Taxing online purchases - Texas

I do quite a bit of shopping online, and one of the stores I often purchase from sells digital content/software (no phsyical product).  Last year, they began charging tax on my purchases after years of not doing so.  They claim that because I live in Texas, the state of Texas is now forcing them to collect sales tax.  They say that the state claims they have a physical prescence in the state, though they are located in Utah and have no office in Texas.

I'm just curoius if this is even correct and what part of the tax code in Texas governs online purchases.  I buy digital content from other online stores that do not charge sales tax.  This particular store will not provide the actual law/code that is forcing them to do this.  Their response to inquiries is always "Well, we just have to."

I just want to know what the facts are concerning online purchases in Texas

dcr000:

I just want to know what the facts are concerning online purchases in Texas

Visit the follwoing website and read all about it:

http://www.window.state.tx.us/taxinfo/sales/faq_use.html

Thanks for the quick reply...I appreciate it.

Even if it's not actually mandatory, an online company can voluntarily collect sales tax and remit it to the state where its customers are located.

Oh, yeah, thay have no obligation to justify it to you.

The link that DPH provided doesn't provide the entire picture here, so let me fill in what's missing. Texas imposes a sales tax on the sale of a "taxable item." Texas Tax Code (TC) section 151.051. The rate of tax is 6.25% of the sales price. Id. A "taxable item" means "tangible personal property and taxable services.  Except as otherwise provided by this chapter, the sale or use of a taxable item in electronic form instead of on physical media does not alter the item's tax status." TC § 151.010. "Tangible personal property" means "personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any other manner, and, for the purposes of this chapter, the term includes a computer program and a telephone prepaid calling card." TC § 151.009.

Therefore, putting all those provisions together, a DVD of a movie that you buy at the a store in Texas is subject to the Texas sales tax because a DVD is tangible personal property (i.e. it can be seen, touched, felt, etc). If you downloaded the same movie over the internet from a Texas retailer, that too is subject to sales tax even though it cannot be "seen, weighed, measured, felt or touched" because the Texas statute says that sales of an item in digital form rather than on physical media (the DVD) does not alter its tax status, making it taxable just like the physical product. Similarly, a computer program constitutes tangible personal property no matter the form in which you buy it (i.e. whether you buy it on a CD-Rom or download it). So, Texas sellers must collect sales tax on those digital products that you buy from them.

So, why don't out-of-state sellers that sell to Texas residents have to collect the sales tax? The reason is that the U.S. Supreme Court held that under the federal Constitution the states lack the power to compel an out-of-state seller to collect sales tax unless it has a physical presence in the state. Quill Corp. v. North Dakota, 504 U.S. 298 (1992). The court said that Congress could change that rule by legislation, but so far the Congress has declined to do that. The rule from the Quill case is why the company mentioned to you that it was forced to collect the tax in Texas—Texas evidently found the seller had some kind of physical presence in the state, which then allows the state to compel the seller to collect the sales tax.

But that's not the end of it. Every state that has a sales tax also has what is called a use tax. In Texas, you'll find the use tax imposed in TC § 151.101. Part of the purpose of the use tax is to prevent residents from avoiding the sales tax by buying taxable goods from out-of-state sellers who don't collect the sales tax. That's important for two reasons. First, it helps preserve the state's revenue. And second, it helps to ensure that residents don't end up sending business out of state just to avoid the sales tax. The use tax is imposed directly on the buyer. It is imposed on the the purchase of the same goods and services as the sales tax, and at the same rate. Thus, when you buy a taxable item from some out-of-state mail order seller that doesn't collect sales tax on it, you are supposed to file a use tax return and pay the use tax on the item. Most individuals are not even aware that their state has a use tax, and states have had trouble enforcing the use tax because they lack information on the out-of-state purchases of their residents. In this computer age, however, states are increasingly able to get that information and enforcement is improving. The link that DPH provided discusses briefly the use tax.

So, while you probably didn't know it, you were required to pay a use tax on the digital content/software that you've been buying from vendors who haven't collected the sales & use tax on the sale. Therefore, whether the vendor collects the tax for the state or whether you pay it as a use tax, you are liable to pay it either way.

Thanks for that clarification. 

I was curious as to whether digital items were treated the same as physical items.  Others in the same situation as I am with regard to this particular store have speculated that the "physical presence" is our own computers, since the store has stated they have no branches/offices in the state.  Since we're downloading a piece of software, Texas is couting our computers as a storage facility for this company, giving them a very large physical presence.

Personally, I think that's reaching a bit on the part of the state of Texas.

dcr000:

Others in the same situation as I am with regard to this particular store have speculated that the "physical presence" is our own computers, since the store has stated they have no branches/offices in the state.  Since we're downloading a piece of software, Texas is couting our computers as a storage facility for this company, giving them a very large physical presence.

What is your relationship to the store such that Texas might claim that your computer gives the store a physical presence in the state? Are you employees or agents of the store? Does the store own the computers?

