February 19, 2020

The Proposed Changes to Online Sales Tax will Hurt Small Business and Texas Communities

By: Jason Ball

The Proposed Changes to Online Sales Tax will Hurt Small Business and Texas Communities

In recent weeks you may have heard that the Texas Comptroller has proposed a significant change to the way sales tax is collected in Texas for online purchases. You may have seen some of the recent articles on the topic. Many others are still unaware of what has been proposed, even several business advocacy organizations across the state.

I understand this topic is a complicated one, and for many, it can be enough to put you to sleep. However, I promise that no matter how naturally interested in the topic you may be, it is important and will have far reaching impacts to communities and businesses across Texas.

The Chamber Board of Directors and the Business Climate Council, have determined that the proposed rule would clearly be detrimental to Round Rock and many other communities that have worked diligently, in partnership with the state, to grow the economy of Texas.

Here’s why:

What has been proposed:

On January 3rd the Texas Comptroller, Glenn Hegar, and his staff published a rule proposing that – for any online retail purchases inside the State of Texas – sales tax will be based on the rates in the city where the product is delivered (a “destination-based” sales tax). Currently, and for decades past, sales tax has been based on the rates in the city where the business is located (an “origin-based” sales tax).

What it will do:

While this may sound like a small change, the impact to Round Rock and many other cities is very large. It is expected that Round Rock would lose $20 million in sales tax annually that fund roads, water, parks, and essential city services like police and fire. That would be equivalent to a 13 cent increase in property tax. If implemented, Round Rock would have no choice but to consider reducing city services, increasing property tax, or some combination of both.

And more importantly to small businesses and communities attempting to grow their economies, a small business making online sales inside the State of Texas will now need to assess the correct sales tax rate among the over 1,600 sales tax jurisdictions in Texas. This is overly burdensome to small business and is an anti-business policy.

Why the comptroller’s proposed rule is the wrong approach:

1) The most appropriate place for this kind of rule to be developed is within the Texas State Legislature, through the normal legislative process. We respect the rule-making authority of the Texas Comptroller’s office. It is a necessary and normal executive function in most instances, but not in this instance. The sweeping impacts of this change are foundational to many Texas cities. And, the legislature has not mandated the comptroller develop such rules. The representatives elected by the people of Texas should determine what needs to be done, not the comptroller and his staff.

2) The proposed rule alters an existing agreement between a private business and a city government of Texas. Businesses invest in areas that provide a stable tax and regulatory environment. If the state can so fundamentally alter standing agreements between municipalities and employers, it will be detrimental to the perception of Texas as a stable place in which to invest, putting future state-wide business recruitment efforts at risk.

3) The proposed rule is burdensome to small business. If you own a small business, with one location, and your customers can place orders over the internet, you will now need to assess sales tax in any one of the 1,600 sales tax jurisdictions across the state. It will be entirely up to you to determine what the appropriate sales tax is, based on the destination of your client. For example, if you make custom t-shirts and your customers can order them online, you will need to assess the sales tax where the shirts are delivered and not where your business is located. If a mistake is made, your business will be held accountable by the state. Ironically, large online entities outside of Texas can choose to pay the State of Texas a single, state-wide rate for simplicity. An option your small Texas business will not be afforded under this proposed ruling.

4) There are better options available to govern collection of in-state sales tax from online transactions. Texas is not the first state to struggle through the finer points of these issues. Notably the State of Illinois has developed a model that is far less burdensome to small business, promotes new business recruitment, and successfully addresses the concerns the comptroller is attempting to solve.

Why the current process is NOT a loophole and IS encouraged by the elected representatives of Texas:

Nearly thirty years ago, the state legislature passed legislation giving the authority to Texas cities to offer a partial sales tax turn back to companies making a large investment in new jobs and facilities, known as a 380 agreement. We disagree strongly with the implication that somehow such agreements are executed without the authority of the people’s representatives. Rather, there is legal precedent to suggest that the proposed rule not only would roll back the original intent of the Texas legislature, but it also unnecessarily extends beyond the scope of House Bill 1525 and House Bill 2153 of the 86th Texas Legislature. The people have been represented throughout this entire process.

Recently proponents of this rule change, have characterized the use of 380 agreements as a “loophole”, implying that something inappropriate has happened. Round Rock has used the tools the state created and encouraged cities to use to grow the economy of Texas. Round Rock has only entered into agreements where new, job creating activities will occur as a result, and not moving jobs from one location to another. This is not a loophole in tax policy, it is the direct intent to grow the economy and Round Rock is an excellent example.

In Round Rock, Dell Technologies has used those resources to grow its campus from an original 1,200 employees to over 12,000 – a tenfold increase in twenty-five years. Over that time, Dell Technologies has remitted over $1.5 billion in sales tax to the State of Texas, providing roads, infrastructure, and services to communities across the state. The growth of Dell Technologies meant that more houses, retail options, and car sales were needed in Round Rock – further igniting growth in an economy that is still a national leader. The simple truth is that Dell Technologies is a story of great success for Texas people and their families.

Why this issue needs more study and needs to be addressed in the legislature:

The Round Rock Chamber is highly concerned about the impact this rule would have and the broader repercussions it will have on the Texas economy if it is implemented. During a hearing of the House Ways and Means committee earlier this month, the comptroller admitted that they cannot quantify what the financial impacts or benefits will be if the rule change is implemented. State-wide this will influence the flow of hundreds of millions of dollars to Texas cities.

That is why we were very glad to hear that our request for an additional sixty-day extension of the review and comment period was granted. We thank the comptroller for recognizing the need to better understand how this rule will impact Texas and evaluate other options open to us.

We respect the comptroller and the job he has been elected to do. However, in this instance, we feel he has reached the wrong conclusion in how this rule is developed. If there are communities and employers applying agreements in a way that does not create new economic activities, but simply moves that activity from one community to another, we would support an approach that addresses it, similar to the approach taken by the State of Illinois. Further study is necessary, and any action taken should begin with the people’s representatives in the state legislature.

As it is written now, this rule discourages communities and businesses from developing long-term relationships in which both invest in each other, and instead encourages short-term thinking. That is a race to the bottom that will hurt all of Texas.

Jason Ball
President and CEO
Round Rock Chamber

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