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INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
Texas Comptroller
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Texas Comptroller Proposes Rule Changes Cementing Tax on 130% of Marketplace Sales

by , and | Sep 17, 2024 | , , , , ,

In a controversial move, the Texas Comptroller is poised to amend Rule 3.330, Data Processing Services, effectively rewriting the rules to favor the contentious stance it has adopted in recent audits and litigation. This proposed amendment, which aims to cement the aggressive stance the Comptroller has taken in audits and litigation that a marketplace provider’s commission-based earnings are taxable “data processing services,” represents a significant departure from long-standing practices and highlights a disturbing trend of what is effectively a retroactive regulatory adjustment.

A LOOK AT THE PROPOSED CHANGES

The crux of the proposed amendment is the addition of paragraph (b)(5) to Rule 3.330, which the Comptroller explains is being added “to clarify that marketplace providers provide data processing services to their customers as they enter, retrieve, search, manipulate, and store data or information in the course of their business.” New paragraph (b)(5) provides that:

Marketplace provider services may be included in taxable data processing services when they involve the computerized entry, retrieval, search, compilation, manipulation, or storage of data or information provided by the purchaser or the purchaser’s designee. For example, services to store product listings and photographs, maintain records of transactions, and to compile analytics are taxable data processing services.

This new paragraph specifically targets the commissions that marketplace providers charge for facilitating sales, taxing them separately from the underlying transactions themselves. This is not just an expansion of the tax base; it’s a redefinition of what constitutes a taxable service, applying it in ways that were never intended under previous interpretations of the law that considered such commissions nontaxable auctioneer/brokerage fees.

WHY THIS AMENDMENT IS PROBLEMATIC

The Comptroller’s approach is problematic for several reasons, including:

  1. Effective Retroactivity. The proposed amendment seeks to justify an aggressive (and questionable) agency position that the Comptroller has only recently begun to assert in audits and litigation after it quietly revoked a long-standing administrative ruling in 2020. The revocation of this ruling in 2020, without public notice or legislative approval, was a stark deviation from established practices. By changing the rules after the fact, the proposed amendment undermines the stability and predictability of the law.
  2. Double Taxation. If a marketplace facilitates a sale where a consumer pays $100 and the marketplace earns a $30 commission, the proposed amendment would not only tax the $100 transaction but also the $30 commission. This results in an effective tax on 130% of marketplace sales, with the additional 30% a double tax on the portion of the sales proceeds paid to the marketplace provider as a commission. Under this scheme, the Comptroller is demanding that marketplace providers pay tax on 130% of the sales price and charge the consumer for tax on the 100% and the seller for the 30%.
  3. Discriminatory Tax Under ITFA. The proposed amendment subjects commissions earned by online marketplace providers to taxation as data processing services while similar services provided offline, such as commissions earned by auctioneers of oil and gas leases, consignment stores, and real estate agents using [...]

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Texas Taxing 130% of Marketplace Sales

by , and | Oct 3, 2023 | , , , ,

Proving that everything is bigger in Texas, the state’s Comptroller is now assessing marketplace providers on 130% of their sales. It seems a sales tax on 100% was not big enough for tax officials in the Lone Star State. The additional 30% is a tax on the portion of the product sales price kept by marketplace providers. Talk about double dipping…

Like all states following the Wayfair decision, Texas adopted a marketplace law in 2019 that required marketplace providers to charge tax on 100% of the sales price for products sold over the platform by third-party sellers. Apparently unsatisfied, the Texas Comptroller has decided to assess tax on 130% of marketplace sales, with the additional 30% a double tax on the portion of the sales proceeds paid to the marketplace provider as a commission.

In most marketplaces, the provider charges a commission for allowing a third-party seller to use the platform and its services, like advertising and access to the platform’s user base. As most commissions are typically in the 30% range, Texas is demanding that marketplace providers pay tax on 130% of the sales price and charge the consumer for tax on the 100% and the seller for the 30%.

Without notifying the public, Texas is asserting, on audit, that these commissions are taxable. This position is contrary to a long-standing administrative ruling that was issued in 2012 and quietly revoked by the Texas Comptroller in 2020.

A quick example illustrates how aggressive this position is and the negative impact it will have on marketplace sellers in Texas: Take a book collector in Austin who is selling used books through a marketplace provider and sells a $100 rare Bible to a customer in Dallas. Historically, the marketplace provider would charge an 8% sales tax on the $100 Bible and send that $8 to the Texas Comptroller.[1] The marketplace provider would then take its $30 commission and send the balance of $70 to the local bookseller.

Now, the Texas Comptroller is telling the marketplace provider, on audit, that the $30 commission it received is separately subject to the sales tax. The marketplace provider in the example should have collected an additional $2.40 in sales tax on its receipt of the commission, resulting in an effective sales tax rate on the transaction of 10.4% (again, with no legislative authority or change behind this view). Instead of getting $70 in revenue, the bookseller will only receive the net after sales tax, or $67.60.[2] While this reduction may not seem like much, it will be the difference between being profitable and losing money for some Texas-based sellers. For the Texas Comptroller to make this policy change without legislative blessing—and while the state is enjoying a record budget surplus—should raise alarm bells.

How does the Texas Comptroller get there? First, it deems the commission payment a transaction separate and distinct from the underlying sale of the Bible in the above example. Second, it looks at the services the marketplace provider offered [...]

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Texas Comptroller Announces Medical or Dental Billing Services are Not Taxable, Effective Immediately

by and | Jul 29, 2021 | , , , ,

On June 4, 2021, the Texas Comptroller issued a policy statement (Accession No. 202106003L) announcing that it is not going to enforce its previously stated policy of taxing medical billing services. This guidance comes in response to a sales and use tax bill that was signed into law April 30, 2021, which excluded “medical or dental billing services” performed prior to the original submission of a medical or dental insurance claim from insurance services. The Comptroller states that it will immediately treat medical or dental billing services as excluded from the definition of insurance services even though the bill is not effective until January 1, 2022. It remains to be seen if the Comptroller’s interpretation of medical billing services, which has been defined through decades of policy and guidance, is aligned with the legislature’s view of “medical or dental billing services.” Some commentators have suggested there may be points of divergence that will need to be worked out over time. For additional information on this topic, please see our prior blog post.



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