31 Days, 31 Ways: Texas to Require Online Retailers to Collect Sales Taxes

Throughout the month of August, The Texas Tribune is featuring 31 ways Texans' lives will change come Sept. 1, the date most bills passed by the Legislature — including the dramatically reduced budget — take effect. Check out our story calendar here. 

Day 25: State lawmakers passed an amendment during the special session to force online retailers like Amazon to collect sales taxes. The rule takes effect on Jan. 1, 2012, but the online giant is fighting to keep things as they are.

Texans are supposed to pay sales taxes on goods they buy from out-of-state online retailers, but who are we kidding? It rarely happens. People don't know they're supposed to do it or they don't care, says David Kruger, the owner of Kruger's Jewelers in downtown Austin. The fourth-generation businessman says he and other Main Street-type retailers have to collect sales taxes from their customers directly. They're tired of appearing as though their wares are more expensive than those of online competitors who don't include sales taxes in their prices. Kruger says he and other brick-and-mortar shops think it's time for the Internet sellers to play by the same rules.

Watch the Tribune's interview with Kruger below.

Needless to say, Kruger supports the Legislature's decision to require out-of-state online retailers with a physical presence in Texas to collect sales taxes from their Lone Star customers. That includes companies that have distribution centers, warehouses, sales or sample rooms, and storage units in Texas. The new law also clarifies the definition of ownership interest in those properties, so that subsidiaries and affiliates of online retailers count when the state checks for physical presence. (We've posted the three-page amendment in the reference box above.)

The state wants all online retailers to collect and remit the taxes, but there's no question who's first in line. Amazon has a distribution center in Irving. Because of that presence, state Comptroller Susan Combs sent a letter to the world's biggest online retailer in 2010 saying it owed Texas more than a quarter of a billion dollars in back taxes. The Seattle-based company refuses to pay the tab, saying it wasn't required to collect and remit those taxes under current law. A related tax audit of the company is "in the administrative hearings process," according to Combs' representatives.

To protect its interests, Amazon has threatened to shut down its operations in Texas (and has taken even more stringent actions in other states, including California). During the session, it also dangled a carrot, offering to invest $300 million in five or six warehouse and distribution centers in the state, employing 6,000 people, if lawmakers would let the company operate for four and a half years without collecting sales taxes from customers. Gov. Rick Perry liked the idea. The Legislature never bought it.

Online retailers will have some time to learn the new tax code. The law takes effect on Jan. 1, 2012. Businesses that meet the state's definition of engaging in business in Texas will have to send sales tax reports like storefront businesses, and will be subject to audits.

The state estimates the provision could bring in an estimated $16 million in general revenue for the next biennium, but Kruger and the organization he belongs to, the Alliance for Main Street Fairness, believes the amount could be much higher (in the $500 million to $800 million range) if online sales tax collection rules were fully and properly enforced by the state. That total is an estimate of what the state would collect if the courts agree with the comptroller on current law, and what will come in with the new law in place.

Web resources:

Sales and Use Tax FAQ page on the Texas Comptroller of Public Accounts' website. (Look for updates in the coming months)

The Alliance for Main Street Fairness is a consortium of small businesses leaders trying to create changes in the tax code to level the playing field between brick and mortar and online retailers.

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