An out-of-state Internet retailer plans to fulfill orders by drop-shipping from a related Texas limited partnership's warehouses, and will also pay commissions to unrelated Texas retail stores that host invisible order links on their websites. Does any of this create Texas sales/use tax nexus for the out-of-state retailer?

Plain-English summary

This is a dense, multi-entity 1999 nexus ruling — worth reading slowly. A tax professional asked the Comptroller to evaluate a planned corporate structure for an Internet retail business, to see whether it would trigger Texas sales/use tax collection duties.

The structure: A Louisiana parent corporation owns a Nevada subsidiary, which in turn owns a 95% limited partnership interest in a Texas limited partnership ("Texas L.P.") that already does wholesale business, warehouses inventory in Texas and Georgia, and owns a Texas-based Internet server. A sister Texas corporation holds the other 5% (as general partner) and separately runs its own retail sales. The parent plans to form a brand-new Nevada company ("Client Corporation") that will sell products at retail online — through its own website and through invisible order links planted on the websites of unrelated third-party Texas retail stores, which earn a commission on each sale referred that way. Client Corporation itself will have no property, employees, or physical presence in Texas. It will contract with Texas L.P. to drop-ship orders from the Texas or Georgia warehouse, invoice at wholesale, and also pay Texas L.P. to host its website on the Texas server.

Question 1 — does Texas L.P. have to collect tax on what it sells/ships to Client Corporation? No, not if Client Corporation gives Texas L.P. a resale certificate — Texas L.P. can accept that certificate instead of collecting tax. If Client Corporation isn't otherwise required to register in Texas, it can use its home-state (Nevada) registration number on that certificate under Rule 3.285(d).

Questions 2-4 — does Client Corporation have to collect Texas tax from its retail customers? Yes, regardless of which warehouse ships the product (Texas or Georgia) — because of the commission arrangement, not the drop-shipping itself. Under Rule 3.286(a)(1)(B), a retailer is "engaged in business" in Texas if it has any representative, agent, salesperson, or solicitor operating in Texas under its authority to sell, deliver, or take orders. The Comptroller determined that the Texas retail stores earning commissions for orders placed through their website links are acting as Client Corporation's representatives or agents for soliciting/taking orders — even though they're legally unrelated third parties, and even though Client Corporation itself has no Texas presence. That single fact establishes nexus, and once nexus exists, Client Corporation must register and collect Texas sales/use tax on all products delivered to its Texas customers — not just the ones referred through the commission links.

What this means for you

Internet/mail-order retailers using affiliate or commission-based referral links

Paying a commission to in-state businesses for referring or taking orders through your website can, by itself, create sales tax nexus in that state — even with zero employees, inventory, or offices there. This is a classic "click-through" or affiliate nexus fact pattern, well before most states wrote explicit affiliate-nexus statutes; the Comptroller got there under the general agent/representative definition.

Companies using a related in-state entity purely for drop-shipping fulfillment

Drop-shipping alone, through a related company that accepts a resale certificate, does not by itself create nexus for the out-of-state seller in this ruling. It was the separate commission-affiliate arrangement that tipped Client Corporation into "engaged in business in Texas" — so don't assume a fulfillment-only relationship and an order-soliciting relationship carry the same risk.

Multi-entity corporate groups structuring retail operations to isolate nexus

This ruling is a reminder that nexus analysis looks at each entity's own activities and relationships, but any single in-state agency/solicitation relationship (here, the commission-based retail-store links) can pull an otherwise nexus-free entity into full Texas collection obligations on all its sales to Texas customers, not just the flagged channel.

Accountants and tax professionals advising e-commerce clients

The controlling text is Rule 3.286(a)(1)(B)'s "representative, agent, salesperson, canvasser, or solicitor operating in this state under the authority of the seller for the purpose of selling, delivering, or taking orders" — that language is broad enough to capture commission-paid website-link partners even without any formal employment or exclusive-agency relationship.

Common questions

Q: Does drop-shipping through a related Texas company by itself create nexus for an out-of-state retailer?
A: Not in this ruling — the Texas partnership doing the fulfillment can simply accept a resale certificate instead of collecting tax, and that alone didn't create nexus for the out-of-state buyer.

Q: Does paying commissions to unrelated Texas businesses for website-referred orders create nexus?
A: Yes. The Comptroller treated those commission-earning Texas retail stores as the out-of-state retailer's representatives/agents soliciting orders in Texas under Rule 3.286(a)(1)(B), which is enough by itself to establish nexus.

Q: Once nexus is established this way, does the retailer only have to collect tax on the commission-referred sales?
A: No — the ruling states the retailer must collect Texas tax on all products delivered to its Texas customers, regardless of which channel or warehouse the order came through.

Q: Does it matter whether the product ships from a Texas warehouse or an out-of-state warehouse?
A: No, not once nexus exists through the agency relationship — the Comptroller reached the same "yes, must collect" answer whether the shipment originated in Texas or Georgia.

Q: Can I rely on this letter for my own e-commerce or affiliate-marketing structure?
A: No. This opinion is based on the facts presented, and other facts, though similar, may provide a different result; it can be relied on only by the taxpayer it was issued to.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.285(d) (resale certificates in drop-shipment transactions; out-of-state registration numbers)
• 34 Tex. Admin. Code Rule 3.286(a)(1)(B) (Seller's and Purchaser's Responsibilities — "engaged in business" through a representative, agent, salesperson, canvasser, or solicitor operating in Texas)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9903287L

Original ruling text

March 29, 1999

Dear Mr. **:

This is in response to your request on behalf of your client seeking guidance
on whether or not the following entity structure and sales transactions will
create liability for collecting the Texas sales and use tax. I have restated
your fact situation and questions below followed by my response. I apologize
for the delay in response.