Note that simply owning any property in the state is enough to create a physical presence—a store or office in the state is not required. Thus, if the store owned a parcel of land in the state that it held for investment or owned servers located in the state, or owned any other property in the state, that's enough to create a physical presence in the state. Likewise, having employee or agents of the store working in the state would be enough, even if the work is being done from the employees' or agent's home. But simply having customers in the state is not sufficient to give a physical presence in the state. 

In any event, the state has determined that the store is liable to collect the tax and until such time as the store gets a court to rule otherwise, the store will have to follow the state's determination.

I'm not sure about one detail--if the firm has NO presence at all in TX then the firm is probably not subject  to any opinions of a TX department of revenue about sales taxes --should it chose to ignore the point.

That said--if the  firm has but one toenail of anything in TX it is probably subject to TX sales tax on everything sent to TX --and the firm may have other practical reasons to be a good corporate citizen as to relationship with TX.

And I'm sure taxagent is right that somewhere there is a TX use tax equivalent to the sales tax wherein you are supposed to pay TX for stuff you purchased outside of TX and brought into TX for use --and I gather some places tax authorities  actually run about physically scouting for things like cars and boats and airplanes and RV's that owners just happened to forget to report... Like it or not, you have a duty to pay the tax, be it via right hand or left hand.

I'm not sure I buy the point that if I am elsewhere and sell you software and you download it to a computer located in TX that I have a business presence in TX and I am subject to collect and pay TX tax --but its probably a moot point as you are subject to an equivalent tax and TX can  beat you to a pulp to pay up.

That said --a combination of tax and operating cost issues might lead one to consider moving certain operations out of one state and to elsewhere --but that's not the issue up pose

And I suppose in some software deals one does not actually own the product outright but has a license to use it  so in that context the vendor may own something in TX --and the vendor may chose not to debate it with TX authorities.

If everybody is running out of tax monies, tax folks are going to look under more and more rocks.

I don't live in Texas, but do live in California. The subject of collecting sales tax on internet purchases from out-of-state merchants has been in the news here, too.

Many online merchants offer their products through "affiliates". I was an affiliate for a large online merchant of books and other items. I put ads for their products on my website, then if someone clicked on that ad and bought the product, I got a small commission. That merchant is located in Washington State, but had no physical presence in California. The State passed a law requiring online merchants to collect California sales tax even if their only physical presence in California was a network of independent affiliates.

The large online merchant reacted by (1) cancelling all their affiiliate accounts, creating severe economic hardship for many small businesses and (2) sponsoring a ballot proposition to nullify the requirement that out-of-state online merchants collect California sales tax.

The Governor responded with a compromise, which has now passed, that the online merchant start collecting sales tax in late 2012, in return for various consessions.

http://www.latimes.com/business/la-fi-amazon-sales-tax-20110924,0,83960.story

What does this have to do with Texas? The brick-and-mortar stores in California lobbied hard for the internet sales tax bill, saying that out-of-state online merchants had a 9% price advantage over in-state merchants. In-state merchants represent hundreds of thousands of jobs, and have very deep pockets to promote what is, essentially, fairness in pricing. As Taxagent accurately pointed out, the customer is liable for a "use tax" on goods purchased from out of state, so this does not represent any new tax, but rather enforcement of an existing tax.

In the past, online merchants claimed that they could not "keep track of" hundreds of different local sales taxes for all their customers. This is obviously pure baloney, since they have databases sophisticated enough to suggest books and other merchandise to you based on your past browsing and buying history. If they can do that, they can set up a database of zip codes and sales tax rates.

As a database administrator, I can set something like that up for my own small business. Giant retailers should be able to do the same.

CuriousInCa:

I don't live in Texas, but do live in California. The subject of collecting sales tax on internet purchases from out-of-state merchants has been in the news here, too.

Many online merchants offer their products through "affiliates". I was an affiliate for a large online merchant of books and other items. I put ads for their products on my website, then if someone clicked on that ad and bought the product, I got a small commission. That merchant is located in Washington State, but had no physical presence in California. The State passed a law requiring online merchants to collect California sales tax even if their only physical presence in California was a network of independent affiliates.

The large online merchant reacted by (1) cancelling all their affiiliate accounts, creating severe economic hardship for many small businesses and (2) sponsoring a ballot proposition to nullify the requirement that out-of-state online merchants collect California sales tax.

The Governor responded with a compromise, which has now passed, that the online merchant start collecting sales tax in late 2012, in return for various consessions.

http://www.latimes.com/business/la-fi-amazon-sales-tax-20110924,0,83960.story

What does this have to do with Texas? The brick-and-mortar stores in California lobbied hard for the internet sales tax bill, saying that out-of-state online merchants had a 9% price advantage over in-state merchants. In-state merchants represent hundreds of thousands of jobs, and have very deep pockets to promote what is, essentially, fairness in pricing. As Taxagent accurately pointed out, the customer is liable for a "use tax" on goods purchased from out of state, so this does not represent any new tax, but rather enforcement of an existing tax.

