The Texas Comptroller recently upheld a decision confirming that an out-of-state business selling software licenses into Texas had established a sales tax nexus.
This ruling highlights the state’s firm stance on taxing digital products and services.
Recent Case Establishes Clear Texas Tax Nexus Rules
The case involved a Delaware-based company that distributes software applications nationwide. In an earlier voluntary disclosure agreement, the company committed to paying all applicable sales and use taxes for the period of August 1, 2015, through August 31, 2019.
Additionally, it agreed to begin collecting and remitting Texas sales tax on future sales beginning September 1, 2019.
Despite this agreement, the company only remitted taxes for the limited period of October 2018 to August 2019. The company argued that its tax obligation only arose once an employee relocated to Texas during that time.
However, the Texas Comptroller’s Business Activity Research Team (BART) took a different view. They determined that the company had established nexus in the state as early as August 2015.
This was due to its continuous sales of licensed software to Texas customers.
How Software Sales Create Texas Tax Nexus
Under Texas law, the sale of “taxable items” is subject to sales tax whether sold physically or digitally. The law defines “taxable items” to include both tangible personal property and taxable services (Tex. Tax Code §151.010).
Texas also treats the sale or license of software—whether delivered electronically or on physical media—as a taxable sale of tangible personal property (Tex. Tax Code §151.009; 34 Tex. Admin. Code §3.308).
Texas Tax Nexus: Beyond Physical Presence
The company’s defense centered on the claim that physical nexus only began once it had a staff member living in Texas.
However, the Administrative Law Judge found this unconvincing, ruling that consistent sales activity in the state constituted “doing business” regardless of the employee’s presence.
Since the company failed to prove that it had not conducted taxable business in Texas during the entire disclosure period, the Comptroller upheld the original nexus determination.
As a result, the company remains liable for uncollected taxes from August 2015 onward.
Lessons from the Latest Texas Tax Nexus Ruling
This case underscores a broader point for remote sellers: merely having economic interaction with Texas, such as regularly licensing software, can be enough to trigger sales tax obligations.
Businesses must carefully consider not just physical presence, but also whether their activities fall within the definitions of “engaged in business” and “tangible personal property” under Texas tax law.
For companies operating across state lines, particularly in digital markets, this ruling serves as a cautionary tale. Even without boots on the ground, your software sales may put you firmly on Texas’s tax radar.
Need help navigating multi-state tax compliance?
Leyton’s experts can assess your nexus exposure and ensure you’re compliant before issues arise.
