Round Rock crossed an important threshold on August 31. In short, a county court issued an injunction which prohibits the state of Texas from implementing a new sales tax regulation until a court can make a final judgement on that sales tax rule. That review is scheduled for June, 2022 – but a final ruling may be more than a year away.
The rule is bad and the injunction is good – for Texas, and for Round Rock, for the time being. Unfortunately, the fight will most assuredly continue. This issue has been the Chamber’s top advocacy priority since Comptroller Glenn Hegar drafted the rule in December 2019, representing the most fundamental shift in Texas tax policy in 50 years.
The Rule is Bad, Anti-Business Policy
The sales tax rule at issue is known as Rule 3.334, which changes how businesses would need to assess and collect sales tax for purchases made online from the current “origin basis” to “destination basis”. The City of Round Rock and the Round Rock Chamber submitted testimony to the Comptroller’s office recommending changes in 2020.
This innocuous description belies the radical nature of the new rule, which would upend existing agreements between employers and municipalities, undermine sales tax backed incentive tools, hurts cities that have worked to grow their tax base, and greatly hinders small businesses from future online growth opportunities. A comprehensive evaluation of the potential impacts to local municipalities has not been performed or provided.
Perhaps most detrimental to the long-term future of Texas business is the impact to small business. Any small business that sells products through a website will need to track what sales tax rate to apply based on the delivery address. There are over 1600 sales tax jurisdictions in the state of Texas! Large businesses will invest in software to track and remit sales tax appropriately, but small businesses will not find these tools to be cheap.
Businesses Were Not Aware of the Change
In spite of the best efforts of the City of Round Rock, the Round Rock Chamber, and many other municipalities and business organizations, small businesses did not know about the proposed change. Recall that 2020 was the year of the COVID-19 shutdown (who can forget!). Businesses were focused on attempting to stay open, let alone become educated about an esoteric change to sales tax policy.
It would have been immensely difficult for online retailers to implement the new ruling under normal circumstances. Most small employers had no idea the change had been proposed. Had an injunction not been applied, businesses would have been left to implement destination sales tax assessment and collection of the 16,000 Texas sales tax districts on October 1 of this year. On the heels of the economic turndown, in the middle of a workforce and logistics bottleneck, and right in the middle of the holiday shopping season for retailers, it would have resulted in confusion at best, and chaos at worst.
What to Expect Next
Advocates of this policy have not been idle, waiting for the rule to be implemented and they will not wait for a final judgment from the court. No matter what the court decides ultimately, proponents of similar policies have brought legislation in the past and are very like to bring new legislation in the next session.
In the 2021 regular session of the 87th Texas Legislature, proponents drafted HB4072 which goes even further, making ALL products delivered to a location subject to destination basis sales tax – not just online purchases. Imagine walking into a store to buy a new refrigerator and requesting delivery. That store would have to know what sales tax to apply based on your delivery address and if it delivers across a sales tax boundary. Again, this is no problem for large retailers, but would have been remarkably difficult for small businesses to adapt.
Strong Public-Private Partnerships Drive Economic Development
When we think of “economic development” most people think of the exciting announcement of a large company announcing its intent to build a new facility, creating hundreds of new jobs, and creating new opportunity for residents and families. What gets missed sometimes is the importance of good policy in creating the kind of environment that fosters and supports business activity.
The City of Round Rock deserves credit and recognition for bringing the lawsuit against the rule, because they recognized how detrimental it would be to businesses and the community. It has taken some political bravery for elected leaders, attorneys, and staff alike and they should be commended.