In the past, online merchants claimed that they could not "keep track of" hundreds of different local sales taxes for all their customers. This is obviously pure baloney, since they have databases sophisticated enough to suggest books and other merchandise to you based on your past browsing and buying history. If they can do that, they can set up a database of zip codes and sales tax rates.

As a database administrator, I can set something like that up for my own small business. Giant retailers should be able to do the same.

 

You know, this particular store does have an affiliate program and I'm sure that there are some in Texas.  That must be the "physical presence" Texas is claiming they have since they have no offices or real employees in this state.  I never even considered that the affiliate program could be what they're using to force this store to collect sales tax.

I bet that's what started this.

CuriousInCa:

In the past, online merchants claimed that they could not "keep track of" hundreds of different local sales taxes for all their customers. This is obviously pure baloney, since they have databases sophisticated enough to suggest books and other merchandise to you based on your past browsing and buying history. If they can do that, they can set up a database of zip codes and sales tax rates.

It's more complicated than that, unfortunately. I did my law thesis on sales tax and internet sales. There are over 7200 different sales tax jurisdictions in the U.S. It is not just the rates that differ, but what products and services are subject to the tax, as well as the procedures for filing, paying and remitting the tax. This would a huge administrative burden to internet sellers if they had to collect the tax nationwide, as they have to potentially be able to collect sales tax in any place. Even if they make just one sale a year in Podunk, they'll have to know exactly which products are taxable in Podunk, which may different than any of the other 7200 jurisdictions, then they have to collect, remit and file a separate return for just that one sale if it's taxable. And worse yet, tax law changes all the time, so they'd have to keep up with tax laws constantly in 7200 jurisdictions. If the item was a small cost item, the administrative cost of that in Podunk would wipe out any profit on the sale. For really large sellers like Amazon, that cost could be fairly readily borne, but for many smaller sellers, that burden of having to be prepared to deal with any of the various 7200 jurisdictions would be overwhelming. Remember, a lot of internet sellers are not very big companies and don't have huge corporate tax staffs to do this stuff.

But the playing field should be leveled so that in state brick and morter firms are not at a disadvantage against out of state mail order sellers just because of sales tax. Ideally, the decision where to buy should not be influenced by the sales tax. As the Supreme Court noted in Quill, Congress can fix this by passing legislation authorizing states to impose the requirement for all sellers to collect sales tax on sales to their state. But Congress won't do that until the nightmare of the 7200 jurisidictions and thousands of differing rules is dealt with. That's where the Streamlined Sales Tax initiative sponsored by some states comes in. This project would essentially have the participating states pass uniform sales tax laws so that the rules are the same in each state (e.g. what items are taxed, etc) except that each state could set its own rates, and would use one tax form for all of them with a central clearinghouse that would process the returns and distribute the tax funds. This would vastly simplify what mail order sellers would have to deal with, making it much more attractive to them than the current system. The hope is that Congress would then authorize states that are members of the streamlined project to impose the requirement to collect the tax on all mail order sellers to their state. I believe that done correctly, it could be a very good solution to the problem. I doubt, however, that Congress would authorize any such act while the current anti-tax Tea Party folks have such sway over the Republican majority in Congress as they do currently.

Taxagent, thanks again for your concise and accurate summary and clarification.

Naturally, I am concerned only with California sales taxes.

I agree that a streamlined means of collecting and distributing sales tax would be an enormous step forward, and agree with what you said about the Tea Party folks. It is important to remember this is NOT A NEW TAX.

It is a tax that people are already obliged to pay, usually through the often-ignored use tax.

"You know, this particular store does have an affiliate program and I'm sure that there are some in Texas. That must be the "physical presence" Texas is claiming they have since they have no offices or real employees in this state. I never even considered that the affiliate program could be what they're using to force this store to collect sales tax."

Yes, I'd like to bet that is correct.

Many states are leveraging affiliate programs as a definition of physical presence in a state. On-line merchants react by cancelling all affliate accounts in that state, which just hurts everyone. The customers lose by not having custom-tailored websites that fit their interests with corresponding products, the online merchant loses the sales, the local brick-and-mortar stores lose because many are also affliates and/or get sales from people who see something online and come in to buy it quickly, and the tax revenue people lose because there is virtually no way to track use tax sales receipts.

Taxagent,

"This would a huge administrative burden to internet sellers if they had to collect the tax nationwide, as they have to potentially be able to collect sales tax in any place."

It seems to me that many smaller merchants engage online payment services to collect their payments. For example, I just bought some software for my business and the software company redirected me to a payment service.

Wouldn't it be practical for the large payment services to manage the sales tax info for their small and medium sized business customers?

Do you think there might be a market for this kind of service?