Comptroller Clarifies Nexus Rules for Businesses with Websites Hosted on Servers in Texas

Friday, April 29, 2011

In a recent policy letter, the Texas Comptroller’s office clarified the rule for determining if a business with a website hosted on servers located in the state has nexus.

Texas imposes the overlapping duties of collecting and remitting sales tax on anyone who is "engaged in business in Texas." Texas regulations explain that a person is "engaged in business in Texas" if the person has "nexus" with Texas. Nexus means a "sufficient" contact with or activity within Texas, and the regulations state that a business that "derives receipts from a rental or lease of tangible personal property that is located in this state or owns or uses tangible personal property that is located in this state, including a computer server or software" has nexus in Texas.

The Comptroller’s office recently stated that this rule is currently in flux, as the Comptroller is working to again revise the provision on using a server or software in the state. Elaborating on this, the Texas Comptroller explained that this provision was amended in 2010, and, since then, it has been interpreted more broadly than the Comptroller's office intended, so the Comptroller is working to amend the rule again.

To clarify the Comptroller’s policy, the Comptroller’s office has provided a "safe harbor" for businesses whose websites are hosted on servers physically located in Texas. If the entirety of the business’s presence and activity in Texas is limited to (1) having ONLY a website on a third-party server in Texas (upon which the third-party provides all the functionality) and (2) delivering physical products into the state via third-party common carrier, then the business is not considered to be engaged in business in Texas.

For more, see 34 Tex. Admin. Code Sec. 3.286 and Tex. Policy Letter Ruling No. 201103016L (Comptroller of Pub. Accounts Mar 24, 2011).

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