Texas Register Preamble
The comptroller adds new subsection (b), determining the place of business of a seller. Subsection (b) revises and expands the provisions of former subsection (e) concerning place of business - special definitions.
Former subsection (e)(1) addressed administrative offices supporting traveling salespersons, and former subsection (e)(2) addressed distribution centers, manufacturing plants, and other facilities. In new subsection (b), the comptroller no longer includes administrative offices supporting a traveling salesperson, and distribution centers, manufacturing plants, storage yards, warehouses, or similar facilities operated by a seller at which salespersons are assigned to work in the determination of "place of business of the seller." A seller does not receive orders at administrative offices that solely serve as the base of operations for a salesperson, or that provide administrative support to a salesperson. Moreover, the mere fact that a salesperson is assigned to work from, or work at, a distribution center, manufacturing plant, storage yard, warehouse, or similar facility operated by a seller does not mean that a seller receives orders at these locations. These locations by themselves do not meet the definition of a place of business of the retailer under Tax Code, §321.002(a)(3)(A). The comptroller amends the section to reflect these changes throughout.
Brady Olsen, Tom Hart, and Andrew Fortune, on behalf of the City of Grand Prairie, and Mr. Voelker commented that their cities anticipate losses of sales tax revenues. Mr. Olsen, Mr. Hart, and Mr. Fortune commented the amendment will negatively impact their city's Local Government Code, Chapter 380 agreements (Chapter 380 agreements) due to removing traveling salesperson from the definition of a place of business.
Mr. Kasner commented that business-to-business warehouses and distribution centers often rely heavily on traveling salespersons who are based at those locations. Mr. Kasner requested that the comptroller define "sales office" and contrast it to an "administrative office" that supports traveling salespersons. Mr. Kroll made a similar request.
The comptroller declines to reinsert the omitted provisions because subsection (b) gives effect to Tax Code, §321.002(a)(3)(A) that requires administrative offices and sales offices to independently meet the statutory definition of a place of business. However, new paragraph (4), discussed below, will allow a transition period for these facilities until September 30, 2021.
In new paragraph (1)(A), the comptroller clarifies that locations must be operated by a seller for the purpose of receiving orders and receive three or more orders in a calendar year from persons other than employees, independent contractors, and natural persons affiliated with the seller to be considered a place of business of the seller in Texas. In new paragraph (3), the comptroller restates the provisions from former subsection (e) relating to purchasing offices with minor changes for ease of readability.
Mr. Kroll commented that the language "other than employees, independent contractors, and natural persons affiliated with the seller" contradicts the language in Senate Bill 1533, 83rd Legislature, 2013, as that statute did not impose a related persons test and that bill does not support the new language regarding purchasing offices in paragraph (3). Ms. May requested clarity related to a traveling salesperson working on a campus (group of business buildings that house sales persons, call centers, fulfillment warehouses, and administrative offices) but not in the same building as a place of business. She recommended changing the word "building" to "campus" to avoid confusion. The comptroller declines to make these suggested changes because the clarification gives effect to the statute's definition of a place of business.
The comptroller adds new paragraph (4) for orders received by sales personnel who are not at a place of business of the seller, and new paragraph (5) for orders not received by sales personnel. The comptroller makes these changes in response to commenters' requests for guidance on how to treat orders received by telephone, including VoIP and cellular phone, facsimile, and email.
In the past, orders were typically received at fixed locations, such as orders received in person at the seller's facility, orders received by mail order to the seller's facility, and orders received through landline telephone calls to the seller's facility. Some orders were received by traveling salespersons, and former paragraph (4) applied Tax Code, §321.203(d)(2) to these orders so that the orders were consummated "at the place of business from which the retailer's agent or employee who took the order operates," even though the order may have been actually received by the traveling salesperson at a different location. With the expansion of modern telecommunication techniques, it has become more commonplace for sales personnel who are not traveling salespersons to receive orders when they are not at the seller's place of business, such as orders received by cellular telephone and by email. Accordingly, new paragraph (4) expands the application of Tax Code, §321.203(d)(2) to these orders so that an order received by a salesperson who is not at a place of business of the seller in Texas will be treated as being received at the location from which the salesperson operates. This treatment will result in a more uniform application of the consummation statutes and will facilitate the ability of taxpayers and auditors to determine the location where an order is received.
