How Texas collects online sales tax might change. Some cities could lose millions.
When a Fort Worth resident buys a Dell computer online, the local sales tax collected doesn’t come back to the city to fix streets or pay police. Rather, it travels roughly 175 miles south and gets divided between Dell and the city of Round Rock, where the company’s headquarters are based.
That’s because of a 60-year economic incentive agreement between the two. And they’re not alone. In Texas, companies funnel their online sales to one location, allowing the local sales tax to be levied in the city where that location is based — rather than where the purchase was made.
But that could soon change under a rule proposed by the Texas Comptroller’s Office that would shift sales taxes collected from online purchases to the city where the order is delivered.
Cities across Texas testified this month before lawmakers, warning of potential losses of tens of millions of dollars if the changes go into effect.
“Round Rock will lose at least $30 million annually in sales tax revenues, and we’ll be forced to increase property taxes to make up the difference,” Steve Sheets, the city attorney for Round Rock, told lawmakers at hearing at the Texas Capitol this month.
And some cities that have entered into these economic incentive agreements, often referred to as “380 agreements” for their place in the local government code, warned that more than just revenue could be lost if businesses decide to move as a result.
But Texas Comptroller Glenn Hegar, the state’s chief financial officer, said that as online sales continue to grow in prominence, more taxpayers will begin to wonder why the local sales taxes they pay are “going to some faraway city or worse off, the bottom line of profit of a business.”
“In every situation where taxes are used for economic development, the voters have the ability to have a say in those local elections,” Hegar told lawmakers at the Texas Capitol this month. “In this situation, Texas taxpayers are paying local taxes that are used in cities where they have absolutely no rights as voters. This is the ultimate case of taxation without representation.”
The proposed changes follow a 2018 U.S. Supreme Court ruling in South Dakota v. Wayfair Inc., in which the court decided states may require remote sellers to collect sales and local taxes. Lawmakers passed bills this past session to align with the court’s ruling.
One bill requires an online marketplace, like eBay, to collect sales taxes rather than individual sellers — and for that sale to be completed based on the destination where the goods are shipped. Another required the Comptroller’s office to establish a single sales tax rate for remote sellers to use.
Previously, remote sellers outside of Texas were not required to collect sales taxes on online purchases. Going forward, Texans can expect to see a sales tax charge on their online purchases, which will bring in millions of additional revenue to the state. If remote sellers opt to use the optional flat rate of 8%, the 1.75% portion of local sales taxes are collected and proportionally distributed to local jurisdictions.
How rule change would affect cities
Economic incentive agreements have been a way for cities to generate revenue and bring jobs to their communities.
In San Marcos, a 2016 agreement with Best Buy brought an internet sales operations center to the city, and at least 50 jobs, earning at least $15 an hour. In exchange, the city offered Best Buy a rebate of 50% of personal property tax revenue and 75% of sales tax revenue generated through online sales in Texas.
“Out of the estimated $8 million in sales tax generated by Best Buy, 75% of that, or six million of it goes back to Best Buy,” Heather Hurlbert, San Marcos’ director of finance, told lawmakers this month.
“We use the sales tax to help offset the need for property tax increases,” Hurlbert said, noting about one-third of the city’s sales tax revenue is allocated toward property tax relief. Without it, the city would have to add 14 cents to the property tax rate, Hurlbert said.
Sheets, the city attorney for Round Rock, said the rule change “will absolutely devastate the financial stability of the city.”
Rep. James Talarico, D-Round Rock, said the city’s example “should ring alarm bells” and stressed that the communities these companies are located in contribute heavily to a business’ operations — even if the sale is online.
“The internet is not, as you say, a metaphysical mystery. When you submit an order, it gets received by a human being in Round Rock, Texas,” Talarico said. “The work that makes that sale possible is all done in Round Rock, Texas, by our community. I don’t work for Dell, but I help pay taxes to make sure Dell employees can get to their job in the morning.”
“Folks buying Dell computers in all these other districts, they can thank us in Round Rock for making that possible.”
Mike Land, Coppell’s city manager, said the recent changes could funnel an estimated $230,000 annually to the city. Meanwhile, he pinned the potential losses for the Dallas suburb at $25 million to $26 million.
Rep. Drew Springer, R-Muenster, stressed it was necessary to discuss how the change would affect cities without the economic incentive agreements in place, as well as cities “that are making out like bandits on this deal.”
“Generational poverty in rural Texas is immensely worse and it continues to get worse as we see brick and mortars go away, and more and more of this online proliferation — which two-day shipment out to rural Texas ain’t a bad deal,” Springer said. “But I think when they see that they’re charged that local sales tax, most Texans think that that comes back to their local community.”
Steve Presley, the mayor of Palestine, was one of a few East Texas cities to support the change. Presley told lawmakers the current setup created an unfair “two-tiered system.”
“This diverts money from the many to give to the few,” Presley said. “This change in our economy is killing our rural areas in Texas that depend heavily on sales tax revenue.”
A minimal impact on Fort Worth
In Fort Worth, officials anticipate the rule change’s effect on the city to be minimal. Out of the city’s 35 active 380 agreements, only an agreement with Acme Brick could be affected, Robert Sturns, the director of Fort Worth’s Economic Development Department, said in an email last week.
In an email last Wednesday, Acme Brick said it is reviewing the change, but that it anticipates it won’t have an effect on its operations since the company doesn’t have online sales.
Under the agreement, Acme Brick receives 100% of revenue from the 1% local sales tax levied by the city, while the remaining 1% of local sales tax is split between the city’s Crime Control & Prevention District and Trinity Metro.
A spokesman for Arlington said the city is monitoring the changes, but declined to speak to how it may affect city revenue.
Issues with the process
Economic development agreements entered before Sept. 1, 2019, would be exempt from the new changes until Dec. 31, 2022. However, many cities are still working to assess the full scope of the changes, and some took issue with the Comptroller’s rule-making process.
Talarico repeatedly stressed over the course of the hearing that he felt the Legislature was better-suited to debate, refine and establish such a policy change when it reconvenes in 2021 — rather than making changes to the Comptroller’s rule after the fact.
With the earliest possible adoption date originally set for Feb. 2, the Comptroller’s Office extended the public comment period to April 3, at which point it will assess next steps.
This story was originally published February 17, 2020 at 6:00 AM.
