Texas gets tough on web taxes

July 22, 2011 02:43 PM

Texas Gov. Rick Perry this week signed a state budget bill that requires sales tax collection by Inc. and any other online retailers with in-state subsidiaries that support retail operations, such as distribution centers.

The bill signed this week, SB 1, covered a broad range of fiscal matters and included the same provisions that Perry, a Republican, rejected in May. Those provisions clarified that retailers had an in-state physical presence requiring them to collect sales tax even if their in-state physical facilities were operated by subsidiaries. Under federal law, states can only force retailers to collect sales tax if they have an in-state physical presence, or “nexus” in legal terms, such as stores or distribution centers.

Amazon has contended that it should be exempt from nexus rules in Texas because its Texas distribution center—which it had planned to expand in a project that it says would have created 6,000 new Amazon jobs and thousands of additional jobs at related businesses—was operated by a subsidiary. Amazon did not immediately comment on Perry’s signing of the bill this week, but the retailer said recently that it was winding down its Texas distribution operations.

The new law, which goes into effect Sept. 1, includes language from the vetoed bill backed by Texas state Rep. John Otto, also a Republican, clarifying that an online retailer must collect sales taxes in Texas if it has a “substantial,” or at least 50%, ownership interest in an in-state physical facility. Other states with a similar law include South Dakota, Kansas and Oklahoma.

While opposed by Amazon and other web-only retailers, the new Texas law is supported by retail chains such as Wal-Mart Stores Inc., which have been collecting tax on online sales for years because of the extensive reach of their physical stores and distribution centers; Wal-Mart contends that such laws provide for a level playing field among chains and web-only retailers. "We are pleased the Texas Legislature stood up for Texas businesses and took action to make online-only retailers play by the same rules as every other business in the state," says David Norman, senior vice president, Texas Division, Walmart U.S. "The new law is a big win for local businesses and maintains the state's free market principles by preventing the government from picking winners and losers in commerce." Wal-Mart Stores is No. 6 in the Internet Retailer Top 500 Guide; Amazon is No. 1.

Perry, who has a pro-business, anti-tax reputation and who is sometimes mentioned as a possible Republican presidential candidate, had said when he vetoed the earlier bill that he was concerned that it would put the state at risk of incurring “negative consequences,” including a loss of Texas job opportunities. The governor hopes to continue working with Texas lawmakers, retailers, consumers and other state and federal officials in an effort to balance the competing needs of groups involved with interstate commerce, a spokeswoman says.


But in signing the legislation this week, he noted that the state had passed a balanced budget without raising new taxes or killing essential services.

Otto has contended all along that his legislative language was designed to increase state revenue without increasing existing tax rates or creating new taxes, but to provide a way to collect existing taxes that went largely uncollected.

Texas is also considering other legislation that would require online retailers to collect sales tax if they receive sales leads from affiliate web sites, such as blogs or special interest sites.




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