Texas Comptroller Glenn Hegar is looking to close a loophole allows online companies and cities to make deals that funnel local sales taxes to cities where the company doesn’t actually fulfill product orders.
Citizens expect that those taxes will stay in the city they live in, but that’s not always happening, and cities in Texas are losing out on that money, thanks to the loophole in the state's Rule 3.334 for Local Sales and Use Taxes.
In a Feb. 4 opinion piece published by the Dallas Morning News, Hegar laid out how the agreements between companies and cities where they have no fulfillment center presence might work.
A business might establish a customer-service center that collects orders. Those orders are sent from other cities, even other states. The arrangement with the municipality where the customer-service center is located collects the local sales tax funding, even if items are delivered or picked up in other Texas cities.
The change proposed by Hegar’s office includes clarification that the local sales tax is tied to the place of business where orders are fulfilled, or locations where items are shipped, not the call centers where orders are placed.
“The tax code’s current definition makes it clear that a ‘place of business’ is an actual location operated by the retailer for the purpose of receiving orders,” Hegar wrote in the opinion column. “It’s a place a customer can visit or call to place an order. This definition, or a version of it, has been in state law since before 1980. We don’t need to change the law, we just need some clarity in its interpretation.”
“Comptroller Hegar has raised an important issue that should be addressed," Rod Bordelon, Senior Fellow and Director of the Center for Economic Prosperity at the Texas Public Policy Foundation told Texas Business Coalition. "Local sales taxes are generally intended to be collected and distributed for the benefit of the taxpayers in that locality. The arrangements identified by the Comptroller thwart that intent by redirecting and distributing local taxes to other communities with no connection to the individuals paying the taxes.”
Businesses retaining tax credits or rebates may have very little operations in that community, Bordelon added.
"Cities and businesses should not be allowed to negotiate where local taxes are distributed," he said. "These arrangements redirect taxes away from the taxpayers in direct contravention of the purpose of local taxation.”
In the opinion piece, Hegar noted that "It's not a small issue." In January, $763.8 million in sales tax revenue was distributed to Texas local governments, the comptroller wrote.
“Comptroller Hegar is right when he says that taxpayers expect local taxes they pay to stay in their local community," Bordelon said. "Other cities and businesses should not be allowed to negotiate that away.”
