If you're a business owner in the State of Texas, sales tax and audit issues are constantly presenting themselves. Recent news reports have been focusing on a sales tax dispute between the Texas Comptroller and Amazon.com. In addition, recent Texas sales tax legislation related to this dispute has been vetoed by the Governor, after passing in the state legislature. Let's take a closer look at what's happening.
The Texas Comptroller has been battling with Amazon.com over the failure to collect sales taxes on Internet sales to Texas residents and businesses. The Texas Comptroller has estimated that the State of Texas loses $600 million a year in sales tax on untaxed online sales. This dispute has found its way into the recently completed regular session of the Texas Legislature, whereby it passed House Bill 2403 requiring all internet sellers to collect Texas sales tax if sales were made to Texas residents and businesses. However, the Governor vetoed the Bill May 24th.
The dispute between Amazon.com and the State involves a very technical legal issue as to the definition of "doing business in Texas." Amazon.com's operations are divided into several different legal entities. The dispute is centered on the relationship between the Amazon.com legal entity making the Internet sales and the Amazon.com legal entity that operates a warehouse that ships items to Texas residents and businesses. The Amazon.com warehouse located in Texas is owned and operated by an affiliated legal entity separate from the Amazon.com entity that actually makes the Internet sales, which is located outside of Texas.
However, in all the reports and stories by the media on this dispute and the Governor's veto H.B. 2403, a key requirement in the existing Texas sales tax law was never mentioned, as most people do not know or understand the existing law. Current law requires every Texas resident and business to report and pay a use tax on taxable items or services purchased tax free from any seller located in-state or out of state. The existing law also subjects every Texas resident and business to audit by the Texas Comptroller.
Texas businesses that hold a Texas sales tax license already file periodic returns to report sales information and sales tax collected. These returns contain a space for reporting use tax on "Taxable Purchases." Non-Permitted Texas residents or businesses are also required to report and pay use tax. The non-permitted reporting requirements are as follows:
- When tax owed is less than $1,000 during a calendar year, non-permitted purchasers must file form 01-156, Occasional Sales and Use Tax Return, on or before the 20th of January following the year in which the purchases were made.
- When tax owed is $1,000 or more during a calendar year, purchaser must file a return and remit taxes due on or before the 20th of the month following the month when the $1,000 threshold is reached and thereafter file monthly returns with payment.
In summary, the State of Texas has always had the ability to tax purchases from out of state retailers, but compliance is voluntary for non-permitted Texas residents and businesses. What the State of Texas actually lacks is an economical means to enforce voluntary compliance by Texas non-permitted residents and businesses. The Comptroller would rather have a limited number of licensed sellers collect the sales tax on the front-end of transactions, instead of depending on voluntary compliance by thousands of non-permitted purchasers on the back end of transactions. Texas lacks the manpower to enforce compliance by non-permitted residents and businesses. In states that have a sales and a personal income tax, the income tax return contains a space to report use tax on taxable purchases since all residents and businesses must file an income tax return.
In reality, a non-permitted Texas individual has a very small risk of being audited by the Comptroller for failure to report and pay use tax on Internet purchases. The risk of audit is slightly higher for a non-permitted business located in Texas. However, the risk of audit for a non-permitted individual or business does increase significantly when certain high dollar purchases are involved. For example, the Texas Comptroller has several audit programs that focus on the purchase of yachts or aircraft, which must be registered with federal agencies, or items that must be imported through U.S. Customs or declared to U.S. Customs when traveling.
Common Retailer Local Sales and Use Tax Audit Errors
The collection of local sales tax is very complicated under Texas law. In most cases, the local sales tax rate charged by a retailer is based on the location of the retailer's sales outlet and the combined local sales tax rate cannot exceed 2%. In addition, when a retailer's local sales tax rate is less than the 2% maximum, a retailer may also be responsible for the collection of local use tax at the point of delivery when the retailer delivers taxable goods or performs a taxable service in a local taxing jurisdiction of a different type from retailer's outlet location. If a retailer's outlet location is in a 2% local taxing location, the retailer will not be responsible for collecting any local tax for other jurisdictions at the point of delivery.
As for contractors who construct new improvements to real property and remodel, repair or restore existing improvements to real property, the general rule noted above will apply to the sale of materials where no installation is involved. When a contractor is selling materials under a separate contract which includes installation or performs a taxable remodeling, repair or restoration service to an existing improvement to real property, the job site becomes the contractor's retail outlet location.
Local sales and use tax audit errors include the following:
- Retailer establishes a retail outlet at a location with a local tax rate less than the 2% maximum allowed by law. A local special purpose district is established at a later date to raise revenues for crime control or emergency services and a new tax is imposed increasing the combined rate. The retailer continues to collect and report sales tax at the old lower combined rate.
- Retailer establishes a retail outlet at a location where the local sales tax rate is less than the 2% maximum allowed by law. The retailer, using its own vehicles, delivers goods to or performs services at a customer's location within a local taxing jurisdiction of a type different from the retailer's outlet location. The retailer is required to collect use tax for each local tax jurisdiction based on the customer's delivery location as long as the combined local tax rate on the transaction does not exceed 2%.
- Contractor's office/warehouse is in an area with no local taxes. Contractor is working under a lump sum contract to construct a new improvement to real property. The contractor's job site is in a local tax jurisdiction. Contractor purchases materials from a retailer with a retail outlet outside a local taxing jurisdiction. The contractor picks up the material at the retailer's outlet or the retailer ships the materials to the job site by common carrier. The contractor is responsible for reporting and paying local use tax directly to the Comptroller on the materials.
- Contractor's office/warehouse is location in an area with only a ½% county sales tax. Contractor has a commercial property remodeling contract and the job site is located within a local taxing jurisdiction with a maximum local tax of 2%. Contractor billed the owner of the real property combine sales tax of 6.75% on the total cost of the job based on the contractor's office/warehouse location instead of the combined rate of 8.25% based on the jobsite location. The contractor would be held liable for the additional tax.
In Examples 1, 2 and 4, Texas law holds that the retailer and contractor are responsible for the collection of the tax unless the buyer issues a sales tax exemption certificate eliminating all taxes on the transaction. If additional local tax is owed and the retailer's business is the type where customers are issued invoices, the retailer has the right to collect the additional sales tax from each customer. However, if the retailer's business is the type where customer information is maintained, the retailer will be unable to recover the additional tax from the customers. A retailer is not allowed by law to recover penalty and interest fee for failure to collect from customers.
In Example 3, the retailer had no responsibility to collect the additional local tax based on the contractor's job site since the retailer did not deliver the materials to the job site with a company owned vehicle.
EEPB would like to remind our Clients we have a multi-state excise and sales tax practice available to assist with your transaction tax issues. The practice is managed by Carl Kluge, who joined the firm after working as an auditor for the Texas Comptroller of Public Accounts and who managed the state and local excise tax compliance function for a Fortune 100 company. Carl has the expertise to address excise tax issues in all 50 states and turn – what most businesses feel is strictly a compliance function – into a cost reduction or tax saving opportunity. For details, visit www. http://www.eepb.com/services/sales-tax. You can also contact Carl at 713-622-0016, ext. 381 or at