Texas Fixes Tax Problem for Hosted Services

Back in May of 2010 I posted an article about the fact that New York state (and potentially many others) were looking for ways to tax individuals at the state level even if they were only working remotely via the internet to computers in companies that had offices in the state.

Since my good friend and cross-border tax guru, David Ingram, passed away in February, I'll take on the task of keeping you up to date on this increasing trend. 

Last year I moved my own hosted accounts off a server in New York because of David's advice that this trend was increasing. In light of this, it is refreshing to note that Texas has just cleared up at least that part (remote businesses treated as if they had a business presence, just because their web site was hosted in a state) of the muddy waters surrounding taxation at the state level.

You see, the states (and for that matter all levels of government the world over it seems) are so short of funds that they are looking at any and all reasons that somebody should be taxed in their jurisdiction - and sending out tax assessments that, even if later found invalid, can cause all manner of extra costs to those involved.

Texas passed a law in late June, Texas House Bill 1841, that fixes a previous ruling by their Comptroller of Public Accounts which had stated that renting space on a server in Texas established a business presence in the state and required the business to collect state taxes on its customers.

Other states have not yet ruled one way or the other but leave it up to their tax adjusters, or have started trying to enforce the state taxes at the administrative level.

The problem is - even if such enforcement is later found to be unjustified, the cost associated with fighting such a ruling is not trivial.

Wikipedia's Internet Taxes page cites a case: Quill Corp. v. North Dakota, 504 U.S. 298 (1992) that deals with whether or not an out-of-state business has a business nexus in a state (in this case North Dakota) from before internet commerce started, showing that this fight has been a long one. The Wikipedia page notes that the US constitution requires some "nexus" with a transaction before it can tax it - and stretching the definition of nexus to include the act of hosting on or remotely communicating with a state-resident computer is pushing the limits IMHO.

Let me know if you have comments or examples of this kind of remote taxation.

richard