HBA-JLV H.B. 2963 77(R) BILL ANALYSIS Office of House Bill AnalysisH.B. 2963 By: Heflin Ways & Means 3/22/2001 Introduced BACKGROUND AND PURPOSE The state of Texas does not collect sales tax on merchandise sold to Texans by businesses which have no physical presence in the state. However, multistate retailers have been expanding physical operations into Texas while keeping catalog, phone, and online sales based out of state. These occurrences have raised concerns about proper taxation when a catalog or other sale is made to a Texas resident from outside the state while the physical operations of the business are located within the state. While federal case law is clear on the prohibition of taxing sales when the business has no presence in the state, current state law does not enable taxation of retailers because the order set-up is based out of state, even though these retailers are soliciting sales from Texas residents. There are concerns that this situation constitutes unequal and non-uniform taxation and that it provides some businesses an improper competitive advantage. Many seek to address the inequalities of taxation and to end a form of tax avoidance brought about when a Texas retailer uses an out-of-state structure to solicit sales from Texas residents. House Bill 2963 specifies what constitutes physical presence for purposes of collecting state sales taxes from retailers who are subject to the jurisdiction of this state. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that this bill does not expressly delegate any additional rulemaking authority to a state officer, department, agency, or institution. ANALYSIS House Bill 2963 amends the Tax Code to modify the definitions of "seller" and "retailer" to include a person having a physical presence in this state and purposefully availing itself of the benefits of the markets in this state by soliciting sales from customers located in this state by any means, including electronic images or billboards (Sec.151.008). The bill specifies what constitutes physical presence by a person in this state for the purpose of collecting taxes, including ownership of certain business property, maintaining a place of business, and transacting various types of business (Sec. 151.012). The bill provides that a person owns property located in this state for the purposes of collecting taxes if the property is owned by a corporation in which the person directly or constructively owns 50 percent or more of the total combined voting power of all classes of stock of the corporation entitled to vote or 50 percent or more of the total value of the stock of that corporation. The bill provides that a person owns real or tangible property in this state if the property is owned by any partnership of which the person is a partner or by any trust or estate of which the person is a beneficiary. The bill sets forth provisions regarding determination of ownership interests in a corporation (Sec. 151.013). The bill provides that a retailer is engaged in business in this state if a retailer otherwise does business in this state and is, under federal law as interpreted in the year the tax is imposed on the retailer, subject to or permitted to be made subject to the jurisdiction of this state for purposes of collecting taxes (Sec. 151.107). The bill authorizes the comptroller of public accounts to recharacterize a transaction, activity, or relationship and treat it in a manner consistent with its underlying nature, on a determination that a transaction, activity, or relationship or a set of related transactions, activities, or relationships does not have a significant business purpose or lacks economic purpose (Sec. 111.024). EFFECTIVE DATE September 1, 2001.