Does an out-of-state company that uses a Texas-based commissioned sales agent become 'engaged in business' in Texas and responsible for collecting Texas use tax on its sales into the state?

Plain-English summary

A Texas-based individual asked the Comptroller who is responsible for collecting sales tax when they act as a commissioned agent for an out-of-state Arkansas company, selling a product made in California. Under the arrangement, the Texas agent takes orders and forwards a deposit check to Arkansas, which places the order with the California manufacturer, who then ships the product COD directly to the Texas purchaser.

The Comptroller answered that having this Texas-based commissioned agent is enough, by itself, to make the out-of-state Arkansas company "engaged in business" in Texas under 34 Tex. Admin. Code Rule 3.286(a)(1)(B), which defines a retailer as engaged in business in Texas if it has any "representative, agent, salesperson, canvasser, or solicitor" in the state acting under the seller's authority to sell, deliver, or take orders for taxable items. It does not matter that the agent is an independent contractor rather than an employee of the company.

Because the Arkansas company is engaged in business in Texas, it is responsible for collecting and remitting Texas use tax on all its taxable sales shipped into the state, not just the sales made through this particular agent. The agent was told to confirm with the company whether it already holds a Texas sales and use tax permit, and to make sure invoices for these sales reflect the applicable use tax. The local (city/county/transit) portion of the use tax is based on where the product is delivered to the customer, not where the agent is located or where the order was taken.

What this means for you

Independent contractors and commissioned sales agents

Acting as a commissioned agent, canvasser, or solicitor for an out-of-state company in Texas can create sales/use tax nexus for that company, even though you are not its employee. If you take orders or otherwise represent an out-of-state seller in Texas, expect the company to need a Texas sales and use tax permit to collect use tax on the resulting sales.

Out-of-state businesses selling through Texas representatives

Placing even one representative, agent, or salesperson in Texas to solicit or take orders is enough to trigger "engaged in business" status under Rule 3.286(a)(1)(B) — this covers all of the company's taxable sales shipped into Texas, not just the transactions the in-state agent personally handles. Get a Texas permit and collect use tax based on the customer's delivery address (for local tax purposes).

Accountants and tax professionals

This letter is a clean, early illustration of the "any representative in the state" nexus standard predating Wayfair-era economic nexus rules — physical presence through an independent contractor's sales activity, without any employment relationship or in-state office, was sufficient to establish nexus.

Common questions

Q: Does it matter that the Texas salesperson is an independent contractor and not an employee of the out-of-state company?
A: No. Rule 3.286(a)(1)(B) reaches any "representative, agent, salesperson, canvasser, or solicitor" acting under the seller's authority in Texas, regardless of whether that person is an employee or an independent contractor.

Q: Who has to collect the tax — the Texas agent or the out-of-state company?
A: The out-of-state company (here, the Arkansas seller) is responsible for collecting and remitting Texas use tax, since having the Texas agent makes the company itself "engaged in business" in the state.

Q: How is the local use tax rate determined?
A: Local use taxes are based on the point of delivery to the customer in Texas, not on where the agent is located or where the sale was negotiated.

Q: What if the out-of-state company doesn't already have a Texas sales and use tax permit?
A: The letter instructs the agent to contact the company to check, or to call the Comptroller's office to determine whether the company is permitted to collect Texas tax.

Citations and references

Statutes:

• 34 Tex. Admin. Code Rule 3.286(a)(1)(B) (defines 'engaged in business' to include having a representative, agent, salesperson, canvasser, or solicitor in Texas selling, delivering, or taking orders for taxable items)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9205L1172C02

Original ruling text

May 18, 1992

Dear ***:

Your letter concerning the taxability of sales that you make in Texas for an
out-of-state company has been assigned to me for review and response.

You will be acting as a commissioned agent representing an Arkansas company,
selling a product manufactured in California. When you receive an order, you
forward a deposit check to Arkansas, who in turn, places an order with the
California manufacturer who ships the product COD to the Texas purchaser. Your
question is who is responsible for collecting sales tax on these sales?

Section (a)(l)(B) of the enclosed Rule 3.286, Seller's and Purchaser's
Responsibilities, defines a retailer to be "engaged in business" in Texas if
the retailer has any "...representative, agent, salesperson, canvasser, or
solicitor in this state under the authority of the seller for the purpose of
selling, delivering, or taking orders for any taxable items."

Therefore, the Arkansas company, by virtue of having you as an agent in Texas,
is engaged in business in Texas and is responsible for collecting and remitting
use tax on all of its sales of taxable items made into this state. You should
contact the company and determine if they have a Texas sales and use tax permit
or you may call this office to determine if the company is permitted to collect
Texas tax. Invoices that you make out for sales of these products should state
the applicable use tax. Use tax is due on items shipped into Texas from an
out-of-state location. The local use taxes are due based on point of delivery
to the customer.

This opinion is based on the facts presented. Other facts though similar may
provide a different result. If you have other questions or need more
information, you may call 512/463-4600, or 1-800-252-5555 from outside Austin.
You may write to Tax Administration Division.

Sincerely,

Gilbert Zamora
Tax Administration Division