton’s percentage of overall sales tax collections in
the future. Additionally, it is unknown how the Comptroller will treat Denton’s percentage share
since the combined local option tax rate in the city is 2%, which includes Denton County
Transportation Authority’s share (0.5%).
ATTACHMENTS
1. Texas Comptroller Memo-Wayfair decision
2. House Bill 1525
3. House Bill 2153
4. House Bill 2153 Fiscal Note
5. House Bill 1525 Fiscal Note
STAFF CONTACT:
Jessica Rogers
Deputy Director of Public Affairs & IGR
(940) 349-7531
Jessica.Rogers@cityofdenton.com
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Texas Comptroller of Public Accounts STAR System
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July 5, 2018
Wayfair and the Ability of Texas to Require Remote Sellers
to Collect Sales and Use Taxes
South Dakota v. Wayfair, 585 U.S. (6/21/18)
Press Contact: Chris Bryan or Kevin Lyons at 512-463-4070
Legislative Contact: Nikki Cobb at 512-463-7252
Summary of the Decision
In a 5-4 decision, the U.S. Supreme Court overruled two prior decisions that held that a state can
only impose sales and use tax collection responsibilities on sellers of goods and services when
they have a physical presence in the state. See Quill Corp. v. North Dakota, 504 U.S. 298 (1992)
and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967).
The decision means that states—and local jurisdictions—can now impose tax collection
responsibilities on sellers who have an economic presence. For example, a state could decide that
out-of-state sellers have to collect and remit sales and use tax once they make total sales into the
state of $250,000 during the prior calendar year.
The Court remanded the case for further proceedings, which means the case is not final, and there
could be other litigation on the question of when a state or local jurisdiction can require remote
sellers to collect and remit sales and use taxes.
201807004L [Tax Type: Sales] [Document Type: Letter/Memo]
The Comptroller of Public Accounts maintains the STAR system as a public service. STAR provides access to a variety
of document types that may be useful in researching Texas tax law and tax policy. Documents which provide the
Comptroller's interpretation of the tax laws are accurate for the time periods and facts presented in the documents.
Letters on STAR can be the basis of a detrimental reliance claim only for the taxpayer to whom the letter was directly
issued. Documents on STAR that no longer represent current policy may be completely or partially superseded, but
there is no assurance that a document on STAR represents current policy even if it has not been marked as
superseded.
Tax laws are complex and subject to change. Interpretations of the laws may be affected by administrative hearings,
court opinions, attorney general opinions and similar authorities. STAR is a research tool, not a substitute for legal
advice. If there is a conflict between the law and the information found on STAR, any decisions will be based on the
law.
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The decision noted that prior Supreme Court cases impose two key limits on state authority
regarding the taxation of interstate commerce, which are still good law:
1. States may not discriminate against interstate commerce, which essentially means
states may not treat out-of-state sellers worse than in-state sellers; and
2. States may not impose undue burdens on interstate commerce, the meaning of
which is an open question as further explained below.
The Court also affirmed that states cannot impose collection responsibilities on sellers unless the
tax applies to an activity with a substantial nexus with the state, which means the seller “avails
itself of the substantial privilege of carrying on business” in that jurisdiction.” See Complete Auto
Transit, Inc. v. Brady, 430 U.S. 274 (1977) and Polar Tankers, Inc. v. City of Valdez, 557 U.S. 1
(2009). The court held that Wayfair, along with Overstock.com and Newegg, who also challenged
the South Dakota law at issue, had sufficient nexus with South Dakota based on their economic
and virtual contacts with the state.
The court noted that applying a tax retroactively could cause discrimination and undue burden on
interstate commerce, but it was not an issue for the court to resolve at this time.
In addition, Congress has authority under the Commerce Clause of the U.S. Constitution to
address these issues, which means Congress could choose to respond to the Wayfair decision by
passing laws to change the outcome.
The court did not determine exactly what constitutes an undue burden on interstate commerce, but
noted that the South Dakota law in question
“includes several features that appear designed to prevent discrimination against or undue burdens
upon interstate commerce” as follows:
1. A small seller exception. The law only applies to sellers that deliver more than
$100,000 of goods or services into South Dakota or engage in 200 or more separate
transactions for the delivery of goods and services into South Dakota annually;
2. The law is not retroactive; and
3. South Dakota is a member of the Streamlined Sales and Use Tax Agreement. (Texas
is not a member and could only become a member through legislative action.) The
agreement provides for, among other things, uniform definitions of certain products and
services, simplified tax rates and immunity from audit liability for sellers that utilize sales
tax administration software paid for by the state members.
