Texas Sales Tax Nexus: Permit Rules for Out-of-State Sellers

Does an out-of-state seller need a Texas sales tax permit?

An out-of-state seller needs a Texas permit once its total Texas revenue for the preceding twelve calendar months reaches $500,000. Under that, Texas's safe harbor means no permit and no collection. The Comptroller words the line three ways: "less than" for the safe harbor, "exceeds" for the start of collection, and "or more" in Publication 94-105. A seller at exactly that figure should treat it as crossed and confirm with the Comptroller. This is Texas's economic nexus rule for sales tax (Texas Comptroller: remote sellers; Publication 94-105).

The safe harbor is only for a remote seller: an out-of-state seller whose only Texas activity is remote solicitation, such as a website, phone, catalog or flyer. A business location, salesperson or representative in Texas means the seller is not remote and has no safe harbor.

The Comptroller's pages give a revenue test only, with no count-of-sales test.

What makes a case not simple:

• Marketplace sales count toward the threshold even when the marketplace collects the tax.
• A Texas permit can also start franchise tax duties (see below).
• Any Texas office, worker or representative removes the safe harbor, and so can inventory the seller keeps in Texas. Inventory held by a marketplace has its own rule below.

Gather twelve months of Texas revenue by month and sales channel, the delivery address of each order, and any marketplace collection notice.

What counts toward the Texas sales tax nexus threshold?

Texas counts gross revenue from all sales of goods and services into Texas, taxable or not. Count every item below, month by month (Texas Comptroller: remote sellers; marketplace FAQ).

Because the test looks at the preceding twelve calendar months, it rolls forward each month; a once-a-year check can miss a crossing. The Comptroller's own example uses the window July through the following June (Texas Comptroller: remote sellers).

By when must the seller get the permit and start collecting?

Collection must start no later than the first day of the fourth month after the threshold-crossing month. The permit must be in hand by then. For the general start-date rules in other states, see when you must collect sales tax.

The Comptroller says to allow two to three weeks to receive a permit (Texas Comptroller: online registration). Applying in the month after the crossing month leaves room for that.

Once collecting, the seller holds the tax in trust for the state. A person who controls collecting or paying it over and wilfully fails to pay it is personally liable for the unpaid amount, even after the business dissolves (Tax Code 111.016).

How does an out-of-state seller apply for a Texas permit?

A seller applies online through the Comptroller's Texas Online Tax Registration Application, or sends Form AP-201 (Texas Comptroller: how to get a permit).

1. Use the online application when everyone listed has a Social Security number. It asks for each owner's, officer's or director's number (a partner may give an EIN instead), plus a NAICS business-activity code (Texas Comptroller: online registration).
2. Use Form AP-201 when a sole owner, partner, officer or director has no Social Security number. Email it to sales.applications@cpa.texas.gov or fax it to 512-936-0010.
3. A seller located outside the United States registers the same way: email or fax the AP-201 (Texas Comptroller: remote sellers). See foreign sellers and sales tax.

Three AP-201 items matter to a remote seller: whether it has internet or mail order sales, whether it is a marketplace provider, and whether it elects the single local rate. The single-rate question applies only when the answers to the form's items 30 to 37, 39 and 43 are all "no" (questions on Texas locations, representatives, property, onsite and temporary sales, Texas franchisees and affiliates, marketplace provider status and health spa memberships) (Form AP-201).

Which local tax does a remote seller collect on Texas orders?

A remote seller collects the state use tax of 6.25% plus local use tax for the place where the order is shipped or delivered, or it elects the single local rate. The local portion is capped at 2%, so the combined maximum is 8.25% (Texas Comptroller: remote sellers; Publication 94-105).

Two traps when using the delivery address:

• Local taxing boundaries do not follow ZIP codes. Many cities share a ZIP code, and a ZIP code can cover areas inside and outside a taxing jurisdiction. Look up each address with the Comptroller's Sales Tax Rate Locator.
• If the delivery address is not in any local taxing jurisdiction, no local use tax is due.

What is the single local use tax rate, and who can use it?

The single local use tax rate is an optional flat local rate for remote sellers: 1.75% for the page's tax year. The Comptroller sets it for each calendar year from the average local rate of the prior state fiscal year and publishes it in the Texas Register before the year starts (Texas Register notice; Tax Code 151.0595).

It replaces the address-by-address local rate on every Texas order, so the seller needs no rate lookup. Businesses located in Texas and marketplace providers cannot use it. A buyer who pays the single rate owes no further local use tax, even where its own local rate is higher (Tax Code 151.0595).

A buyer charged more than its own local rate may apply to the Comptroller once a year for a refund of the difference on Form 00-957 (Texas Comptroller: marketplace FAQ).

How does a seller elect or revoke the single local rate on Form 01-799?

A new remote seller elects on its permit application (AP-201 item 46). An existing remote seller sends Form 01-799 by email or mail, and the election takes effect on the first day of a reporting period (Texas Comptroller: remote sellers).

