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Tug of war over Texas online sales tax

On Behalf of | Jul 13, 2021 | Counsel for Texas Municipalities |

A simple change to the sales tax sourcing rule by the Texas Comptroller will go into effect later this year. Comptroller’s Rule 3.334 will redirect sales tax revenue from online purchases. Instead of going to the seller’s place of business, the revenue will go to the buyer’s location.

Hoping to avoid a downward shift

While the change simply flips the tax from one destination to another, for involved taxing jurisdictions, the simple change could mean a dramatic downward shift in revenue.

The Texas state sales and use tax is 6.25 percent, but local taxing jurisdictions such as cities and counties can add their own sales and use tax – up to 2 percent – for a maximum combined rate of 8.25 percent.

The City of Round Rock recently filed a lawsuit that seeks to get the Comptroller’s change stopped before it takes effect on Oct. 1.

‘ . . . invalid, void . . . ‘

Round Rock says the change “is invalid, void, and of no force and effect.” Because the city just north of Austin is home to Dell Technologies, it stands to lose millions of dollars per year in sales tax revenue generated by online sales of the popular computers.

Round Rock argues that the change is in direct conflict with the Texas Tax Code, which states: “A sale of a taxable item occurs within the municipality in which the sale is consummated.”

The Code goes on: “If a retailer has only one place of business in this state, all of the retailer’s retail sales of taxable items are consummated at that place of business.”

Putting a new burden on business?

Round Rock also notes that if the change is enacted, businesses will have to determine the applicable sales tax rates for people across Texas and that consumers’ mailing addresses are often not within the boundaries of the correct taxing jurisdiction.

“Businesses would have to track sales tax rates in more than 1,600 taxing entities across Texas, instead of the one rate where their business is located,” said Jason Ball, president of the Round Rock Chamber.

Of course, other cities might argue that it’s time that sales tax revenue generated by Dell and other large Texas manufacturers is dispersed around the state rather than concentrated in the cities that are home to corporate headquarters.



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