What the Comptroller is Doing Now
We are proceeding carefully and deliberately to fully understand this historic decision, while
seeking input in order to implement the new law in a way that best serves the state of Texas, our
citizens and the businesses already operating here. We welcome input from all stakeholders,
including:
1. Legislators;
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2. Texas retailers;
3. Remote sellers and marketplace providers who are currently not collecting;
4. Local taxing jurisdictions;
5. Our Taxpayer and Business Advisory Groups; and
6. Trade associations and other affected parties.
We are reviewing agency rules that need amending to, for example, explain the amount of
economic nexus in sales and/or transactions required to create a safe harbor for small sellers. We
intend to adopt new rules under our current legal authority in early 2019, but this could change
depending on issues that arise during the rulemaking process.
We will not apply the new law retroactively to remote sellers that have no physical presence in
Texas; we want a smooth transition and a successful partnership with remote sellers who start
collecting and remitting Texas taxes. We will provide ample notice to remote sellers as to when
they need to start collecting and remitting.
Considerations for the Legislature
We are reviewing Texas statutes the Legislature may consider updating when it convenes in 2019.
We will continue to work with state legislators to ensure they are fully briefed on our progress.
With appropriate notice, and prior to legislative action, Tax Code § 151.107(a)(5) (Retailer
Engaged in Business in the State) could be imposed on remote sellers to the extent they “[solicit]
orders for taxable items by mail or through other media,” meaning, for example, sellers who
solicit sales in Texas through catalogs and emails.
We suggest the Legislature consider reviewing the following provisions, which could help address
the legal requirement that states not impose undue burdens on remote sellers:
1. Amend the definition of “seller” and “retailer” in Tax Code § 151.008 (“Seller” or
“Retailer”) to include marketplace platforms used by third-party sellers and provide
adequate liability protection for the marketplaces that collect and remit for those sellers.
2. Amend Tax Code § 151.059 (Fee Imposed in Lieu of Local Sales and Use Taxes),
which currently allows a nonresident (remote) seller to pay a fee based on a weighted
average local sales and use tax rate in lieu of collecting local sales and use tax based on
actual local tax rates. This statute currently only applies to a change in collection
responsibilities based on the passage of federal legislation, not to changes in federal law
based on a court case such as
Wayfair.
3. Amend Tax Code § 151.107(c), which is a companion provision to § 151.059. This
statute imposes a collection responsibility on sellers of only tangible personal property,
and not taxable services, if federal legislation passes.
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Fiscal Impact
We expect that state and local jurisdictions will see tax collections increase because of the Wayfair
decision, but the amount depends on several questions raised by the decision that are yet to be
resolved relating to, for example, eliminating undue burdens on remote sellers. More specific
estimates will be provided as the implementation and legislative process continues.
An estimate developed in 2014 projected that up to $840 million in state sales taxes in fiscal 2017
would be uncollected by remote sellers through all channels, including catalogs, emails and
phone. There have been significant changes in the online marketplace during the last four years.
As a result, the Wayfair decision does not mean the state will collect the amount estimated in
2014. More specifically, the prior estimate needs to be considered in light of the following factors:
1. In the past year, some remote sellers have volunteered to collect in anticipation of
the Wayfair decision or for other reasons. For example, some taxes are now being
collected due to the fall 2017 amnesty program sponsored by the Multistate Tax
Commission nexus program for third-party sellers using Amazon’s online marketplace.
2. Growth in internet sales in recent years has been concentrated among the largest
retailers, most of which already collect Texas sales and use taxes.
3. A portion of taxes on remote sales will never be collected because the sales will be
under the economic nexus threshold for small sellers, which is yet to be determined in
Texas.
4. There will always be some non-compliance by remote sellers, just like there is
continued non-compliance by some in-state sellers.
5. There will be some gain depending on the agency’s implementation of the new law
and related legislative action.
6. Wayfair is already collecting in Texas. Overstock.com has announced it will start
collecting in all jurisdictions across the country because of the Wayfair decision.
ACCESSION NUMBER: 201807004L
SUPERSEDED: N
DOCUMENT TYPE: L
DATE: 2018-07-05
TAX TYPE: SALES
3/21/2019 86(R) HB 2153 - Introduced version - Fiscal Note
https://capitol.texas.gov/Search/DocViewer.aspx?ID=86RHB021531F&QueryText=%22hb2153%22&DocType=F 1/2
LEGISLATIVE BUDGET BOARD
Austin, Texas
FISCAL NOTE, 86TH LEGISLATIVE REGULAR SESSION
March 12, 2019
TO:Honorable Dustin Burrows, Chair, House Committee on Ways & Means
FROM:John McGeady, Assistant Director Sarah Keyton, Assistant Director Legislative Budget Board
IN RE:HB2153 by Burrows (Relating to a single local use tax rate as an alternative to combined
local use tax rates for computing the amount of local use taxes remote sellers are required to
collect and to the allocation of tax revenue collected at that rate.), As Introduced
No fiscal implication to the State is anticipated.