Your Facts

Your client is a Nevada corporation ("Client Corporation") that intends to make
retail sales of products via the Internet. Client Corporation intends to
conduct its business with entities that are part of the following structure:

Parent Corporation is a Louisiana Corporation owned by 49 shareholders. Parent
Corporation owns real estate and stock in its subsidiaries. Parent
Corporation's real estate holdings include warehouses in Texas and Georgia.
Parent Corporation has one wholly owned subsidiary that is organized as a
Nevada Corporation (the "Subsidiary Corporation").

Subsidiary Corporation owns a 95% limited partnership interest in a Texas
limited partnership (the "Texas L.P."). Subsidiary Corporation does not have a
physical presence in Texas. Subsidiary's only asset is its 95% limited
partnership interest in the Texas L.P.

Texas Corporation (the "Texas Corporation") is a sister corporation of Parent
Corporation and is the 5% general partner of Texas L.P. Texas Corporation is
owned by a group of 40 shareholders. All 40 shareholders are also shareholders
of Parent Corporation. Texas Corporation makes retail sales of products (the
"Products") separate from the business activities of the Texas L.P.

Texas L.P. is a Texas limited partnership that makes wholesale sales of the
Products in Texas and throughout the United States. Texas L.P. maintains
inventories of the Products at Parent Corporation's Texas and Georgia
warehouses. Texas L.P. also owns an Internet server located in Texas.

Parent Corporation plans to form Client Corporation as a subsidiary corporation
in Nevada. Client Corporation will not have any property, employees or activity
in Texas, except as noted below.

Client Corporation intends to create its own webpage through which customers
may place retail orders for the Products. Some of Client Corporation's
customers will live in Texas. Client Corporation also intends to place
invisible links on the webpages of unrelated, third-party retail stores through
which customers may place orders. Orders placed by customers through the web
pages of the retail stores will be accepted and processed by Client
Corporation. Some of the customers will live in Texas. Client Corporation will
accept all of the orders in Nevada. Client Corporation will contract with Texas
L.P. to fulfill the orders (by drop shipment), from either the Texas warehouse
or the Georgia warehouse, Texas L.P. will drop ship the products using the US
mail service and UPS.

Texas L.P. will invoice Client Corporation for the orders filled based on the
market wholesale price of the Products. Client Corporation will charge its
retail customers the retail price for the Products. For orders received through
the webpages of retail stores, Client Corporation will pay the appropriate
retail store a commission on each sale.

Client Corporation intends to contract with Texas L.P. to assist it in creating
its web page. Texas L.P. will maintain Client Corporation's web page on its
server located in Texas. Client Corporation will pay the Texas L.P. for its
monthly use of the server space and any other services connected with the sales
transactions (i.e., drop shipping). Client Corporation will also contract with
Texas L.P. to assist it in establishing invisible web page links on the web
pages of various retail stores. Some of the retail stores are located in Texas.

Questions

1. Is Texas L.P. required to collect Texas sales and use tax on its sales of
   products to Client Corporation or collect Texas sales and use tax in connection
   with the drop shipments to retail customers?

Response: Texas L.P. may accept a resale certificate from Client Corporation
in lieu of collecting tax. If Client Corporation is not required to be
registered to collect and report Texas sales and use tax, Client Corporation
may use the registration number assigned to it by its home state. See Rule
3.285 (d).

2. Must Client Corporation collect Texas sales and use tax from its retail
   customers if orders processed by Client Corporation are drop-shipped from
   Parent Corporation's Texas warehouse to Texas customers?

Response: Based on subsection (a)(1)(B) of Rule 3.286 - Seller's and
Purchaser's Responsibilities Definitions, Client Corporation will be considered
engaged in business in Texas. This subsection states:

(1) Engaged in business. A retailer is engaged in business in Texas if the
retailer is:

(A) maintaining, occupying, or using, permanently or temporarily, directly or
indirectly, or through an agent, by whatever name called, an office, place of
distribution, sales or sample room, warehouse or storage place, or other place
of business;

(B) having any representative, agent, salesperson, canvasser, or solicitor
operating in this state under the authority of the seller for the purpose of
selling, delivering, or taking orders for any taxable items;
...

The Texas Retailers receiving commissions from Client Corporation for orders
placed through the Texas Retailer's web pages are considered to be
representatives or agents of Client Corporation for the purpose of soliciting
or taking orders for Client Corporation's products. Client Corporation would
be required to be registered to collect and report Texas sales and use tax on
all products delivered to Client Corporation's customers in Texas.

3. Must Client Corporation collect Texas sales and use tax from its retail
   customers if orders processed by Client Corporation are drop-shipped from
   Parent Corporation's Georgia warehouse to Texas customers?

Response: Yes, see response to #2.

4. Must Client Corporation collect Texas sales and use tax from its retail
   customers if orders processed by Client Corporation from Texas customers are
   drop-shipped from Georgia while all other orders (i.e., out-of-state orders)
   are drop-shipped from Texas?

Response: Yes, see response to #2.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts. You may also e-mail our tax help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division