KISS Me, I’m Texan!
Practical Considerations for the Texas Single Local Tax Rate for Remote Sellers
by Will Bader, Director
Keep It Simple Stupid
The “KISS” design principle is not typically used as an underlying framework for drafting sales tax policy. This is certainly true in Texas, where the Comptroller’s office oversees one of the more complex sales tax sourcing methodologies in the county.
Luckily for out of state vendors falling under the new remote seller’s regulations promulgated on the back of the 2018 Wayfair ruling1, the State of Texas is attempting to simplify collections requirements for those not physically located in the state.
Effective, October 1, 2019, remote seller’s satisfying the $500K2 Texas revenue threshold established by the state, will have the option of collecting sales tax based on two rate regimes:
- Destination - collect local sales tax based on the destination of goods shipped into Texas
- Single Rate - collect local sales tax using a standard 8% rate on all goods shipped into Texas3
The 8% rate will be in effect from October 1, 2019 - December 31, 2019, and is based on the average tax rate paid in the prior year as determined by the Comptroller's office4. Expect math-based lawsuits next year and every year after that.
Good News or Bad News?
The Texas legislature did a pretty good job from the remote seller’s perspective of following the Keep It Simple Stupid approach when drafting the Single Rate for Remote Seller’s statute. Unfortunately, they only managed to write three lines in the tax code before complicating the matter for purchasers. The good news is that these complications may work out in favor of Texas businesses who purchase from out of state.
Bad News - Use Tax Avoidance
The new law moves the Texas tax code to be more in line with the framework outlined in the Wayfair case by implementing “simplified tax rate structures” for remote sellers5. In addition to complying with guidance provided by the Supreme Court, the uniform rate is designed to encourage remote sellers to start collecting Texas sales tax.
With that in mind, if you purchase from out of state vendors that do not charge sales tax, but you don’t accrue use tax, and have somehow avoided being audited by the state, you probably don’t consider this good news.
Uniform Rate Comparison
For remote sellers, clearly, the single rate option will be the easiest in terms of invoicing and automation. Set any taxable Texas sales to taxable at 8% and you’re done. For purchasers, the state will allow refund adjustments if the single rate is higher than the local rate, so in the long run, the uniform rate will generally work out in your favor. In the short run, depending on where goods are received, you may see an increase in taxes paid.
Good News - High Taxing Jurisdictions - For those companies located in or receiving out of state goods/services in high taxing jurisdictions (8.25%) from vendors electing the uniform tax rate, you will see a reduction in .25% of sales taxes paid on purchases. Companies will not have to accrue additional use tax to make up the difference. This means $25K in local tax savings on each $10MM in taxable purchases.
Annoying News - Low Taxing Jurisdictions - Alternatively, if you are in a low taxing jurisdiction (less than 8%), the uniform tax rate will lead to an increase in cash outflows. Luckily, the state will allow businesses to request a refund for any taxes paid in excess of what would have been paid had the remote vendor not elected the uniform rate. This is good news albeit annoying given that business will still need to incur the cost of calculating and capturing said overpayments.
Practical Considerations – What are my options?
Option 1: Vendor Elects Uniform Rate
This is the best scenario for purchasers located in and/or receive goods in high taxing jurisdictions.
Begin paying sales tax on invoices from out of state vendors and when audited, be sure to identify instances of the uniform sales tax rate exceeding the actual local taxes due to ensure all credits due are granted. Alternatively, if you prefer not to loan money to the state for longer than necessary, track overpayments and either adjust sales tax returns or submit refund claims when credits get large enough.
Maintain a list of your remote sellers that have elected to use the uniform sales tax rate and if not already in place, make sure transaction data contains accurate location information. When it comes time to identify local taxes overpaid using the uniform rate, having accurate and verifiable location data should make the overpayment analysis fairly straightforward.
Option 2: Vendor Elects Not to Use Uniform Rate
This is good for purchasers located in and/or receive goods in low taxing jurisdictions; however, you will have to rely on vendors to select the correct local tax rates.
If your vendor does not choose the uniform sales tax rate, they should collect sales tax based on locals at the transaction destination. The biggest opportunity for errors will be in the ship to addresses identified on the invoice and used to calculate the tax due. Confirm vendors use the correct ship-to location on each invoice. Often out of state vendors will default to a corporate office which may be located in an 8.25% jurisdiction, while the goods are actually received/used in a lower taxing area.
Option 3: Register as a direct pay
This is a good option if you are located in and/or receive goods in low taxing jurisdictions. Instead of relying on a vendor to select the correct tax rates and taxability, your company will self-assess the correct tax due.
IF your business typically uses or receives materials/equipment in jurisdictions with lower than 8% aggregate sales tax rates, consider registering as a direct pay. By issuing a direct pay certificate to a vendor, you are able to source sales tax based on the place of first storage or use6. For industries typically located outside of metropolitan areas, savings can be significant.
On $10MM in purchases from out of state vendors, assuming a 1 to 1.25% rate adjustment, savings would equate to $100K - $125K each year. Additional local rate savings may be available from in-state vendors as well.
Understand that as a direct payor, your company will have to invest time and resources to self-assess tax due on purchasing and you can almost guarantee an audit from the state every 3 or 4 years.
Regardless of which option you choose, reach out to your remote selling vendors and make sure they (and you) understand the impact of their election on your business. Likewise, if your company’s purchases are not subject to tax, now is the time to make sure any out of state vendors have a resale or other Texas exemption certificates on file.
Will Bader, CPA is a Director of Transaction Tax Services in the Merit Advisors, LLC Houston office. Will specializes in sales and use taxes and serves a diverse array of companies and industries.
For any questions or additional insights, feel free to contact Will at email@example.com
- South Dakota v. Wayfair, Inc
- Texas Admin. Code 3.286 - Seller's and Purchaser's Responsibilities.
- Texas Tax Code Ann. § 151.0595(e) - Single Local Tax Rate for Remote Sellers
- South Dakota v Wayfair, Inc
- Texas Admin. Code 3.288(i)