Does a California company that runs an internet 'mall' website for Texas retailers create Texas sales tax nexus for itself or for the retailer's out-of-state clients, and who is responsible for collecting and remitting the sales tax?

Subject

Representation/Nexus In Texas — Electronic Mall Accessible Via Internet Maintained On Oos Server — Nexus Not Established Through Client Retailers In Texas

Plain-English summary

COMPANY A was a California business that supported, maintained, and administered an electronic "mall" -- an early e-commerce website -- accessible over the Internet and World Wide Web. Its server was in California, and all of its design, implementation, support, maintenance, and administrative work was performed there. COMPANY A said that, except as noted in its letter, it had no nexus in Texas.

COMPANY A was retained by client retailers -- some located in Texas -- to design and implement each retailer's website, maintain it on an ongoing basis, and receive, record, and take payment for sales made through the site to the retailer's customers, then remit the retailer's share of those sales to the retailer. COMPANY A earned a commission on sales transacted through the website, and it took physical custody of the funds customers paid, but never took possession of any of the goods themselves. It owned no direct or indirect interest in any client retailer, and the retailers -- not COMPANY A -- were solely responsible for manufacturing or acquiring the products, maintaining inventory (kept at the retailer's own Texas premises), and fulfilling orders from that inventory. COMPANY A also made some sales of tangible personal property on its own account, including to some Texas customers.

COMPANY A asked the Comptroller four questions, and got direct answers:

1. Is COMPANY A responsible, as agent for its Texas client retailers, for assessing and collecting sales tax on sales made to those retailers' Texas customers? Yes.
2. Is COMPANY A responsible for remitting that collected tax directly to Texas, and is its liability extinguished if it instead remits and accounts to the client retailer? COMPANY A is liable for remitting any Texas tax it collects, but it can extinguish that liability by remitting the tax to the Texas retailer instead. The Comptroller advised that the commission sales agreement should spell out which party -- COMPANY A or the client retailer -- handles the sales tax duties.
3. Is COMPANY A responsible for filing Texas sales tax returns, on its own behalf or the retailer's? COMPANY A is responsible for filing Texas sales tax returns if it does not remit the tax it collected from Texas residents to the retailers making the sales.
4. Does COMPANY A's agency relationship with Texas client retailers, by itself, give COMPANY A nexus in Texas for its own sales of tangible personal property -- and does the same logic give COMPANY A's non-Texas client retailers nexus in Texas? No, and no.

The Comptroller noted this opinion is based on the facts presented and could change on additional or different facts.

What this means for you

Website operators and payment processors serving retailers in multiple states

If you build and run a retailer's e-commerce site and collect payment on the retailer's behalf -- essentially acting as the retailer's agent for sales into Texas -- this ruling says you can be on the hook for assessing, collecting, and (if you don't pass the money and accounting through to the retailer) remitting and filing Texas sales tax on those transactions. Make sure your commission or services agreement clearly states who is responsible for the sales tax duties.

Out-of-state retailers using a third-party mall or marketplace platform

Under this 1996 ruling, simply having your website designed, hosted, and payment-processed by an out-of-state platform operator that also serves Texas-based retailers did not, by itself, create Texas nexus for you. The Comptroller's answer to question 4 was a direct "No."

Platform operators worried about their own nexus exposure

COMPANY A asked directly whether serving Texas client retailers as their sales agent would create nexus for COMPANY A's own separate sales of tangible personal property. The Comptroller said no -- the agency relationship with Texas retailers did not itself establish nexus for the platform operator.

Common questions

Q: Who has to collect Texas sales tax when a third party runs a retailer's website and takes the payments?
A: The Comptroller ruled that the third party (here, COMPANY A) is responsible, as agent for its Texas client retailers, for assessing and collecting the sales tax due on those sales.

Q: If the platform operator forwards the money and accounting to the retailer instead of remitting directly to Texas, is it off the hook?
A: Yes -- COMPANY A's liability to remit is extinguished if it remits the collected tax to the Texas retailer instead of directly to the state. But the ruling adds that the commission sales agreement should spell out the parties' respective sales tax duties.

