The city of Round Rock stands to lose at least $20 million in annual sales tax revenue should the Texas comptroller adopt a new rule as proposed.

The proposal would redistribute sales tax collected on internet purchases by routing tax revenue to the purchaser’s city rather than the city where the online sale is received by the business fulfilling the order. Currently, the opposite takes place: Sales tax revenue stays in the city where the business is located.

For Round Rock—the headquarters of Dell Technologies—this shift would result in tens of millions of dollars in lost revenue annually, city officials said.

“Frankly, if these rules are adopted as proposed, they will absolutely devastate the financial stability of the city of Round Rock,” City Attorney Steve Sheets said during a Feb. 6 state House Committee on Ways and Means public hearing regarding the rule.

Sales tax revenue

In fiscal year 2018-19, the city of Round Rock collected a total of $28.5 million in sales tax from Dell, Sheets said. Based on the terms of an economic incentive agreement signed in 1993, the city rebated around $8.5 million to Dell in FY 2019.

Sheets, who worked on the original economic agreement with Dell, said when the company was looking to relocate in the early 1990s, it received "very generous incentive offers" from cities, including Nashville, and other countries such as Ireland. The reason Dell stayed in Texas, he said, is due to the incentive agreement Round Rock was able to offer.

“The state of Texas collected $1.5 billion in state sales tax generated by Dell’s sales over the past 25 years,” Sheets said. “If the city of Round Rock had not stepped up and offered Dell an incentive to stay in Central Texas, all of those tax dollars would have been lost.”

As it stands, 43% of the city's general fund revenue comes from sales tax, 35% from property tax and 22% from other revenue such as fees and permits, according to the FY 2020 budget. The high percentage of sales tax revenue has kept city property tax rates low, local leaders say.

However, should the comptroller’s proposed rule go into effect, the city would need to increase its property tax rate by $0.133 to offset the loss of sales tax revenue from Dell, Sheets said. City staff estimate that an increase of that amount would raise the city portion of a tax bill for the median homeowner by $339 a year, or approximately a 30% increase.

"This rule would have major, major unintended consequences to Dell, to Round Rock, to the state of Texas," Round Rock Mayor Craig Morgan told Community Impact Newspaper on Feb. 13. "It's hard to overstate how devastating this could be."

Local leaders, including Morgan and Jason Ball, the president and CEO of the Round Rock Chamber, spoke at a Feb. 4 hearing hosted by the comptroller. They cited concerns with the rule including the alteration of existing agreements between private businesses and the city, a dramatic reduction in sales tax collections and a reduced pro-business environment.

A changing environment

In 2019, the comptroller’s office remitted $9.6 billion in sales tax revenue to local governments, Comptroller Glenn Hegar said at the Feb. 6 hearing. E-commerce shares of all retail sales were approximately 4.5% in 2011, 11% in 2019 and are expected to be 15% this year, he said.

“Technology has rapidly changed,” Hegar said. “Internet orders have significantly increased and so have the questions regarding the sources of local taxes for internet orders.”

In his testimony before the House committee, Hegar said while it may appear that there is a lot of new information in his proposed rule, in fact he “made a couple of clarifications.”

“We believe that the amendments will provide clarity to the businesses and the local jurisdictions and also will help to prevent any arbitrary shifting of local revenues from one jurisdiction to another,” he said.

Local officials disagree, saying that the proposed rule fundamentally shifts the way sales tax is collected statewide. Texas is an origin-sourced sales state, meaning taxes are remitted where the seller is located.

For example, if an Austin resident purchases clothing from the Round Rock Premium Outlets, the sales tax stays in Round Rock, where the sale took place. Likewise, as it currently stands, if a Hutto resident purchases a Dell computer online, the city of Round Rock receives the sales tax because Dell is physically located in Round Rock.

“The state firmly still believes in original sales tax collection,” state Rep. James Talarico said during the Feb. 6 hearing. “Are we proposing to change that as a state, so we can be structured as a destination-based sales tax state?”

The comptroller insisted that changes to the rules around e-commerce do not affect walk-in sales or sales made over the phone.

“Internet orders are placed on a website and software application and received electronically on a server somewhere, often in the cloud, and do not require human contact for the order to be received by the business,” he said.

At the committee hearing, Round Rock representatives pushed back, pointing to the approximately 12,000 employees who work at Dell’s corporate campus composed of eight buildings and spanning over 2 million square feet.

“The comptroller is taking a very unusual position to say that internet orders aren’t received anywhere,” Sheets said. “I’m not even sure what that means. That’s a cornerstone of this rule. If they acknowledged that they are received somewhere, they would have to acknowledge that they are received at Dell’s place of business. That’s in Round Rock.”

Next steps

As it stands, the proposed rule provides a temporary exemption for businesses and cities that entered into an economic incentive agreement as of Sept. 1, 2019, Hegar said. That exception would expire Dec. 31, 2022, he said.

“I cannot blame the cities or the businesses that have entered into these agreements,” he said. “Yet as e-commerce continues to grow, more and more taxpayers will begin to ask why they are paying local sales taxes that are not going to their local communities and instead are going to some far away city, or worse off, the bottom-line profit of a business.”

The comment period on this proposed rule was slated to end Feb. 17. However, on Feb. 11, the comptroller announced an extension of the public comment period until April 3 to further evaluate the proposed rule and its impacts.

"We thank the comptroller’s office for responding to the request of so many communities and business organizations to take additional time to evaluate this proposed rule change," Ball told Community Impact Newspaper. "We have significant concerns with the proposed rule, and it is clear that businesses and communities need more time to evaluate potential impacts."

Editor's note: This article was updated to add the estimated property tax impact to a median homeowner.