Texas Upholds Nexus Determination for Out-of-State Seller

The Texas Comptroller of Public Accounts upheld a nexus determination for an out-of-state seller making sales of licensed software into Texas.  


The Petitioner in the case was a Delaware-based corporation selling software applications. The Petitioner had previously submitted a Voluntary Disclosure Submission with a disclosure period of August 1, 2015 – August 31, 2019.  


In the disclosure, the Petitioner agreed to remit all sales and use tax due on its sales into Texas for the period in question. The petitioner also agreed that as of September 1, 2019, it would collect and remit Texas sales tax on its sales into the state. The Petitioner stated that it sold and licensed software in Texas for the period in question and had not collected tax on the sales. The Petitioner stated that it had an employee residing in Texas from October 2018 to August 2019. In October 2020, the Petitioner remitted sales and use tax due only for the period from October 2018 to August 2019. 


The Texas Business Activity Research Team (BART) concluded that the Petitioner had nexus starting in August 2015 because their sales of software applications into the state constituted doing business in Texas. Texas imposes sales tax on the sale of a taxable item in the state in addition to the “storage, use, or other consumption in this state of a taxable item purchased from a retailer for storage, use, or other consumption in this state” per Tex. Tax Code §§151.051, .101. According to Tex. Tax Code §151.010, the term “taxable item” includes tangible personal property and taxable services. Whether an item is in electronic form or on physical media, the sale or use of a taxable item does not alter the item’s tax status. Texas considers the sale or lease or license of a computer program as a sale of tangible personal property (see Tex. Tax Code §151.009; 34 Tex. Admin. Code §§3.308(c)(1)(A), and tax is due on the sale of such when it is transferred for consideration, stored, used, or consumed in Texas, whether in electronic format or on physical media.


The Petitioner maintained that their nexus began in October 2018, when one of their employees moved to Texas, creating physical nexus.  


The case was decided against the Petitioner because software applications are included in the definition of “tangible personal property and taxable services.“ The Petitioner was considered to be engaged in business in Texas because it conducted regular reoccurring activities selling software licenses in Texas. The Administrative Law Judge in the case determined that the Petitioner did not provide sufficient evidence to demonstrate that it was not engaged in business in Texas during the period in question. As a result, the nexus determination was upheld, and the Petitioner is liable for the tax due for the entire disclosure period. 

When evaluating nexus in Texas, businesses must consider not only whether they have economic nexus but also physical nexus for sales tax. The definitions of “engaged in business” and “tangible personal property” are also critical in determining whether a business has sales tax nexus. While a business may not have employees entering the state but is selling licensed software into the state of Texas, those business activities may be enough to establish sales tax nexus.


(Decision, Hearing No. 118,524, Texas Comptroller of Public Accounts, May 4, 2023, released June 2023) 

Posted on August 14, 2023