Q: Does running an e-commerce site or "mall" for Texas retailers give the platform operator its own Texas nexus?
A: No. The Comptroller answered directly that COMPANY A does not acquire nexus in Texas solely by virtue of its agency relationship with Texas client retailers.

Q: Does that same reasoning protect the platform's other (non-Texas) client retailers from gaining Texas nexus?
A: Yes -- the Comptroller also said those other client retailers do not acquire Texas nexus solely by virtue of their relationship with COMPANY A.

Q: Could a different fact pattern change this outcome?
A: Yes. The letter explicitly says the opinion is rendered based on the facts presented, and the opinion may change if there are additional or different facts.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9609L1438G12

Original ruling text

September 18, 1996

Dear ***:

Thank you for your recent letter which is restated in part with responses
below.

COMPANY A is a California company engaged in the support, maintenance, and
administrator of an electronic "mall" accessible through the Internet and
World Wide Web.

COMPANY A is maintained on a server located in California.

All design, implementation, support, maintenance, and administrative
services rendered by COMPANY A are performed in California.

Except as noted below, COMPANY A has no nexus in Texas.

COMPANY A has been retained by client retailers, one or more of whom is
located in Texas, to perform the following services;

1. Design and implement a Website for the client retailer, and

2. Support and maintain the Website on an ongoing basis, and

3. Receive, record, and take payment for sales made through the
   Website to the client retailer's customers, and

4. Remit payment of the client retailer's share of such sales to the
   client retailer.

COMPANY A receives a commission on all sales transacted through the
Website. COMPANY A is in physical custody of funds remitted by our
client retailer's customers, but is never in possession of any personalty
related to the transaction.

COMPANY A owns no direct or indirect interest in any of its client retailers.

The client retailer is solely responsible for any manufacturing, purchasing,
or other acquisition of products sold through COMPANY A.

The client retailer is solely responsible for the maintenance of any physical
inventory of products sold through COMPANY A. Such inventories will
presumably be maintained at the client retailer's premises, located in Texas.

The client retailer is solely responsible for the fulfillment of any orders
generated through COMPANY A and fulfillments are made from retail inventory
maintained by the client retailer and located in Texas.

COMPANY A may engage in sales of tangible personally on its own account.
Some of these sales may be transacted with customers located in Texas.

Issues on Which We Seek an Opinion:

It is clear to us that client retailers located in Texas possess nexus
sufficient to subject them to both sales and income tax jurisdiction within
Texas. However, we are unclear as to COMPANY A's responsibility in this
regard. We therefore request a ruling on the following issues;

1. Is COMPANY A responsible, as agent for its client retailers located
   in Texas, for the assessment and collection of sales taxes due on sales
   transacted with its client retailer's customers in Texas?

Response: Yes

2. Is COMPANY A responsible for remittance directly to Texas for sales
   taxes collected on behalf of its client retailers located in Texas? If
   remittances and accountings are made to COMPANY A's client retailers, is
   COMPANY A's liability to Texas extinguished?

Response: COMPANY A is liable for remittance of Texas tax that it collects.
It may extinguish that liability by remitting the tax to the Texas retailer.
The commission sales agreement should be specific as to the sales tax duties
of COMPANY A and client retailers.

3. Is COMPANY A responsible for filing sales tax returns, either on its own
   behalf, or on behalf of its client retailer located in Texas?

Response: COMPANY A is responsible for filing Texas sales tax returns if
it does not remit the tax collected from Texas residents to the retailers
making the sales.

4. Does COMPANY A itself, solely by virtue of its agency relationship with
   client retailers located in Texas, acquire nexus in Texas sufficient to
   subject its own sales of tangible personalty to sales tax?

Response: No

If so, do COMPANY A's other client retailers (those not located in Texas,
solely by virtue of their relationship with COMPANY A, acquire nexus in
Texas sufficient to subject their sales of tangible personally to sales tax?)

Response: No.

This opinion is rendered based on the facts presented. If there are
additional or different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 3-4680. The direct
line is 512/463-4680. You may also write to Tax Policy, Comptroller of
Public Accounts. My Internet address is [email protected].

Sincerely,

Al Van Allen
Tax Policy Division

NOTE: Previous Accession Number 9609710L