Paragraph (4) clarifies that the order will be treated as being received at a place of business only if the location out of which the salesperson operates independently meets the requirement for being a place of business of the seller. In addition, to transition from the former rule to the current rule, the comptroller will temporarily expand the definition of "place of business of the seller" for these orders to include an outlet, office, or location operated by the seller that serves as a base of operations or that provides administrative support to the salesperson, until September 30, 2021.
New paragraph (5) addresses orders not received by sales personnel, such as orders received through a shopping website or shopping software application. The comptroller cannot apply the consummation principals of Tax Code, §321.203(d)(2) to these types of orders because that provision is limited to orders received by an "agent or employee."
Instead, these orders will be treated as being received at locations that are not places of business of the seller. This treatment is consistent with the concept that a "place of business" requires the presence of personnel to receive the order. Computer servers, Internet protocol addresses, and automated telephone ordering systems would not ordinarily be called "places of business" of the seller. The comptroller has concluded that the legislature could not have intended that the receipt of an order by an automated mechanical device would make the device an "established outlet, office or location operated by the retailer."
Also, this treatment of orders not received by sales personnel is required to promote uniformity and ease of administration for taxpayers and auditors. Website orders can be received at multiple physical addresses -- any locations that have Internet access. A website order is sent to an Internet protocol ("IP") address. An IP address is the address of the device receiving the order, such as a computer server. An IP address is not a physical address. Websites may use dynamic IP addresses that are assigned by the network upon connection and that change over time. The public IP address of a website may simply be routing orders to different, private IP addresses. Load balancers may change the IP addresses that communicate with customers. Conversely, multiple web sites may be hosted at a single IP address.
The computer server receiving an order placed through a shopping website may belong to the seller or it may belong to a third party. The computer server may be situated on the seller's premises, it may be situated at a co-location facility operated by a third party, or it may be situated at a web hosting facility operated by a third party. The computer server may be one of multiple servers that serve the same website from different physical addresses as part of a cloud distribution network. The computer server may route the order to multiple other servers for load balancing purposes. Conversely, a single computer server may serve multiple websites. Also, the seller may or may not know the physical address of the server receiving the order. The best way to treat these orders consistently and coherently is to treat them uniformly as being received at locations that are not places of business of the seller.
Because the former rule did not explicitly address orders not received by sales personnel, the comptroller is applying paragraph (5) prospectively to orders received after September 30, 2021.
The comptroller adds new subsection (c) to incorporate and reorganize many of the provisions of former subsection (h) concerning consummation of a sale. It reorganizes the general consummation rules stated in former paragraph (3) and applies the general consummation rules to specific situations that were previously addressed in other paragraphs of former subsection (h).
Subsection (c), like former paragraph (3) that it replaces, does not differentiate based on the number of places of business of the seller in the state. Subsection (c) states that the consummation principles of the subsection apply to all sellers, regardless of whether they have no place of business, a single place of business, or multiple places of businesses in the state.
Mr. Sheets commented that the rule should include a special provision for sellers with a single place of business in Texas based on Tax Code, §321.203(b). The comment stated that "all taxable sales of the retailer are consummated at the one place of business."
Tax Code, §321.203(b) describes the consummation principles for a seller that has only one place of business in the state. But those principles are consistent with the treatment of other sellers and do not require special treatment in the rule.
Tax Code, §321.203 as a whole establishes a hierarchy among places of business involved in a transaction. If an order is fulfilled from a place of business of the seller in Texas, the sale is consummated at that location even if the order is received at another place of business in Texas (except for orders received in person). Conversely, an order is consummated at the place of business of the seller in Texas where it is received only if the order was not fulfilled from a place of business in Texas (except for orders received in person). Adopted subsection (c) reflects this hierarchy.