The bill would amend Chapter 151, Tax Code to provide for a single local use tax rate in lieu of
combined local use tax rates applicable to sales of taxable items by certain remote sellers. Section 151.0595 would be added to provide that a remote seller required to collect and remit one or
more local use taxes shall compute the amount to collect and remit either by using the combined rate of
all applicable local use taxes or, at the remote seller's election, the single local use tax rate. "Remote seller" would be defined as a seller whose only activities in the state are described in Sections
151.107(a)(4) or (5): regular or systematic solicitation of sales of taxable items in the state by
distribution of catalogs, periodicals, advertising flyers, or other advertising, by means of print, radio, or
television media, or by mail, telegraphy, telephone, computer data base, cable, optic, microwave, or
other communication system for the purpose of effecting sales; or solicitation of orders for taxable
items by mail or through other media if the seller under federal law is subject to or permitted to be
made subject to the jurisdiction of this state for the purpose of sales tax collection. A remote seller who elects to use the single local use tax rate would be required to notify the
comptroller of the election before using the rate, and the rate would apply to all taxable sales of the
remote seller. The single local use tax rate effective in a calendar year would be the estimated average rate of local
sales and use taxes imposed during the preceding state fiscal year. That rate would be determined by
the comptroller by multiplication of the ratio of local sales tax remittances to state sales tax remittances
during the preceding fiscal year times the state sales tax rate, rounded to the nearest one-fourth of one
percent. A purchaser could annually apply to the comptroller for a refund of the excess when payment of tax
based on the single local use tax rate exceeds the amount of tax that would have been paid had tax been
3/21/2019 86(R) HB 2153 - Introduced version - Fiscal Note
https://capitol.texas.gov/Search/DocViewer.aspx?ID=86RHB021531F&QueryText=%22hb2153%22&DocType=F 2/2
paid based on the combined rate of otherwise applicable local taxes. A purchaser who pays tax to a remote seller at the single local use tax rate would not be liable for any
additional amount of local use tax that might otherwise be due had the remote seller not elected to use
the single local use tax rate. Distribution of local tax revenue remitted by remote sellers electing to use the single rate would be
made by the comptroller, on a monthly basis after applicable deductions, to eligible taxing units in the
same percentage shares as those taxing units receive of allocations of other local sales and use tax
revenues. The bill would provide that the comptroller adopt any rules necessary for implementation not later than
October 1, 2019, and would provide that the bill does not require a remote seller to collect local use
taxes on sales of taxable items made before October 1, 2019.
The bill would have no fiscal implications for the state.
The bill would take effect September 1, 2019.
Local Government Impact
Based on fiscal year 2018 data, the single local use tax rate computed as prescribed by the bill would
be 1.75 percent. While a rate of 1.75 is an average and the combined rate in any particular location will vary from that,
it does not necessarily follow that taxing units in areas where the combined local rate is at the current
two percent maximum will receive less revenue than if remote sellers were required to collect and
remit at applicable local combined rates. Because revenue remitted subject to the single rate would be
distributed to local taxing units in proportion to their allocations of local sales and use taxes remitted
by retailers not eligible to use the single rate, taxing units in areas where the prevailing combined local
rate is two percent will receive, other things equal, larger shares of the single rate remittances than
taxing units in areas with lower combined rates.
There would be no significant fiscal implications for local governments in the aggregate; there could
be some variance in distribution of revenue among jurisdictions compared with the distribution that
would occur were all remote sellers required to collect and remit tax at applicable local combined rates,
but the extent of such variance cannot be determined and would not be expected to be significant in
relation to the total allocations of local sales and use tax revenues.
Source Agencies:304 Comptroller of Public Accounts
LBB Staff:WP, KK, SD
3/21/2019 86(R) HB 1525 - Introduced version - Fiscal Note
https://capitol.texas.gov/Search/DocViewer.aspx?ID=86RHB015251F&QueryText=%22hb1525%22&DocType=F 1/3
LEGISLATIVE BUDGET BOARD
Austin, Texas
FISCAL NOTE, 86TH LEGISLATIVE REGULAR SESSION
March 12, 2019
TO:Honorable Dustin Burrows, Chair, House Committee on Ways & Means
FROM:John McGeady, Assistant Director Sarah Keyton, Assistant Director Legislative Budget Board
IN RE:HB1525 by Burrows (Relating to the administration and collection of sales and use taxes
applicable to sales involving marketplace providers.), As Introduced
Estimated Two-year Net Impact to General Revenue Related Funds for HB1525 , As Introduced: a
positive impact of $550,000,000 through the biennium ending August 31, 2021.
