The City of Round Rock has filed a lawsuit trying to overturn a new state sales tax rule that is expected to cost the city about $30 million in annual revenue, most notably from online sales made by Round Rock-based Dell Technologies.
The lawsuit asserts that the rule change made by the Texas Comptroller of Public Accounts “is invalid, void, and of no force and effect.” The Comptroller’s Rule 3.334 has been more than a year in the making and takes effect October 1, 2021.
The rule deals with sourcing of sales tax from online purchases. For more than a decade, sales tax on online sales was collected at the seller’s place of business. But the new rule says that remote sellers “should collect local use tax based on the destination location.”
That means, for example, that a Dell would pay sales tax in Galveston for a Dell computer shipped to Galveston — not to Round Rock where the company is headquartered.
“Frankly, if these rules as proposed are adopted by the Comptroller, they will absolutely devastate the financial stability of the city of Round Rock,” said City Attorney Steve Sheets at hearing of the Texas House of Representatives’ Ways and Means Committee last year.
“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.”
On the other hand, lawmakers at that hearing stressed that the change would benefit Texans elsewhere, allowing other localities to collect sales tax on Dell products sold within the state.
The lawsuit states the Rule 3.334 amendments “directly conflict with the plain language” of a provision 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.”
The city’s attorneys also cite this provision of the Tax Code: “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 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.”
The lawsuit further argues that the rule creates a difficult compliance burden for businesses who would have to track sales taxes based on mailing addresses, which don’t necessarily line up with taxing jurisdiction boundaries.
Round Rock’s business community is backing the lawsuit. Jason Ball, President of the Round Rock Chamber, commented, “Collecting taxes on internet sales at the buyer’s location instead of the seller’s place of business creates significant, unnecessary challenges for businesses. 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.”
Round Rock Mayor Craig Morgan stated in a news release, “This rule change is bad for the state of Texas, bad for Round Rock, and bad for our businesses. This kind of fundamental change should only be made by our elected leaders in the Texas Legislature, not the Comptroller.”
GOP lawmakers disagreed. At the Ways and Means Committee hearing last February, Rep. Drew Springer (R-Muenster) said, “I would argue that 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.”
He continued, “Two-day shipment to rural Texas ain’t a bad deal. And we get that, we understand that. But I think when most Texans see that they’re charged that local sales tax, they think that that comes back to their local community and will help reduce their property taxes or provide their services that are needed.”
A handful of big cities “are making out like bandits on this deal” while others are harmed, Springer said. The small towns in his district, for example, are losing tax dollars “to send to the bottom line of a corporation with some side benefits to these ten municipalities.”
Rep. Dustin Burrows (R-Lubbock) said that the rule change would rebalance this: “We’re re-shifting money within Texas, for the most part. Some cities in Texas are getting more and others are getting less.”
Dell Technologies made Round Rock its home in in the mid-1990s. The company has contributed hugely to municipal revenues, though in recent years the city tried to diversify its revenue sources to avoid over-reliance on the company. In 2018, the council adopted a budget cap that prevented adoption of a budget relying on 20% or more revenue from Dell.
Read the Lawsuit
