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Sales Tax Debate Rule 3.334
Are You Aware of the Pending Sales Tax Sourcing Changes!
Texas Comptroller Rule 3.334
n January 2020, the Comptroller proposed rule changes for Rule 3.334 with public hearings in February 2020. In May of 2020 the Comptroller of Public Accounts updated and adopted a new version of Rule 3.334 which changes sales tax sourcing from Origin Based to Destination Based for Texas sellers with an online presence.
This result is tied to changes in the definition of “place of business of seller”. That definition now provides, contrary to the statutory definition, that sales personnel of the seller must receive an order for a location to be considered a place of business of the seller. Additionally, the rule changes also mandate, contrary to past practice, that orders placed on the Internet can never be received by sales personnel. These rule changes were proposed and adopted despite no change in the statutory language on which the rules are supposed to be based.
As a result of this change, if an order is not received by sales personnel, such as Internet orders, the local community supplying the ordered good will lose local sales tax it previously received and the community where the purchaser lives will gain local sales tax it had never previously received.
Concerns and actions by City Municipalities due to the updated version of Tex. Admin. Code 3.334.
Legislative Response.
Apparently recognizing that the Comptroller’s changes to Rule 3.334 are at odds with the statutes governing the allocation of local sales tax, the Chairman of the House Ways & Means Committee in the last session sought to change the law to move Texas from Origin Sourcing to Destination Sourcing. He was unsuccessful. He is trying again, leading an interim hearing of the Committee looking at such a switch. If he is successful, all local taxes will be remitted to the local jurisdiction where the purchaser takes possession of the item. Such a result would be a massive change.
Proponents Of Destination Sourcing.
• Makes sales tax distribution follow the purchaser rather than the seller
• Some communities (rural, bedroom, affluent) believe they will receive more sales tax
• In the United States, 35 of the 50 states already have Destination
Based Tax Sourcing
• Taxation without representation. Should only have to pay the taxes at the purchaser’s residence
• Shifts the sourcing of local sales tax income for almost all cities in Texas. There will be a drop in the amount of local sales tax overall. Any gain will be insignificant. Several local jurisdictions project a dramatic loss in local sales tax revenue.
• Jurisdictions have the authority to provide sales tax based incentives to companies ranging from Fortune 100 down to
Main Street storefronts. With many purchases under new Rule 3.334 being sourced to the location of the purchaser’s address, municipalities are questioning if the commitments they made to incentivize companies will be grandfathered. If they aren’t, what happens to them?
• In July 2021 the Cities of Carrollton, Coppell, DeSoto, Farmer’s
Branch, and Humble, and separately, the City of Round Rock filed suits against Glenn Hegar in his official capacity as the
Texas Comptroller of Public Accounts to reverse the parts of Rule 3.334 that are not supported by Texas Statutes and to invalidate the rule on procedural grounds. These suits were filed in state court in Travis County. In August 2021 after arguments were made before the 250th Civil District Court, the Comptroller’s
Office agreed to a temporary injunction to delay enforcement of those provisions of Rule 3.334 that were scheduled to go into effect
October 1, 2021.
Opponents Of Switching and Maintaining Origin Sourcing.
• Requires businesses to be responsible to 1,698 different taxing jurisdictions
• No study has been done to determine what the true impacts will be in switching
• Changes decades of tax policy – which has helped make Texas the 9th Largest Economy by GDP in the world
• Is Complex and Burdensome to business
• Takes away funding from municipalities for basic city services like roadways, public safety, and other general revenue items because you are taking away the funding source
• Increased initial and annual cost incurred by businesses to implement
The costs of doing business in Texas will become more expensive. Businesses will have to determine which option(s) to manage the destination burden work best in their environment.
What is the Risk to Municipalities?
No City can fully evaluate the impact of the changes to their tax base due to the complexities of each of the rules. Assuming that a City could get every taxable business in their town to understand the proposed rules and then indicate the degree to which each rule would impact their existing tax returns, it is still impossible for any City to know just how much sales tax they would receive from businesses located in other jurisdictions. Therefore, every City is guessing whether the change would be positive or negative, but it is simply a guess.
Based on the diversity of income streams cities have it is safe to say that some cities with high residential bases and minimal commercial will be winners and those that have the heavy commercial and low residential will be losers, but until some meaningful effort is made by the Comptroller to define those impacts, no one can truly know which city is which.
Jurisdictions that provide incentives from sales taxes to attract, retain, and expand businesses may lose a critical tool to grow jobs.
RULE 3.334
What is the Bottom Line for Businesses?
Businesses who collect sales tax and deliver services and or items outside of the taxing jurisdiction where they conduct business will be responsible
for submitting sales tax to the community that is the destination for the good or service on each separate invoice. Businesses must be prepared to incur additional administrative costs to do business from this new administrative requirement and unfunded mandate imposed by the Comptroller. While there are software programs that can be subscribed to and/or purchased to help manage this burden, it seems an unnecessary imposition. Yes, the comptroller provides quarterly updates that can be downloaded by the business, or the company can contract out to manage their financials and tax collection obligation. However, the question remains why a business should be forced to incur new administrative costs (time and money) that doesn’t help it generate any new sales or profit.
