Texas legislation implements Wayfair changes


Kevin Herzberg
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David Rohlmeier
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Pat McCown
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Robbie Blacketer
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Tam Vo
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Texas recently has enacted significant sales tax legislation implementing economic nexus provisions in the wake of South Dakota v. Wayfair, Inc.,1 including marketplace provider legislation2 and a single local use tax rate as an option for remote sellers.3 In addition to the Wayfair legislation, Texas is adopting changes to its sale for resale policy4 and the scope of the audio-visual production equipment exemption.5 Legislation also has been enacted to extend the Texas Property Tax Redevelopment and Tax Abatement Act for 10 years until Sept. 1, 2029, and increase local government transparency.6 Finally, Texas is adopting unclaimed property provisions designed to enhance the Texas Comptroller’s powers to enforce compliance.7

Sales tax provisions In response to the U.S. Supreme Court’s decision in Wayfair, in lieu of legislation, the Comptroller amended a rule detailing a seller’s and purchaser’s responsibilities to include permit and collection requirements for remote sellers included in the statute that were deemed unconstitutional prior to the substantial nexus analysis of the Court.8 The amendment established a safe harbor for remote sellers, who have less than $500,000 in total Texas revenue for the preceding 12 months, in January 2019. Enforcement of that standard will now begin on Oct. 1, 2019. While the Comptroller’s rule was not supplemented through separate legislation, legislative action was required to extend permit and collection requirements to marketplace providers and simplify the reporting process.

Marketplace Providers On May 24, 2019, Gov. Greg Abbott signed legislation, effective Oct. 1, 2019, relating to the administration and collection of sales and use taxes applicable to sales involving marketplace providers. The legislation amends the statute to include marketplace providers in the definition of “seller” and “retailer,”9 added a marketplace provider section10 to the statute, as well as amended the local tax sections to add language confirming that sales made by marketplace providers are consummated at the location where the item is shipped, delivered or possession is taken by the purchaser.11

The marketplace provider statute defines the terms “marketplace,” “marketplace provider,” and “marketplace seller.” A “marketplace” is a physical or electronic medium including a store, Internet website, software application or a catalog used by persons other than the owner of the medium.12 A “marketplace provider” is a person who owns or operates a marketplace and directly or indirectly processes sales or payments for marketplace sellers.13 A “marketplace seller” is a seller, other than the marketplace provider, who makes a sale of a taxable item through a marketplace.14

The statute also establishes that “marketplace providers” have the rights and duties of a seller for sales made through the marketplace15 and must certify to each marketplace seller that they assume those rights and duties, by collecting and remitting sales and use tax on all sales made through the marketplace.16 This certification accepted in good faith by a marketplace seller allows these sellers to exclude sales made through the marketplace from the seller’s report.17 However, the marketplace seller is required to retain all records for sales and provide to the marketplace provider information required to correctly collect and remit sales and use tax. This information may include a certification as to the taxability, non-taxability or exemption from tax.18 If the marketplace provider relies in good faith on the information and can prove this reliance resulted in failure to collect and remit the tax, the marketplace seller is then held liable for the deficiency,19 unless the marketplace seller and provider are affiliates or associates, in which case both are liable for the deficiency.20 This section also provides for the protection of marketplace providers from class action lawsuits.21 Lastly, the new section allows the Comptroller to adopt rules and forms to implement the section as well as exempt certain marketplace providers from some or all of the requirements.22

Single local use tax rate On May 17, 2019, Gov. Abbott signed legislation designed to provide remote sellers an optional, simplified means of computing local use tax.23 The legislation lessens the compliance burden for remote sellers by allowing an election under a newly enacted section of the Texas Tax Code to use a single rate calculated and published by the Comptroller in the Texas Register.24 The remote seller will have to notify the Comptroller in the form and manner established.25 The single rate will be an estimated average local tax rate computed by the Comptroller using the total local sales tax collections divided by the state tax collections multiplied by 6.25% and rounded to the nearest 0.25%.26 Remote sellers are not required to begin collection of this rate until Oct. 1, 2019.27 The rate from Oct. 1, 2019, to Dec. 31, 2019, is 1.75%.28 Purchasers whose payment of the combined rate exceeds the local rate for their jurisdiction can annually apply for a refund of the amount in excess of their local rate, and the Comptroller may adopt rules regarding the procedure and proof required for the refund.29 However, a purchaser located in a jurisdiction with a rate greater than the single rate elected to be used by the remote seller is not liable for any additional local use tax.30

