City files suit seeking to overturn sales tax rule change

The City of Round Rock filed a lawsuit asserting that a change made by the Texas Comptroller to a sales tax sourcing rule “is invalid, void, and of no force and effect,” and should be overturned.

The Comptroller’s Rule 3.334 would source sales tax revenue from online purchases to the buyer’s location instead of the seller’s place of business. The change to decades-old sourcing rules could cost Round Rock taxpayers millions of dollars a year in lost sales tax revenue, most notably from online sales made by Round Rock-based Dell Technologies.

Under the change, the local sales tax revenues from purchases that pay for essential City services such as public safety, parks and road maintenance will be reallocated to the locations in Texas where orders are delivered. The rule change has an effective date of Oct. 1, 2021.

The suit states the Rule 3.334 amendments “directly conflict with the plain language” of the Texas Tax Code, which states:

“A sale of a taxable item occurs within the municipality in which the sale is consummated. A sale is consummated as provided by this section regardless of the place where transfer of title or possession occurs.”

More significantly, in the case of a company like Dell, the Tax Code states,

“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.”

The suit points out that the rule treats orders communicated over the internet differently from orders communicated by phone, email and fax, which is also contrary to the Tax Code. The rule change would require businesses to determine the sales tax rates of customers across the state, where mailing addresses often don’t line up with taxing jurisdiction boundaries.

The rule also creates a significant burden for companies, especially small businesses, according to the Round Rock Chamber.

“Collecting taxes on internet sales at the buyer’s location instead of the seller’s place of business creates significant, unnecessary challenges for businesses,” said Jason Ball, President of the Round Rock Chamber. “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.”

The suit states that Texas Comptroller Glenn Hegar “attempts to unlawfully accomplish with rulemaking what the legislative branch of Texas government refused to enact,” and that, in doing so, “the Comptroller has aggressively overstepped his rulemaking authority.”

“This rule change is bad for the state of Texas, bad for Round Rock, and bad for our businesses,” Mayor Craig Morgan said. “This kind of fundamental change should only be made by our elected leaders in the Texas Legislature, not the Comptroller. If this rule takes effect, it will eliminate an economic development tool that has been the foundation of the ‘Texas Miracle’ championed by both former Governor Rick Perry and current Governor Greg Abbott.”

“Economic growth is a partnership of the public and private sectors. An administrative agency making this kind of fundamental change to tax laws hamstrings our community’s efforts to attract new businesses to Round Rock,” Ball said. “Business leaders seek states and communities that provide stable tax environments that allow for incentive agreements based on long-term, mutually beneficial relationships with the private sector.”

City officials have been fighting the rule change for more than 18 months. Mayor Morgan and City Attorney Steve Sheets spoke at a Tuesday, Feb. 4, 2020, hearing held by the Texas Comptroller, and Sheets also testified at a Wednesday, Feb. 5, 2020, meeting of the state House Ways & Means Committee.

The lawsuit was filed Monday, July 12 with the Travis County District Court, which is the mandatory venue for lawsuits challenging an administrative rule by a State agency.

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