United States

Texas: Ohio-Based Provider of Waste Management Consulting Services Had Texas Nexus

Jul 25, 2016
From KPMG TaxWatch

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The Texas Comptroller recently determined that an out-of-state company that provided services to Texas companies had nexus with Texas for both sales and use tax and franchise tax purposes, despite the fact that it lacked a physical presence in the state. The taxpayer established and managed waste-hauling services for commercial properties nationwide, including properties in Texas. After filling out a nexus questionnaire at the request of the Comptroller’s office, the Comptroller determined the taxpayer had nexus with Texas and assessed franchise tax and sales and use taxes accordingly. The taxpayer argued that it lacked the requisite contacts to be subject to tax under the Due Process and Commerce Clauses. The taxpayer also argued, in the alternative, that its services were not subject to Texas sales and use tax. The matter eventually came before an ALJ.  At hearing, the taxpayer testified that it purchased waste-hauling services from local contractors and paid Texas sales tax on those purchases. It later billed its customers for the services performed by the in-state parties, but did not charge sales tax. It was undisputed that the taxpayer did not have employees, agents, or representatives in Texas and did not own or lease any property in Texas. All of its activities in Texas were completed through communications via email, telephone, and fax.

The ALJ first held that the taxpayer had the requisite contacts with the state to be subject to tax under the Due Process Clause because of its numerous contacts with the state. Notably, it entered into agreements to perform waste-hauling consulting, implementation, and management for numerous shopping centers in Texas. The taxpayer billed the Texas tenants for the services, collected payment, and bore the risk of default.  The ALJ next held that the taxpayer had substantial nexus with Texas under the Commerce Clause. Although the taxpayer lacked a physical presence in Texas, it was able establish and maintain a market in the state by contracting with Texas-based waste-haulers. In other words, nexus was established because the taxpayer provided services in Texas through local independent contractors. The ALJ also concluded that the imposition of tax did not violate the three other prongs of the Complete Auto Transit test for determining the constitutionality of a state tax. Finally, the ALJ rejected the taxpayer’s argument that it was not providing taxable waste-hauling services because it did not perform a water-hauling service; rather, it contracted with local businesses to perform the actual services.  In the ALJ’s view, the taxpayer provided waste-hauling services by contracting with waste haulers to perform the services for tenants on its behalf. Thus, the services were taxable.  The ALJ affirmed the sales and use and franchise tax assessments. Please contact Doug Maziur at 713-319-3866 with questions on this ALJ decision.  

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.