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Texas Passes HB1841; Law Clarifies E-Commerce Sales Tax Obligations

Members of the Texas Legislature showed rock solid support for the state’s fast-growing technology industry by overwhelmingly passing HB 1841, a bill that eliminates any question that the mere use of a web-hosting company with a server in Texas might result in a state sales tax collection obligation.  The bill was authored by Rep. Will Hartnett of Dallas and co-sponsored by Ways and Means Committee Chairman Harvey Hilderbran of Kerrville. Sen. John Carona sponsored the bill in the Texas Senate. Governor Perry signed the bill earlier this month.

Until last July, the mere use of a server in a state had not been considered adequate to establish state sales tax obligations.  The U.S. Supreme Court has consistently ruled that a state can only require a company to collect its sales tax if the company has a substantial physical presence in the state.

In July 2010, the Texas Comptroller’s office amended a state regulation saying that the mere use of a computer server located in Texas was enough to require an e-commerce vendor to collect state sales tax even though the company had no other physical presence in Texas.  The Comptroller’s office later stated this was not their intent but they never repealed the new regulation so there was still some doubt on this issue.  HB 1841 removes any lingering doubt and effectively repeals the regulation and eliminates any unintended confusion about state policy on the subject.

This is a very positive outcome for Rackspace customers and the cloud computing and hosting industry.

About the Author

This is a post written and contributed by Alan Schoenbaum.

Alan Schoenbaum is Special Counsel for Rackspace.

Prior to joining Rackspace in 2005, he was a partner at Akin Gump Strauss Hauer & Feld LLP in San Antonio, Texas. Alan has more than 25 years of experience in corporate and securities law and mergers and acquisitions. Throughout his legal career he has represented public and private growth companies, venture capital funds and their portfolio companies. Alan received his B.A. in English and his law degree from the University of Texas at Austin.


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