Sales for resale On June 10, 2019, Gov. Abbott signed immediately effective legislation that amends several sections of the tax code to clarify existing law with respect to the application of sales and use tax to certain property and services.31 The intent of the legislation, which was supported by the Comptroller, is to limit the sale for resale exemption to sellers of taxable items. A change was made to the statute effective Oct. 1, 2011, in response to several court cases involving the sale for resale exemption. However, that change did not result in the Comptroller’s intention that items purchased for resale must be sold as a transaction subject to sales tax. The following changes codify the Comptroller’s intentions.

First, the legislation amends the sale for resale statute by adding a subsection and language to remove services provided through coin-operated machines operated by the consumer from the definition of “amusement service”32 and “personal services.”33 It also repeals Tex. Tax. Code Sec. 151.335 that exempts amusement and personal services provided through coin-operated machines operated by the consumer.34 These services will remain non-taxable as an exclusion from the definition of a taxable item, rather than as an exemption. This will end the resale exemption afforded in Roark Amusement by the Texas Supreme Court.35 Operators of amusement services sold through coin-operated machines will no longer be able to purchase “prizes” for resale because the service provided by the machine is not subject to sales tax, but excluded from the definition of a taxable item.

The legislation redefines “sale for resale” in Tex. Tax. Code Sec. 151.006 by:

  • Limiting the definition to tangible personal property or taxable service resold as a taxable item instead of resold with or as a taxable item.36
  • Clarifying that a sale for resale is available for items and services transferred to non-profit entities defined in Tex. Tax. Code Sec. 151.310, as well as governmental entities, by adding services and replacing “federal government” in the statute.37 A sale for resale is not limited to tangible personal property or to contracts with the federal government only.
  • Clarifying that a sale for resale is only available for service providers providing taxable services listed in Tex. Tax. Code Sec. 151.0101 except for contracts with certain governmental entities.38
  • Excluding oil well service providers subject to Chapter 191 of the Texas Tax Code from purchasing items used, consumed, expended in or incorporated into an oil gas well in the performance of the service from sale for resale by adding a subsection to the statute.39

Finally, the legislation amends the statute to clarify that the exemption of certain environment and conservation services only applies to the labor and not the materials furnished. The labor and materials must be separately stated.40 It also provides an exception for lump-sum charges for labor and materials provided to a health care facility defined in Section 108.002 of the Texas Health and Safety Code or an oncology center allowing 65% of the lump sum charge as exempt.41

Audio/visual production equipment exemption On May 31, 2019, Gov. Abbott signed immediately effective legislation to clarify that the exemption afforded audio/visual production equipment is limited to equipment used to create master recordings that will be transferred for consideration.42 This is accomplished by amending the statute to include the phrase “for consideration” and defining master recording as the principal media by which copies are commercially made available.43

Property tax abatement On June 14, 2019, Gov. Abbott signed legislation, effective on Sept. 1, 2019, to extend the Texas Property Tax Redevelopment and Tax Abatement Act for 10 years to expire Sept. 1, 2029, and increase local government transparency.44 Under existing law, municipalities or commissioners courts may enter into tax abatement agreements with property owners in designated reinvestment zone areas.45 The abatement agreements allow property owners to receive relief on a portion of their property tax liability for up to 10 years.46

The legislation creates new public notice provisions, requiring taxing units to hold a public hearing before adopting, amending, repealing, or reauthorizing tax abatement guidelines and criteria. The criteria and guidelines must then be displayed on the taxing units’ websites.47 Additionally, any tax unit considering approving a tax abatement agreement must give the public 30 days’ notice of the meeting and provide:

