Texas Taxes Set To Bushwhack Ecommerce Sites

Are the 10-gallon hats in Texas looking to mosey in on e-commerce in the Lone Star State? It appears that way, as a new tweak to sales tax law has been rewritten to impact companies who have a server in the state.

Say what? A server?

Yes, according to the revisions by the Texas Comptroller’s Office, companies that have servers in the state would have to collect sales tax on sales to Texas customers.

Past court cases have created the standard that e-tailers either have to have a “substantial” physical presence, but Texas seems to have shrunk the definition of what exactly that means. According to ecommercetimes.com:

“Prior to this change, no state has taken the position that the mere use of a server located in a state is adequate to establish nexus. This might be because there is a question of whether the mere use of a server would satisfy the federal prohibition against state taxes that discriminate against electronic commerce.”

Why the new rules? It appears that the change comes in light of the rough financial waters the state has found itself in. In an April 14 story in the Dallas Morning News, the math was described as this:

“Texas is looking at a two-year budget shortfall of as much as $15 billion. Speaking recently in Austin, Texas Comptroller Susan Combs said the state is losing almost $600 million a year in state and local sales taxes from online purchases.”

The story went on to delve into Texas’ ongoing audit of Amazon, which has a distribution center in the state but hadn’t been paying Texas sales tax, as well as an effort led by Texas-based JCPenney to take tax collection to the next level by making every ecommerce site collect sales taxes no matter what kind of presence they have in the state.

Quoted by the Dallas Morning News is Wayne Zakrzewski, Associate General Counsel at JCPenney, who is helping push the “Main Street Fairness Act.”

According to Dallasnews.com:

“The proposal would allow states to require online sellers to collect sales taxes whether or not they have a physical presence in the state. Obstacles are significant, but compromises are being made, Zakrzewski said. ‘This is the best chance we’ve ever had to pass this legislation.’”

So, it looks like Texas is going to work on incrementally forcing e-tailers to pay state sales tax, even if they only own one server in the state. But behind the scenes brick-and-mortar businesses based in the state are looking at “leveling the playing field”, so that every Etsy.com seller, affiliate marketer or ebook writer would be responsible for collecting sales taxes.

About Mike Koehler

Mike Koehler is the New Media Director for Schnake Turnbo Frank | PR, the largest and oldest public relations firm in Oklahoma. Mike consults with clients about the best use of tools on the Internet, Web strategy and social media policy. Mike blogs regularly at www.smirknewmedia.com and is working on his first book to be published in 2010. Mike lives in Oklahoma City with his wife and three kids.

You can find Mike on Twitter: @mkokc.

12 Responses to Texas Taxes Set To Bushwhack Ecommerce Sites

  1. Wow – talk about short-term thinking.

    ….

    Dear Web Hosting Company,

    Please delete my account, I've moved my domain to a company that hosts in Oklahoma.

    Formerly a happy customer until your government got in the way,

    -Everyone.

  2. Rebecca Madigan says:

    My first thought was "Oh crap, not again." My second thought was "It's the internet, so companies can use international hosting sites. Another kick in the e-commerce stomach." There's also a concept of transactional nexus being bandied about, if something is bought in a state, the remote seller has nexus. Which pushes this whole thing into the realm of ridiculousness.

    I found this in a 2009 fact sheet created by the California Chamber of Commerce:

    Why don't we just repeal the safe harbor for computer servers under
    California law? As in two dozen other states, California law provides a safe
    harbor for presence of data on a computer server in California. That means
    that the state cannot impose a sales tax collection duty on an out-of-state
    website hosted in California. Rather, the duty to pay the tax lies with the
    consumer. The safe harbor gives out-of-state retailers who use California
    web hosts certainty that doing so will not lead to a duty to collect sales tax
    from their customers. If the safe harbor were removed, web hosting in
    California would suffer relative to the states that keep the safe harbor.
    Moreover, were the safe harbor removed, it is very doubtful whether federal
    law would permit the state to impose a sales tax collection duty under the
    federal Commerce Clause. The Supreme Court has not yet addressed
    whether presence on a computer server is considered "physical presence"
    sufficient to establish sales tax nexus.

    The last sentence says it all – this concept is going to head to the supreme court. A scheme that discriminates solely against affiliate marketers is unacceptable. Perhaps these alternate schemes will accelerate the movement, and get this discussed and decided once and for all.

    • @djambazov says:

      I think you are right Rebecca, it will also play out in the Supreme Court. Troubling to see the "monkey see, monkey do" attitude play out in different states.

  3. @loxly says:

    Most website owners don't know where their servers are located. Does Texas want to lose the income from the companies that own the servers that they are selling hosting on?

    This will backfire big.

  4. Daniel M. Clark says:

    This is what happens when people's backs are put up against a wall. States have massive shortfalls, due at least in part, to sales shifting online – $600 million a year in Texas if that number is accurate. And I say this as someone now living in Texas and married to someone who was born & raised here… never, ever count on the Texas state government to do anything smart.

    So, we have a state government that is reeling from a decade of increasing shortfalls due to increasing online shopping who rarely think twice before doing anything that might make them a little money. It doesn't look good for our side.

    Will it backfire, like Deb said? Maybe. Time will tell. Texas isn't exactly a small state (by area or by population) so things that happen here have a pretty major impact on the rest of the country (read up on the school textbook fiasco for recent proof of that).

    • @djambazov says:

      The school textbook fiasco is a scary example of Texas leading the way. I am all for governments, at the city/state/national level, doing what they need to do to make up budget shortfalls. But like Brian pointed out in the earlier comment it is very easy to move servers, this is an initiative that won't make Texas any real money.

      (lol on the "anything smart" comment, btw)

  5. Scott Hazard says:

    With several large hosting firms located in Texas and many smaller ones, I suppose this will get fought. This is a prime example of how people who have no idea how the Internet works writing laws to "govern" it.
    Amazon now leases about 3 million sq. ft. in the Dallas/Fort Worth area and they don't collect tax on Texas sales, so they'll go after the industry that is the easiest to move with a law that's impossible to enforce. But, this is the state the elected Louie Gohmert (YouTube him, he's funny as h*ll) to the US HOR, so anything can happen.
    This will inconvenience people and will put others out of work, but it won't raise any money.

  6. @Twirrim says:

    Ouch.. RackSpace is based in Texas, and at least one (2?) large data centers there. If that passes I wonder how long it will take RackSpace to take its business and hosting to another state?

  7. Pat Grady says:

    The Government Pay Boom
    America's most privileged class are public union workers. http://online.wsj.com/article/SB10001424052748704

    Politicians see a shortfall and the only answer is more taxes.
    Who pays the price for their poor oversight and lack of fiscal restraint?
    We do.

    I wonder how many people paying a Texas business for a Texas server have the employment tenure, and retirement benefits that Texas state employees enjoy.

    When you're old and waiting tables at the South Padre Island resort, serving them drinks… remember this day.

  8. Wow it is amazing.I think I should try it into my Ecommerce Website so that it can get a lot of visitors..
    Thanks for this blog.I’ll share it with my friends.