As if competing against Amazon supply weren't enough, expanding definitions of sales tax nexus provide more obstacles for small-to-medium sized supply chain players. Not to mention, if anything you do as far as transacting business so much as crosses paths with California, Florida, New York or Texas - beware - you are embarking on territory that makes The Amazing Race look like a cakewalk.
But why Texas? California, Florida, and New York are also members of what is known as the "Big Four" due to their large populations and high sales tax revenue collections. However, Texas remains as the top exporting state in the United States, according to Texas Manufacturing Assistance Center. This is due to Texas' proximity to Mexico, I-35 and DFW's handful of Foreign Trade Zones. Thus, for manufacturers, distributors and other supply chain players looking to catch a break from duty and excise tax, capitalize on the lowest distribution cost in the country as well as maintain a central location, then Texas is an ideal place to conduct business.
Do You Have Nexus in Texas?
Remote Seller Nexus: Since the aforementioned reasons make Texas a desirable place to transact business, the state has broadened its statutory definitions of nexus as a way to capitalize on out-of-state sellers. Texas has what is called Affiliate Nexus, which, when put simply, requires out-of-state entities to collect sales tax in Texas if they maintain, "certain affiliate relations" in the state. To better illustrate this concept, we will introduce Fran, our first sales and use tax nexus survivor:
Fran runs a successful widget manufacturing operating out of Oklahoma City, but frequently supplies clients with her widgets from a warehouse located in Dallas, Texas. Fran receives orders from her office in Oklahoma, but supplies and delivers the widgets from the warehouse in Dallas. Thus her frequent utilization of warehouse/distribution facilities in Texas requires Fran to collect use tax (which, in Texas, is the same as the sales tax rate).
Drop Shipping Nexus in Texas: Drop shipping and logistics has frequently become the dominant delivery and distribution mode across the United States. With Texas being in the "Big Four" its rules regarding drop shipping are special, and as a supply chain survivor in Texas, you will need to know when to collect sales tax.
Eric's fast growing Cajun seasonings business has caught the attention of food industry professionals in Texas. Eric runs his business out of New Orleans, Louisiana but supplies clients in Fort Worth, Houston and Galveston. He frequently relies on drop shippers to deliver to consumers. Since drop shippers are obligated to collect sales tax on sales made in Texas, Eric's nexus status in Texas will determine whether or not he needs to collect sales tax in Texas. Since Eric frequently sells his product in Texas and delivers on behalf of a drop shipper, Eric is liable for collecting sales tax in Texas.
Use Tax and Resale Certificates in Texas: If Eric (in the previous example) did not have sales tax nexus in Texas then the obligation would be on the drop shipper to collect sales tax, unless of course, they are collecting resale certificates. The wholesalers collect resale certificates if they are not charging tax to their retailer (i.e. Eric's Cajun seasonings business).
Bottom Line: Due to Texas' ideal circumstances (see paragraph 2) for conducting business, distributors, retailers, manufacturers and wholesales must stay in touch with sales and tax changes and the "Big Four." Luckily, Texas is relaxed in areas such as drop shipping, much like New York is. However if you are Florida or California and frequently using drop shipping and resale certificates, it may be necessary to research further to determine if your business is obligated to collect sales tax in those states.
In conclusion: The best way to keep up with the modern supply chain business is to automate sales tax processes. In other words, more and more supply chain players are relying on software or a computerized system to keep track of sales tax records. This way, they'll be secure if an audit strikes.
Interested in learning more?
Upcoming webinar: Stay ahead of Sales Tax Changes
Hosted by: Avalara
On Wednesday, September 11th at 10am CDT/ 11am EST