  • The name of the property owner and the name of the applicant for the agreement;
  • The name and location of the reinvestment zone where the property subject to the agreement is located;
  • A general description of the nature of the improvements or repairs included in the agreement; and
  • The estimated cost of the improvements or repairs.48

Lastly, for three years after the expiration of an abatement agreement, the chief appraiser must report to the Texas Comptroller the appraised value of the property subject to abatement.49

Unclaimed property On June 10, 2019, Gov. Abbott signed immediately effective legislation relating to certain unclaimed property provisions designed to strengthen the Comptroller’s enforcement authority.50 The bill amends the property code by:

  • Removing the requirement that the existence of the property owner is unknown to presume abandonment of personal property (retaining the requirement that the location of the property owner is unknown);51
  • Clarifying that the unclaimed property statute applies to the property itself, rather than to the holder of personal property, property held by financial institutions and Texas minerals that is presumed abandoned;52
  • Requiring records to be kept for 10 years from the later of the date reportable or the date the report is filed;53 and
  • Authorizing the Comptroller or Attorney General to examine the records of any person to determine compliance.54

The legislation also adds new sections to the Texas Property Code:

  • Requiring permanent combined reporting for members of a combined group;55
  • Generally setting the statute of limitations to seven years for examinations begun on or after June 10, 2019, unless a false or fraudulent report has been filed, no report has been filed, or a court grants a petition to compel action from a person regarding unclaimed property;56 and
  • Granting the Comptroller the power to issue administrative subpoenas and the Attorney General the authority to enforce subpoenas.57

Commentary While most states have taken the legislative route to endorse Wayfair implementation from the perspective of subjecting remote sellers to sales tax collection and remittance responsibilities, the Comptroller moved forward on remote sellers via regulatory fiat earlier this year. The legislature’s additional step to require marketplace providers to collect tax on the sales of the third-party seller will add an estimated $550,000 of additional revenue to the State’s general fund in the biennium (a small amount in part because the effective date for this provision is not until Oct. 1, 2019). The Comptroller relied on Internet retailer industry reports and confidential information to arrive at the estimate. Adding in the factors of efficiency in administering and enforcing compliance to a limited number of marketplace providers versus numerous individual sellers contributed to the value of the estimate. The marketplace provider collection and reporting requirements is a way to capture the sales lost to the safe harbor provided to small remote sellers and ease the burden of compliance.

The Comptroller could possibly provide a safe harbor for marketplace providers as well, with the authority to exempt certain marketplace providers from some or all of the requirements as granted in Tex. Tax Code Sec. 151.0242(k). The implementation of the single local tax rate did not have a state treasury fiscal impact, but simplifies the reporting of local taxes for remote sellers. It appears the Comptroller is intent on crafting laws relating to remote sellers to minimize the burden on interstate commerce and possibly minimize litigation.

By amending the statute to clarify existing law that supports the agency’s policy of sales for resale, the Comptroller is finally able to rely on enacted legislation that clearly supports the disallowance of the sale for resale exemption for hotel consumables and consumables used by oil well service providers such as sand and proppant. Because the sales transactions to the consumer are not subject to sales tax, the consumables cannot be purchased for resale. Amusement service providers are required to pay tax on purchases of redemption prizes effective immediately.

The enacted provisions to the property code strengthening the Comptroller’s enforcement authority and increasing the statute of limitations appear to support an increase in audit activity for unclaimed property holders going forward.

