After An Earlier Veto, Texas Enacts Nexus-Expanding Legislation In Response To Dispute With Amazon Over Distribution Center

As many readers may be aware, last October, the Texas Comptroller issued a $269 million assessment against Amazon.com for uncollected use tax for the period December 2005 to December 2009. News reports indicated that the assessment was based primarily on the grounds that a related entity, Amazon.com KYDC LLC, operates a distribution center in Irving, Texas (near the Dallas/Forth Worth airport). Amazon disagrees with the assessment, and later sued to obtain the Comptroller’s audit file containing information regarding the basis for the assessment.

July 19 marked the latest volley in the battle between Amazon.com and the State of Texas. Other e-commerce sellers and direct marketers should now ensure that they do not suffer collateral damage.

In response to the contentious dispute that had developed between the State and Amazon, the Texas legislature introduced a number of bills in its 2011 legislative session intended, in effect, to make clear that Amazon.com is obligated to collect and remit Texas use tax. One version of such legislation made its way to Texas Governor Rick Perry in late May, only to be vetoed by the Governor, who has expressed opposition to Amazon nexus legislation. The Texas legislature, however, re-inserted the nexus-expanding language from the bill Perry vetoed into a broad budgetbill, SB 1, which passed in late June.

Governor Perry, after waiting until the final day on which he could act, signed SB 1 on July 19. The bill includes various revisions to the Texas Tax Code that appear to be intended to subject a retailer to an obligation to collect Texas use tax if the retailer uses a distribution center in the state which is maintained by a related company (or even an agent of the retailer), such as was the case for Amazon. The new provisions are broadly-written and arguably redundant in many respects, suggesting that the legislature wanted to be certain that the new law encompasses any conceivable legal arrangement between a retailer and distribution company. (Or, perhaps more cynically, the legislature wanted to be certain that the law covers whatever legal arrangements Amazon, specifically, may have with its distribution center.) Thus, the law provides that a retailer is “engaged in business” in the State, and thus obligated to collect use tax, if the retailer:

• maintains or uses in the state, either directly or indirectly, or through a subsidiary or agent, a distribution center or any other physical location where business is conducted;
• derives receipts from the sale of tangible personal property situated in the state;
• holds a substantial (50% or greater) ownership interest in, or is owned in substantial part by, a person who maintains a location in the state from which business is conducted, if:
• the retailer sells a similar product line under a similar trade name as the in-state entity; or
• the in-state entity promotes or facilitates sales or otherwise assists the retailer in maintaining market in the state, including by receiving returns; or
• holds a substantial ownership interest in, or is owned in substantial part by, a person that maintains a distribution certain or similar facility in the state and delivers property sold by the retailer to consumers.

See Texas Tax Code § 151.107(a)(1), (3), (7), (8). SB 1 also amends the definition of “retailer” to include a person who, under an agreement with another person, (A) is entrusted with possession of tangible personal property in which the other person has title and (B) is authorized to sell the property without additional action by the person having title.Id. § 151.008(b)(6).

While apparently drafted in a manner intended to target Amazon, Internet retailers and direct marketers that contract with a Texas business or use a Texas location, particularly for distribution purposes, should review the law and consult with their counsel to determine if they may be affected by new definitions. Given the high stakes battle between Amazon and the State, other companies could be caught in the cross-fire or even be targeted themselves. Best not to become an unwitting victim.