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City Opposes Proposed Sales Tax Rule Change

By: City of Round Rock

Comptroller’s proposal would change sourcing rules for internet purchases, which would cost City millions in sales tax revenue

Round Rock City officials spoke at a pair of hearings in early February in opposition to proposed changes to a sales tax sourcing rule that could cost the City nearly $30 million in annual revenue. 

The Texas Comptroller’s Proposed Rule 3.334 would send sales tax revenue from internet purchases to the buyer’s location instead of the seller’s place of business. The change to decades-old rules means Dell Technologies Inc.’s Round Rock-based global headquarters would no longer meet the place of business requirements and almost all of Dell’s local sales taxes, currently relied on by Round Rock, will be redistributed to the location in Texas where orders are delivered. 

Round Rock Mayor Craig Morgan and City Attorney Steve Sheets spoke at a Tuesday, Feb. 4, hearing at the Texas Comptroller, and Sheets also testified at a Wednesday, Feb. 5, meeting of the state House Ways & Means Committee.  

“There’s too much at stake not to fight this proposal every step of the way, and I believe, ultimately, we will prevail on the merits of our argument,” Morgan said. “The good news is that other Texas cities are working shoulder to shoulder with us in this battle. Also fighting with us is our State Rep. James Talarico, who asked many important questions of several testifying witnesses and made a clear case for Round Rock and Dell at the Ways & Means Committee hearing, and our State Sen. Charles Schwertner, who has been instrumental in organizing several of his fellow senators in support of Round Rock and many other adversely impacted cities in this state.” 

The proposed rule would reduce Round Rock’s revenues from sales tax by 35 percent, or $29 million.   

The Round Rock Chamber has issued a statement opposing the proposed change, and Chamber CEO Jason Ball also spoke at the Comptroller meeting. 

We find that the proposed rule would clearly be detrimental to Round Rock and many other communities that have worked diligently, in partnership with the state and within the parameters of state law, to grow the economy of Texas,” Ball said. “The proposed rule effectively alters an existing agreement between a private business and a city government of Texas.” 

Specific impacts of the proposal to Round Rock would be: 

  • Core service reductions: The proposed rule will reduce Round Rock’s net revenues from sales tax by 35 percent, or $29 million annually, the equivalent to 13.3 cents of property tax rate revenues – a substantial increase over the City’s current 43.9 cent tax rate.  
  • Property tax increase: Round Rock citizens voted in 1987 to dedicate an extra half cent of sales tax to reduce property taxes. The loss in sales tax revenue from Dell reduces sales taxes available for property tax reduction by 35 percent, resulting in a $7.3 million or 4.9 cent property tax rate increase. 
  • Economic development and roads curtailed. The reduction would severely impact Round Rock’s Type B corporation and result in a substantial decrease in its available revenues, 35 percent or $7.3 million per year. While Round Rock’s Type B would be able to meet its current outstanding debt obligations, future new debt to meet growing road and economic development needs would be severely limited. 

The City acknowledges some changes to sales tax rules are needed to comply with legislation passed last session in response to the U.S. Supreme Court’s Wayfair decisionIn his remarks Tuesday, Mayor Morgan said the City stands ready to “assist and confer with the State Comptroller to devise practical solutions for Texas.” 

The comment deadline on the Comptroller’s rules was recently extended by 60 days to Monday, April 3, 2020. After that, the Comptroller will need to publish final rules and address all of the concerns expressed. Once the final rules are published, they will go into effect within 30 days, unless a different effective date is set in the final rules. It could be as soon as 30 to 60 days after April 3.