General Revenue-Related Funds, Five-Year Impact:
Fiscal Year Probable Net Positive/(Negative) Impact
to General Revenue Related Funds
2020 $242,500,000
2021 $307,500,000
2022 $315,200,000
2023 $323,100,000
2024 $331,100,000
All Funds, Five-Year Impact:
Fiscal Year
Probable Revenue
Gain from General Revenue Fund 1
Probable Revenue
Gain from Cities
Probable Revenue
Gain from Transit Authorities
Probable Revenue
Gain from Counties & Special
Districts
2020 $242,500,000 $40,000,000 $14,000,000 $8,000,000
2021 $307,500,000 $57,000,000 $20,000,000 $11,000,000
2022 $315,200,000 $58,000,000 $20,000,000 $12,000,000
2023 $323,100,000 $60,000,000 $21,000,000 $12,000,000
2024 $331,100,000 $61,000,000 $21,000,000 $12,000,000
Fiscal Analysis
The bill would amend Chapters 151, 321, and 323, Tax Code in relation to administration and
collection of sales and use taxes applicable to sales involving marketplace providers.
3/21/2019 86(R) HB 1525 - Introduced version - Fiscal Note
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The bill would amend Section 151.008(b) to include a marketplace provider as a person within the
meaning of "seller" and "retailer," and therefore subject to the provisions of Chapter 151 applicable to
sellers and retailers. The bill would add Section 151.0242 regarding marketplace providers and marketplace sellers. "Marketplace" would be defined as a physical or electronic medium, including a store, internet
website, software application, or catalog, through which persons other than the owner or operator of
the medium make sales of taxable items; "marketplace provider" would be defined as a person who
owns or operates a marketplace and directly or indirectly processes sales or payments for marketplace
sellers; and "marketplace seller" would be defined as a seller other than the marketplace provider who
makes a sale of a taxable item through a marketplace. A marketplace provider would be required to: 1) certify to each marketplace seller that the marketplace
provider assumes the rights and duties of a seller or retailer under Chapter 151 with respect to sales
made by the marketplace seller through the marketplace; 2) report under Subchapter I all sales made
through the marketplace; and 3) collect and remit the taxes imposed under the chapter on sales of
taxable items made through the marketplace. A marketplace seller would exclude sales made through a marketplace from the seller's report under
Subchapter I, retain records for all marketplace sales, and furnish information to a marketplace
provider that is required to correctly collect and remit sales and use tax, including certification that an
item being sold is a taxable item, not a taxable item, or is exempt from taxation. A marketplace provider would not be liable for failure to collect and remit the correct amount of tax if
good faith reliance on incorrect information provided by a marketplace seller were demonstrated, in
which case the marketplace seller would be liable for the deficiency. The comptroller would have rulemaking authority for implementation of the added section, including
authority by rule to except certain small marketplace providers from some or all of the requirements of
the section. The bill would also amend Sections 321.203 and 323.203, regarding municipal and county sales and
use taxes, to provide that a sale of a taxable item made by a marketplace seller through a marketplace is
consummated at the location in this state to which the item is shipped or delivered or at which
possession is taken by the purchaser. The bill would take effect September 1, 2019.
Methodology
The estimates are based on industry reports on internet retailing and confidential information provided
to the comptroller. The expected increases in tax collections are attributable to greater efficiency of tax
administration and convenience and avoidance of undue burdens for taxpayers when responsibility for
collection and remittance rests with marketplace providers rather than myriad individual sellers. The estimates for 2020 assume an implementation date of October 1, 2019 for purposes of efficient
3/21/2019 86(R) HB 1525 - Introduced version - Fiscal Note
https://capitol.texas.gov/Search/DocViewer.aspx?ID=86RHB015251F&QueryText=%22hb1525%22&DocType=F 3/3
coordination with changes in seller responsibilities, as adopted by rule with October 1, 2019 effect,
following the decision of the United States Supreme Court in South Dakota v. Wayfair, Inc.
Local Government Impact
There would be a corresponding gain of sales and use tax revenue to local taxing jurisdictions. The
estimated revenue gains are displayed in the above tables.
Source Agencies:304 Comptroller of Public Accounts
LBB Staff:WP, KK