The statutory provision in Tax Code, §321.203(b), for a seller with a single place of business in Texas, is a recognition that the hierarchy is not required in that circumstance. The outcome will be the same regardless of whether the order is received, fulfilled, or received and fulfilled from that place of business, and regardless of whether the order is placed at that location in person - the sale will be consummated at that place of business.
Tax Code, §321.203(b) cannot be interpreted to mean that all sales are consummated at the seller's single place of business in Texas, even if that place of business did not receive the order, did not fulfill the order, and did not serve as the location where the order was delivered to the customer. To consummate a sale and to impose local sales tax in a jurisdiction that had nothing to do with a transaction would be an absurd and possibly unconstitutional reading of the statute.
Mr. Harris commented that the proposed subsection (c)(1) was inconsistent with Chapter 321 because Chapter 321 explicitly ties consummation of sales to the place of business where orders are "received," not where they are "placed." He commented that to the extent that the amendment relies on placement to determine where a sale is consummated, the section contradicts Chapter 321. He requests that any reference to placement of orders, other than orders placed in person or orders placed with a retailer's supplier, should be deleted.
The comptroller agrees that other than orders placed in person, the consummation of sales is tied to the place of business where the order is received, if not fulfilled by a place of business of the seller in Texas. The comptroller makes revisions to clarify and clear up any confusion by the use of the term "placed."
New paragraph (1) provides the consummation of sale rules for orders received at a place of business of the seller in Texas.
New subparagraph (A) provides the consummation of sale rules for orders placed in person, and includes a reference to orders placed at a temporary place of business of the seller, in lieu of the provision found in former subparagraph (h)(6)(C) regarding temporary places of business. Subparagraph (B) provides the consummation of sale rules for orders not placed in person.
New paragraph (2) provides the consummation of sale rules for orders not received at a place of business of the seller in Texas. New subparagraph (A) provides the consummation rule for an order fulfilled at a place of the seller in Texas. New subparagraph (B) provides the consummation rule for an order not fulfilled from a place of business of the seller in Texas.
In light of the Wayfair decision, the comptroller provides in clause (ii) that a remote seller that is required to collect Texas use tax under §3.286(b)(2) must also collect local use tax based on the location to which the item is shipped or delivered or at which the purchaser of the item takes possession unless the remote seller elects to collect the single local use tax rate enacted in House Bill 2153. See Tax Code, §321.205(c) (Use Tax: Municipality in which Use Occurs) and §323.205(c) (Use Tax: County in which Use Occurs).
New paragraph (3) restates the provision in former subsection (h)(3)(F) concerning an exception for qualifying economic development agreements entered into before January 1, 2009, pursuant to Tax Code, §321.203(c-4) - (c-5) or §323.203(c-4) - (c-5) (Consummation of Sale).
Jeffrey Moore, Brown & Hofmeister L.L.P, commented that paragraph (3) runs afoul of Article I, Section 16 of the Constitution of the State of Texas (Bills of Attainder; Ex Post Facto or Retroactive Laws; Impairing Obligation of Contracts). Mr. Moore suggests that the comptroller revise the effective date of the provision until the end of the existing term of the agreement.
The comptroller declines to make this revision because paragraph (3) merely restates the language in former subsection (h)(3)(F), which was adopted in 2014. This subsection implements Senate Bill 997, 83rd Legislature, 2013 (codified at Tax Code, §321.203(c-4) and (c-5)). Moreover, Tax Code, §321.203(c-5) explicitly provides an expiration date of September 1, 2024.
The comptroller deletes former subsection (h)(4) concerning traveling salespersons. The place of business of a traveling salesperson is determined under subsection (b)(4) - orders received by sales personnel who are not at a place of business of the seller when they receive the order.
