One of the biggest benefits to online shopping is the illusion you don’t have to pay taxes. True, in most cases you don’t pay sales tax up front, but states still require you to pay a “Use Tax”, which is a whole ugly thing onto itself, but initially everyone basks in the glow of paying no sales tax. The current laws are written that a company must only pay sales tax to it if they have facilities in that state, and then they must only pay taxes on orders placed by people residing in that state. Not overly complicated, but what if a state redefined what counts as a presence in their state. What if they counted servers?

Say “howdy” to the newest plan from Texas to collect taxes.

Recently users of the Yahoo! Small Business service which allows you to operate an online store were greeted with the following message upon entering their account:


Recent changes to sales tax rules in Texas may require ecommerce merchants using a server located in Texas to collect tax on sales made to customers in Texas. Merchants are advised that Yahoo! Small Business uses servers located in Texas. Merchants who accept orders from customers in Texas should consult with their own tax professional to determine if the new tax rules apply to their business, and for questions regarding tax obligations. For background information, please see our help page.

All of this comes from Texas Administrative Code, RULE §3.286, “Seller’s and Purchaser’s Responsibilities, including Nexus, Permits, Returns and Reporting Periods, Collection and Exemption Rules, and Criminal Penalties”.  Section 2, part E reads:

(2) Engaged in business–A person is engaged in business in Texas if the person has nexus with the state as evidenced by, but not limited to, any of the following:

(E) 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;

So, if you have an online business, and you have a server in Texas, you will now have to pay them taxes.

While Yahoo! warned its customers, I know of at least one online store run on a private server in Texas that hadn’t heard a word about this until I told them.  I happened to know which hosting company they use, and I know that company has its server farm in Texas, but my friend had no idea that is where their store technically resides.

And that’s part of the problem here in that most people have no clue where their servers are.  You sign up for it, you’re done, you never think twice about where you are technically doing business from.  Of course, you also have to wonder how Texas hopes to have any clue who has a site in Texas.

All that being said, seriously, Texas?  Everyone knows state budgets are tight right now, but this is sinking pretty darn near the bottom of the barrel for revenue streams.  Personally I could see a company moving its site if it’s large enough, and then Texas not only doesn’t get their tax money, but a business in the state loses income.  If enough states follow the same path, how long until everyone moves to some off-shore server farm?

Good job, Texas, way to not plan ahead.

What say you?  Has Texas lost its marbles when it comes to defining a business within its borders?