Does an out-of-state clothing-subscription retailer owe Texas sales tax on shipments where customers get a 7-day try-on period before being charged?

Plain-English summary

An out-of-state online clothing-subscription retailer (think a "try before you buy" style box) asked the Comptroller whether it had to collect Texas sales and use tax, even though it has no offices, warehouses, employees, or independent contractors in Texas. Its customers sign up for free, get a monthly box of clothes picked by a stylist, and are billed only for what they keep after a 7-day try-on period; anything returned unworn within that window is free.

The Comptroller ruled the retailer does have a Texas tax collection obligation. Under Quill Corp. v. North Dakota, an out-of-state seller only needed a "substantial nexus" through physical presence to be required to collect. Here, the retailer's own terms said title and risk of loss pass to the customer upon delivery to the carrier — but the Comptroller isn't bound by a private contract it's not a party to, and looked instead at who could actually exercise ownership rights. Because the retailer keeps the power to charge the customer for the clothes (title doesn't truly settle until the customer either keeps the items or the 7-day period expires), the retailer effectively retains an ownership interest in clothing physically sitting in Texas during that window. That's enough physical presence to create substantial nexus and a collection duty.

The ruling itself notes that it was issued about seven weeks after the U.S. Supreme Court's South Dakota v. Wayfair decision (June 2018), which allows states to tax remote sellers based on economic presence alone, and states the Comptroller intended to adopt new rules to implement Wayfair in early 2019 — which it later did (see the disclaimer above).

What this means for you

Subscription-box, try-before-you-buy, and similar retailers

Contract language that shifts "title and risk of loss" to the customer at shipment doesn't control the tax analysis if you retain the practical ability to charge for the goods later (e.g., a return window, a right to bill for unreturned items). The Comptroller looks at who can actually exercise ownership rights over property physically located in Texas, not just what your terms of service say.

Out-of-state e-commerce sellers evaluating whether they have Texas nexus

This ruling's core holding — nexus through retained ownership rights in property present in the state — still stands on its own facts. But it is no longer the only way to have Texas nexus. Since 2019, Texas also taxes remote sellers who simply exceed economic activity thresholds in the state, regardless of any property or people physically present here. Check both tests.

Accountants and tax professionals

The ruling leans on the "substantial physical presence" line of Comptroller's Decisions (106,632 and 108,626 (2014)), which look past contractual title-transfer language to the retained rights and interests a seller keeps in property located in Texas. Useful precedent for any consignment-like, try-on, or conditional-sale arrangement where legal title nominally passes but practical ownership doesn't.

Common questions

Q: We have no offices, warehouses, or employees in Texas — can we still owe Texas tax?
A: Yes, per this ruling, if your own contractual or business terms mean you retain effective ownership rights (like the right to charge for goods later) over property that's physically located in Texas, even briefly, that can be enough physical presence for substantial nexus.

Q: Does it matter that our terms of service say title passes to the customer at shipment?
A: Not necessarily. The Comptroller isn't bound by private contract language it isn't a party to, and will look at who can practically exercise ownership rights — here, the retailer's ability to charge for kept items — rather than the label used in the contract.

Q: Is physical presence still the only way to get Texas nexus?
A: No — this is important context missing from the ruling's original 2018 text. Since 2019, Texas also applies an economic-nexus test (adopted after Wayfair) based on Texas sales/revenue thresholds, independent of any physical presence.

Q: Can I rely on this ruling for my own subscription business?
A: No. It's a private letter ruling binding on the Comptroller only for the taxpayer and facts submitted, and it cannot be relied on by any other taxpayer — a business with different return/billing terms could come out differently.

Citations and references

Statutes, decisions, and cases:

• Tex. Tax Code § 151.051(a) (Sales Tax Imposed); § 151.005(1) ("Sale" or "Purchase")
• Tex. Tax Code § 151.008(a) ("Seller" or "Retailer"); § 151.052(a), § 151.103(a) (Collection by Retailer)
• Quill Corp. v. North Dakota, 504 U.S. 298 (1992) (physical-presence substantial-nexus standard)
• South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018) (basis for the Comptroller's later economic-nexus rules)
• Comptroller's Decision No. 46,628 (2006); Nos. 106,632 & 108,626 (2014) (retained ownership rights = substantial nexus)
• Comptroller's Decision Nos. 107,200 (2013), 103,756 (2011), 25,932 (1990) (Comptroller not bound by private contract terms)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201808011L

Original ruling text

August 14, 2018

RE: Private Letter Ruling No. 2017010116

* Taxpayer No. *

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE: 1] We are responding to your request dated March 25, 2016. Detrimental reliance relief is provided in accordance with Rule 3.10, the Taxpayer Bill of Rights.

You requested guidance on whether your client, ** (Taxpayer), is obligated to collect sales and use tax in Texas.

Facts Presented

The relevant facts are based on information in your request and email correspondence as well as information found on Taxpayer’s website.

Taxpayer, incorporated in Delaware, is an online clothing retailer that allows customers to receive clothing every month.

The customer must register and become a member. The customer must provide credit card information, which Taxpayer keeps on file. The customer, however, does not pay a membership fee and may cancel at any time.

Taxpayer ships clothing to customers each month. Initially, Taxpayer sends a preview e- mail of its fashion expert’s selections. Taxpayer then ships the clothing if it does not get a response rejecting the shipment within 48 hours. Before shipping, Taxpayer verifies that there are sufficient funds on the credit card on file, but does not bill the customer for the clothing. As stated on its website, Taxpayer charges a styling fee for each order to cover the cost of the fashion expert, free shipping and returns, and the convenience of the try-on period. Taxpayer applies the amount of the styling fee toward the cost of the clothing that a customer keeps.

