TX: Presence of Clothing in State for Try-On Period Creates Substantial Nexus

In a recent private letter ruling, the Texas Comptroller addressed whether an online clothing retailer had nexus with Texas for the audit period at issue. This ruling was issued before the Wayfair decision was released and therefore the physical presence standard was applied. The taxpayer at issue selected clothing for clients based on their preferences and shipped clothes to clients on a monthly basis. Clients were not charged for the clothing before shipment, but the taxpayer verified that there were sufficient funds on the client’s credit card to pay for the goods if the client wished to keep them. Clients were allowed a seven-day, so-called “try-on” period to determine whether or not to keep the clothing. After the seven-day period, which was measured from the date the clothing was delivered by a common carrier, the taxpayer charged clients for the clothing. Title and risk of loss associated with the items passed to the customers, per the taxpayer’s terms and conditions, once the goods were handed over to a common carrier.

The Comptroller ruled that the taxpayer had an obligation to collect Texas sales and use taxes because the presence of its clothing in the state created substantial nexus. In the Comptroller’s view, the taxpayer continued to own the clothing during the seven-day period because it had the right to charge the customer for clothing that he or she decided to keep and did not recognize the revenue from the sale of the clothing until after the seven-day period expired. Although the taxpayer’s terms and conditions stated that risk of loss and title to the property transferred to the customer upon delivery of the clothes to a common carrier, the Comptroller noted that it is “well settled that the Comptroller is not bound by a private contract to which the Comptroller is not a party.” Please contact Sarah Vergel de Dios at 202-533-3186 with questions on this private letter ruling.