The comptroller adds new paragraph (4) and includes the language in former subsection (h)(1) concerning local sales taxes due and local use taxes due without any changes. The comptroller restates the language in former subsection (h)(2) concerning multiple special purpose district taxes and multiple transit authority taxes in paragraph (5) without changes to the language.
The comptroller deletes the language found in former subsection (h)(5) concerning drop shipments because these provisions are redundant and the general consummation rules cover these types of orders.
The comptroller adds new paragraph (6) to add the language found in former subsection (h)(6) concerning itinerant vendors and vending machines without changes to the language.
The proposed rule contained a special provision in subsection (c)(6) for Internet orders. The adopted rule deletes this provision. However, the comments regarding the proposed rule for Internet orders may have some relevance to subsection (b)(5), discussed above, regarding orders not received by sales personnel. Accordingly, the comptroller has considered these comments and summarizes them below.
The comptroller received comments concerning Internet orders from Mr. Camareno; the Board of Directors for the Coppell Chamber of Commerce; Mr. Edmonson; Steven Taplits, on behalf of Bed Bath & Beyond; Mr. Voelker; Mr. Kasner; Mr. Olsen; Mr. Hart; Mr. Morgan; Mr. Sheets; Ms. Olson Bourland; Jerry Stratton; Jenna Armstrong, on behalf of the Lake Houston Area Chamber of Commerce; Jack Roberts; G. Brint Ryan, on behalf of Ryan LLC; Doug Duffie, Doug Duffie, LLC; Adina Christian, on behalf of her client; Mr. Kelemen; Mr. Moseley; Ms. May; Jane Hughson, on behalf of the City of San Marcos; David Howard; Linda Howard; Mr. Moore; Mr. Harris; Mr. Kroll; Mr. Pannell; Dan Butcher, Clark Hill Strasburger; Ms. Hunt; Jason Ball, on behalf of the Round Rock Chamber of Commerce; Michael Rollins, on behalf of the Austin Chamber of Commerce; Chris Hillman, on behalf of the City of Irving; Gary Thomas, on behalf of the Dallas Area Rapid Transit; the Honorable US Representative John Carter, on behalf of Round Rock and many other communities; Mr. Durham; Joshua Selleck, on behalf of the City of Kilgore; Kristi Carlson, on behalf of Best Buy Co., Inc.; John Torigian, on behalf of HD Supply; TJ Gilmore and David Erb, on behalf of the City of Lewisville; Michael Land, on behalf of the City of Coppell; Michael Meek, on behalf of the Greater New Braunfels Chamber of Commerce; Mr. Kennedy; John Christian, on behalf of Ryan LLC; Mr. Harris; Heather Hurlbert, on behalf of the City of San Marcos; Mr. Scott; Jared Werner, on behalf of the City of New Braunfels; Mr. Fortune; and Kenneth Welch.
Mr. Kelemen; Ms. Hunt; Mr. Land; the Board of Directors for the Coppell Chamber of Commerce; Mr. Camareno; Representative Zwiener; Representative Talarico; Mr. Morgan; Mr. Sheets; Ms. Olson Bourland; Mr. Voelker; Mr. Durham; Mr. Gilmore; Mr. Ball; Mr. Olsen; Mr. Hart; Mr. Fortune; Ms. Hurlbert; Ms. Hughson; Ms. Armstrong; Mr. Hillman; Mr. Ryan; Ms. Christian; Mr. Duffie; Mr. Howard; Ms. Howard; US Representative Carter; Mr. Scott; Ms. Carlson; Mr. Torigian; and Mr. Kasner stated that the proposed provision regarding Internet orders will have a negative impact on city sales and use tax revenues which will force many of the cities to increase property taxes, reduce core services, and curtail economic development. Mr. Sheets, Mr. Fortune, Mr. Olsen, Mr. Hart, Mr. Morgan, Ms. Hunt, Mr. Harris, and Mr. Durham commented that the amendment will cause a downgrade to city bond ratings.Cont'd...
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