When a Dallas resident purchases a Dell computer online, in addition to the selling price, they pay for the sales tax associated with it. But those tax dollars do not go to their community in Dallas. The money goes to Round Rock, Texas, where Dell is headquartered, and some of those tax dollars are shared with Dell due to an agreement that brought the computer maker’s headquarters to Round Rock in 1993.
Texas Comptroller Glenn Hegar wants Texans to know where their local sales taxes on online orders are going. Not only that, he has begun a debate about possibly changing the existing practice of local sales taxes on online orders going to the community where the seller is, not where the buyer resides.
In Texas, the state collects 6.25 cents on every taxable dollar for a purchase, while local governments get up to two cents in addition to that. Local governments can enter into Chapter 380 economic development agreements with businesses on their sales, allowing the governments to rebate up to 75 percent of those local sales taxes to those businesses.
Hegar’s rule change was discussed in an interim House Ways & Means committee hearing earlier this month.
This rule change comes in the context of two bills on sales tax passed by the Legislature last session. These bills aligned Texas with the Supreme Court Wayfair decision to require remote sellers to collect sales tax on online orders, which was used in part to fund a new boost to public schools. They also assigned a single tax rate for those remote sellers and required marketplaces like eBay to collect sales tax rather than individual sellers – and for that sale to be completed by the destination.
Per Hegar, 1,600 taxing units in Texas receive local sales tax, and there are at least a dozen or so agreements known to the comptroller’s office allowing businesses to share in those local sales tax from internet orders. The growth of e-commerce was one reason why Hegar considered the rule change. In 2019, 11 percent of all sales tax came from e-commerce, and it is projected to increase to 15 percent in 2020.
Winners and Losers
The vast majority of Texas’ sales tax statute was written in the 1980s, Associate Deputy Comptroller for Tax Karey Barton said, and the current law’s definition of “place of business” is antiquated. This is part of an attempt to clarify the law due to the changing times and technology.
Hegar said that Texans normally have a say in the process when their community has an economic development initiative. In these situations, a lot of the people affected don’t have a say because they can’t vote for officials in the community that entered into the agreement. He calls it “the ultimate case of taxation without representation.”
This issue was debated by committee members and legislators representing affected areas, including State Reps. James Talarico (D-Round Rock) and Erin Zwiener (D-Driftwood).
Chairman Dustin Burrows (R-Lubbock) asked if this expanded the rulemaking authority of the comptroller’s office. Hegar pushed back on this. Another issue brought up was the loss of a million dollars of revenue for certain cities due to the rule change, creating winners and losers. Hegar said current law already creates winners and losers.
Take Round Rock for example. Dell accounts for 35 percent of the sales tax the city collects, which translates to $20 million to their general fund. Round Rock Mayor Craig Morgan told CBS Austin the city would cut major core services or have a 13 cent hike in property taxes to make up the difference should the Comptroller’s rule change go into effect.
Talarico asked if this rule would change Texas’ status as one of 11 states to have an origin-based sales tax collection, where the tax is sent to where the seller is located rather than where the buyer is, to a destination-based sales tax collection. Hegar denied this. He said the rule change clarifies how you can source a certain subset of orders — internet orders.
Hegar added the comptroller’s job is to take all stakeholders’ input and figure out how to lessen the impact. As the state tax collector, Hegar wants the rule to be “fair and equitable.”
Talarico suggested that the Legislature was better suited to address this issue and promised to work on it in the next session.
Under the proposed rules, 380 agreements signed before September 1, 2019, are grandfathered in until December 31, 2022.
One question that remains after the hearing is the impact is not entirely clear. How much do cities lose in the current arrangement or in the case if the proposed rule change goes into effect?
The comment period for stakeholders on this proposed rule has been extended to April 3.