Customers are allowed a “7-day Try-on Period” (7-day Period) to examine the clothing. The 7-day Period begins the day the package is marked delivered by the common carrier. Taxpayer charges customers only for the clothes they keep after the 7-day Period. Customers can also mark clothing as kept before the 7-day Period expires. If customers do not wish to keep clothing, they can ship items back using a prepaid return slip provided by Taxpayer. Taxpayer recognizes the revenue from the sale of the clothing when the customer marks the clothing as kept before expiration of the 7-day Period or when the 7- day period expires.

Taxpayer has the sole discretion to accept returned clothing. Taxpayer will accept returns, and not bill the customer, for clothes that are shipped back before the expiration of the 7- day Period, provided the clothes are unworn, unused, unwashed, and undamaged, and have tags still attached. Returns may be made after the 7-day Period in exchange for store credit. If a customer requests a return more than 30 days after arrival, Taxpayer charges a restocking fee.

Taxpayer’s terms and conditions state: “the risk of loss and title for items purchased by you [the customer] pass to you upon Company’s delivery of the items to the carrier pursuant to the Company Shipping Policy.” Once Taxpayer ships the package to the customer, the risk of loss and title to the clothing purchased automatically passes to the customer.

Taxpayer does not have any employees, warehouses, offices, or capital assets in Texas. It also does not have any independent contractors soliciting sales or marketing for it in Texas.

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question: Does the Taxpayer have a sales and use tax collection obligation in Texas?

Ruling: Taxpayer has a sales and use tax collection obligation in Texas.

Analysis:

Section 151.051(a) (Sales Tax Imposed) imposes a sales tax on each sale of tangible personal property in this state. Section 151.005(1) (“Sale” or “Purchase”) provides in relevant part:

“Sale” or “purchase” means any of the following when done or performed for consideration:

(1) a transfer of title or possession of tangible personal property….

Section 151.008(a) (“Seller” or “Retailer”) defines the term “seller” as a person engaged in the business of making sales of taxable items. Section 151.052(a) (Collection by Retailer) requires the seller to collect sales tax on taxable sales.

Texas’s authority to impose a duty on an out-of-state retailer to collect sales and use tax is subject to the limits of the United States Constitution. Previously, a state could only require an out-of-state seller to collect the state’s sales and use tax if the seller had a substantial nexus with the state. See Quill Corp. v. North Dakota, 504 U.S. 298 (1992) and Comptroller’s Decision No. 46,628 (2006). Through Quill, the U.S. Supreme Court ruled that an out-of-state retailer must have a physical presence in the taxing state to meet the substantial nexus requirement.

Under the Quill test, Taxpayer has a substantial nexus with Texas through the presence of its clothing. Texas requires out-of-state companies to collect sales and use tax on sales to Texas customers when the company has property in Texas. See Comptroller’s Decision Nos. 106,632 and 108,626 (2014); STAR Accession Nos. 9207L1191B14 (July 1992); 9802223L (Feb. 19, 1998); 9404225L (April 14, 1994).

The key question in this request is whether Taxpayer continues to own the clothing during the 7-day Period. When a person retains ownership over property in this state, the person has substantial nexus with Texas. See Comptroller’s Decision Nos. 106,632 and 108,626 (2014) (stating that “[t]he substantial physical presence requirement is determined by the character of the rights and interest Petitioner retained in the software and digital images downloaded by users located in Texas”). In this situation, Taxpayer retains ownership over the clothing during the 7-day Period because it has the right to charge the customer for the clothes he or she keeps.

Through its terms and conditions, Taxpayer passes the risk of loss and title to the property to the customer upon delivery of the clothes to the common carrier. Nevertheless, it is well settled that the Comptroller is not bound by a private contract to which the Comptroller is not a party. Comptroller’s Decision Nos. 107,200 (2013); 103,756 (2011); and 25,932 (1990).

Taxpayer has the power to exercise its ownership rights over the clothing while the clothing is in Texas. Taxpayer can and will charge the customer for the clothing after it ships the items. Because the customer has not paid for the clothes, the customer does not truly own the clothes, free of restrictions, until Taxpayer charges the customer for the clothing, which occurs after the clothing is physically present in this state. During the 7-day Period, the customer possesses the clothing on the condition that he or she will either return the clothes within the 7-day Period or pay for them once the 7-day Period expires.

Moreover, under Section 151.005(1), a sale is a transfer of title for consideration. (Emphasis added). Without question, a customer pays Taxpayer for the clothes after the clothing is present within the state. Further, Taxpayer does not recognize the revenue from the sale of the clothing until the customer marks the clothing as kept or the 7-day Period expires. Thus, the sale of clothing occurs in this state as the customer pays for the clothes after the clothing is in this state.

Based on the facts provided, Taxpayer has a substantial nexus because it has a physical presence in Texas through the presence of its clothing. Taxpayer makes taxable sales of its clothing in this state under Sections 151.051(a) and 151.103(a). Taxpayer, as the seller, must collect and remit sales and use tax on these sales under Section 151.052(a).

On June 21, 2018, the U.S. Supreme Court issued a decision allowing states to require remote sellers that have an economic presence in the state to collect sales tax. See South Dakota v. Wayfair, 138 S. Ct. 2080 (June 21, 2018). We intend to adopt new rules under our current legal authority in early 2019 to implement this decision.

Comptroller’s Decisions and STAR documents cited are available on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 2017010116.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.