An owner, general partner, officer or authorized agent signs the form. The Comptroller's example: a seller that elects in February starts the single rate in March, on the return due April 20.

Revoking is slow, so treat the election as a choice for at least the rest of the year. The Comptroller's examples: a revocation received April 1 takes effect the next January 1; one received November 1 takes effect the January 1 after that (Form 01-799).

If a marketplace collects for me, do I still need a Texas permit?

A remote seller that sells only through a marketplace that certifies it collects Texas tax does not need a Texas permit. It must keep records of all marketplace sales for at least four years (Texas Comptroller: marketplace sellers).

Four points change that:

• The marketplace must give a certification, which can sit in its terms of use. With none, the seller collects until it receives one (marketplace FAQ).
• A seller above the safe harbor with its own taxable sales must hold a permit and collect on those sales. Marketplace sales go on the return but not in taxable sales.
• A Texas-based seller needs a permit even if every sale is through a marketplace.
• Inventory stored in a marketplace's Texas facility needs no permit below the safe harbor if the marketplace certifies it assumes the seller's duties; above the safe harbor, the seller needs a permit. Either way, that inventory gives a taxable entity Texas franchise tax responsibility.

Return reporting is in filing sales tax returns.

Does a Texas sales tax permit create Texas franchise tax duties?

It can. The Comptroller lists the date a foreign taxable entity obtains a Texas use tax permit among the dates its franchise tax nexus can begin, and nexus starts on the earliest listed date, even if the entity never reached the franchise tax receipts test (Texas Comptroller: remote sellers). The Comptroller says an entity with a use tax permit is presumed to have nexus (marketplace sellers).

Texas franchise tax also has its own test: annual gross receipts from business in Texas of $500,000 or more. Obtaining a permit before the sales tax duty starts could therefore bring an entity into franchise tax earlier than the receipts test would. The Comptroller does not say whether every sales and use tax permit counts as a "use tax permit" here, so confirm that before applying early.

Franchise tax applies to a taxable entity such as a corporation, LLC or limited partnership, not to a sole proprietor without a liability-protecting entity or, generally, a general partnership owned directly and entirely by individuals. Reports and the no-tax-due rules are in Texas franchise tax.

How does a seller stop being a Texas remote seller?

A remote seller ends its Texas use tax duty by filing Form 01-798 or the Comptroller's web form. It must have no physical presence in Texas, and either stop selling in Texas or show twelve consecutive months in which revenue for the preceding twelve calendar months was under $500,000 (Texas Comptroller: marketplace FAQ).

Four points:

• Texas words the test as twelve consecutive months, each with revenue for its own preceding twelve calendar months under the safe harbor. The Comptroller does not say how many months of sales data that takes in practice, so confirm with the Comptroller before filing.
• After termination, collection resumes on the first day of the second month following any twelve calendar months in which Texas revenue exceeds the safe harbor. That is sooner than the fourth-month rule for a first crossing.
• A seller that gains a physical presence or representative in Texas stops being a remote seller, but it still must collect sales and use tax (Form 01-798).
• Ending use tax duties does not end franchise tax duties. The Comptroller handles that through a separate process.

Example

These examples are illustrative and use US dollars.

An Ohio store crosses the line

An Ohio store sells $380,000 through its own site and $200,000 through a collecting marketplace into Texas in the twelve months ending in November. The $580,000 total is over the safe harbor and the window ending in October was not, so November is the crossing month. It must hold a permit and start collecting on its own taxable orders by March 1, the first day of the fourth month after November. It applies in December, since the permit can take two to three weeks, and keeps the marketplace's certification.

The same store picks the single rate

The store ships a $1,000 taxable order to a buyer where the local rate is 2 percent. At the delivery rate it collects $62.50 state tax plus $20.00 local tax. At a single local rate of 1.75 percent, it collects $62.50 plus $17.50. For an address outside any local taxing jurisdiction, the delivery-address method collects only the $62.50. The Comptroller's pages do not say how the single rate applies at such an address, so the seller confirms that first. A buyer charged more than its own local rate can claim the difference back on Form 00-957. As a new seller, the store elects on its permit application; had it already held a permit, it would send Form 01-799 before the reporting period it wants the rate to start.

A seller under the safe harbor

A seller has $300,000 of Texas sales in the preceding twelve months and no Texas presence. It is under the safe harbor: no permit, no collection. It records Texas revenue by month and channel, adds the latest twelve months at each month-end, and checks franchise tax nexus before applying for a permit early, since a permit could start it.

Different for you?

• You have an office, worker or representative in Texas, or your own inventory there: you are likely not a remote seller and the safe harbor may not apply. Get help with registration and records.
• You already sold into Texas past the line without collecting: see catching up on uncollected sales tax.
• You sell software subscriptions or other digital services: see sales tax on SaaS and software.
• Your business is outside the US: see foreign sellers and US sales tax.
• A permit may make you a Texas franchise taxpayer: see Texas franchise tax.
• You need returns, due dates or zero-sales filings: see filing sales tax returns.
• You sell into other states too: start with when you must collect sales tax and the threshold list by state.