1 138 S. Ct. 2080 (2018). For a discussion of this case, see GT SALT Alert: Wayfair Ruling Overturns Quill Physical Presence Requirement.
2 H.B. 1525, Laws 2019, enacted May 24, 2019.
3 H.B. 2153, Laws 2019, enacted May 17, 2019.
4 S.B. 1525, Laws 2019, enacted June 10, 2019.
5 H.B. 3086, Laws 2019, enacted May 31, 2019.
6 H.B. 3143, Laws 2019, enacted June 14, 2019.
7 H.B. 3598, Laws 2019, enacted June 10, 2019.
8 34 TEX. ADMIN. CODE § 3.286.
9 TEX. TAX CODE ANN. § 151.008(b)(7).
10 TEX. TAX CODE ANN. § 151.0242.
11 TEX. TAX CODE ANN. §§ 321.203; 323.203(e-1).
12 TEX. TAX CODE ANN. § 151.0242(a)(1).
13 TEX. TAX CODE ANN. § 151.0242(a)(2).
14 TEX. TAX CODE ANN. § 151.0242(a)(3).
15 TEX. TAX CODE ANN. § 151.0242(b).
16 TEX. TAX CODE ANN. § 151.0242(c)(1)-(3). Note that the Comptroller recently clarified how a marketplace provider should certify that it will collect and remit tax for third-party sellers. No special form or language is required to notify marketplace sellers that the provider is collecting and remitting tax. The notification can be part of the agreement between the marketplace seller and provider. The provider is not required to issue a separate document to all sellers. Frequently Asked Questions, Texas Tax Responsibilities and Resources for Sellers After Wayfair, Texas Comptroller of Public Accounts, July 2019.
17 TEX. TAX CODE ANN. § 151.0242(d).
18 TEX. TAX CODE ANN. § 151.0242(e), (f).
19 TEX. TAX CODE ANN. § 151.0242(g).
20 TEX. TAX CODE ANN. § 151.0242(h).
21 TEX. TAX CODE ANN. § 151.0242(j).
22 TEX. TAX CODE ANN. § 151.0242(k).
23 H.B. 2153, Laws 2019.
24 TEX. TAX CODE ANN. § 151.0595.
25 TEX. TAX CODE ANN. § 151.0595(b)(1), (c).
26 TEX. TAX CODE ANN. § 151.0595(e)(1)-(3).
27 H.B. 2153, § 6(a).
28 H.B. 2153, § 6(b).
29 TEX. TAX CODE ANN. § 151.0595(f).
30 TEX. TAX CODE ANN. § 151.0595(g).
31 S.B. 1525, § 6.
32 TEX. TAX CODE ANN. § 151.0028(c).
33 TEX. TAX CODE ANN. § 151.0045.
34 S.B. 1525, § 5.
35 Combs v. Roark Amusement & Vending, L.P., 422 S.W.3d 632 (Tex. 2013).
36 TEX. TAX CODE ANN. § 151.006(a)(1).
37 TEX. TAX CODE ANN. § 151.006(a)(5).
38 TEX. TAX CODE ANN. § 151.006(c).
39 TEX. TAX CODE ANN. § 151.006(e).
40 TEX. TAX CODE ANN. § 151.338(a)(1), (2), (b).
41 TEX. TAX CODE ANN. § 151.338(c)(1), (2).
42 H.B. 3086, Laws 2019.
43 TEX. TAX CODE ANN. § 151.3185(a)(1)(A), (a)(2)(A), (h).
44 H.B. 3143, amending TEX. TAX CODE ANN. § 312.006.
45 See TEX. TAX CODE ANN. § 312.202 (defining reinvestment zone).
46 TEX. TAX CODE ANN. §§ 312.204(a); 312.206(a).
47 TEX. TAX CODE ANN. § 312.002(c-1), (c-2).
48 TEX. TAX CODE ANN. §312.207(c)-(d).
49 Id.
50 H.B. 3598, Laws 2019.
51 TEX. PROP. CODE ANN. § 72.101(a)(1).
52 TEX. PROP. CODE ANN. § 74.001(a).
53 TEX. PROP. CODE ANN. § 74.103(b)(1), (2).
54 TEX. PROP. CODE ANN. § 74.702(a).
55 TEX. PROP. CODE ANN. §§ 74.105; 74.106.
56 TEX. PROP. CODE ANN. § 74.7021; H.B. 3598, § 14.
57 TEX. PROP. CODE ANN. §§ 74.711; 74.712.

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