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February 5, 2020
In this issue
Local Sales Tax Rule 3.334 Hearing
Ways and Means Hearing on Wayfair (and proposed Rule 3.334)
TTARA Webcast Update February 13 at 9:00 a.m. (Sign-Up Below)
CPA Carl Walker Joins the TTARA Analyst Team
Local Sales Tax Rule 3.334 Hearing
At the request of a number of cities, the Comptroller held a public hearing yesterday for testimony on the proposed rewrite of administrative rule 3.334 concerning local sales taxes as published in the January 3 Texas Register. The proposed rule would change the method for sourcing local sales taxes on sales over the Internet from the location of the seller to the location of the purchaser. This seemingly technical change could result in a shift of millions of dollars of sales taxes from one set of communities to another.
The hearing lasted about 2 1/2 hours during which 21 attendees testified. Testimony had to be submitted in writing before oral testimony which was limited to 10 minutes. Testimony was heard by a panel of four: Karey Barton, Associate Deputy Comptroller for Tax; William Hamner, Special Counsel; Teresa Bostick, Director of Tax Policy; and Lara Abi Habib, Tax Policy Attorney.
Comptroller Hegar set the stage for the hearing with the publication of a guest editorial in the Dallas Morning News explaining why the rule change had been proposed. In his commentary, the Comptroller stated that a principal purpose of the change was to short-circuit a “tax loophole” that permits sales taxes to be paid to a single local government where orders are received rather than to where purchasers reside and consume local government services. The method to attack this “loophole,” is to switch the sourcing of many Internet orders from origin to destination.
Deemed particularly objectionable by the Comptroller are economic development agreements entered into by local governments pursuant to the broad authority in Local Government Code Chapters 380 (for cities) and 381 (for counties) whereby on remote taxes collected by a business can be shared with the business by the local government in which the business is located. These amounts may be substantial, causing concerns that over time, these arrangements may effectively erode the overall local sales tax base.
Sales (Internet, phone, etc.) a principal focus of nearly all the testimony included concerns about and/or objections to the Internet order sourcing change. The Comptroller’s editorial was frequently commented on during the hearing.
For the most part, testimony from cities dominated the hearing. Most (16 of the 21 that testified) did so on behalf of more than a dozen cities, including those with and without Chapter 380 economic development agreements that the Comptroller objected to. Only two cities expressed support for the proposed rule; all others expressed objections which included several recurring themes:
The amount of their sales tax revenue that would be lost and the resulting budget problems.
Support for the rule provisions to implement HB 1525 and HB 2183 passed last session to expand use tax collection from out-of-state sellers as legitimized in the U.S. Supreme Court’s South Dakota v. Wayfair decision.
Criticism of the non-Wayfair implementation-related provisions.
The need for additional time to analyze potential consequences and develop plans to deal with them.
Delay making changes until the House Ways and Means Committee reports on its interim charge to study local sales taxes and the Legislature has an opportunity to consider it next session.
Make changes by statute, not by rule.
Conflicts with Tax Code provisions concerning local sales tax sourcing.
No statutory authority to treat Internet orders differently than orders submitted by other means.
TTARA’s testimony relayed two primary concerns expressed in discussions with a number of our affected members: (1) the need for clearer and expanded definitions, especially those related to Internet orders, to reduce confusion and provide clarity needed to facilitate compliance, especially with regard to business to business sales, and (2) the very significant and difficult administrative compliance burden, with its associated costs, that will be placed on sellers, particularly those that do not have a 380 agreement. These companies will have to incur substantial and immediate expense to comply with the rule, and would have to modify their sales processing systems to be able to track how orders are received: over the Internet, or by some other means (such as phone orders). The agency was asked to re-evaluate the proposed rule in light of these concerns and, at a minimum, to address the need for clarity.
Other than TTARA and the city representatives, the other four witnesses and the crux of their remarks were:
A member of Senator Nichols staff read a letter from the Senator expressing support for the proposed rule as well as an overall switch from origin to uniform destination sourcing.
An attorney from Ryan opined that the proposed rule violates the federal Internet Tax Freedom Act and that the Comptroller does not have the statutory authority required to change the sourcing of Internet orders by rule.
A partner of HWMK, an Austin government and public affairs firm, on behalf of a group of the firm’s clients, emphasized the compliance difficulties regarding B-to-B transactions, the need for more clarity, and a postponement of any action until the conclusion of a collaborative process among the Comptroller, Legislature and affected parties.
DELL Tax Director stressed the resulting undue burden on sellers, expanded on the difficulty of applying the rule to B-to-B transactions, and recommended that any changes await action by the Legislature.
When testimony concluded, Karey Barton announced the agency would give due consideration to all the testimony and other comments received and would give notice of the results of their deliberations. In that regard, written comments will be accepted for two more weeks as the Comptroller has extended the period to do so until February 17.
For additional information about the hearing or the proposed rule, contact John Kennedy at jkennedy@ttara.org or (512) 472-8838.
Ways and Means Hearing on Wayfair (and proposed Rule 3.334)
The local sales tax sourcing issue continued to be the focus of discussion at a previously scheduled hearing of the House Ways and Means this morning. Comptroller Hegar and Karey Barton provided an update on the implementation of legislation requiring remote sellers to collect Texas sales and use tax and the proposed local sales tax rule, which dominated the testimony and member questions.
Karey Barton offered some general background, testifying that the state was collecting substantial new revenue from remote sellers, $213 million additional sales tax revenue in the fourth quarter of 2019.
Concerning the proposed sales tax rule, Karey Barton testified that it would do three things: 1) implement the newly passed legislation, 2) clarify elements of existing agency policy, and 3) establish a uniform local sales tax sourcing standard for Internet sales. Comptroller Hegar made it clear that Chapter 380 agreements are a target of the rule. He noted that he was a strong supporter of communities having economic development tools, but current 380 agreements are being abused. The current method of sourcing local sales taxes to the location of the seller is, in effect, “taxation without representation,” as citizens must pay taxes to cities in which they do not reside and vote.
A number of legislators asked questions, including several that were not Ways and Means Committee members. Representative James Talarico, a non-committee member from Round Rock, noted that Dell Computer has brought over 12,000 jobs to the city in conjunction with their 380 agreement. Representative Erin Zweiner, another non-committee member from Driftwood, asked if the agency had done a fiscal analysis on which communities would gain or lose under the proposal (the agency has not.)
A number of local officials then began testimony, which continues at the time of this writing, on the Comptroller’s proposed rule, though this is not an official part of the committee’s charge.
The committee is also scheduled to take testimony on the use of debt collection firms by local governments. |
