After little sales tax revenue growth in 2017, Missouri City rebounded in 2018 and saw a 14.4% increase in allocations—its highest increase in 10 years, according to Texas comptroller data.
Cities rely on sales tax revenue received when residents shop at places that collect sales tax. A portion of that tax funds annual city budgets, which pays for operations and services to residents, Missouri City City Manager Anthony Snipes said.
However, with more goods sold online, cities find it harder to capture local sales tax revenue. To help reverse this, the 86th Texas Legislature passed two bills aimed at taxing e-commerce sales from marketplaces, such as Etsy and eBay. Missouri City is also looking at how these new laws will affect its potential future revenue.
“Our hope is as businesses and other partnerships come to fruition, residents—new and current—will be able to see what is going on in Missouri City and be involved,” Snipes said.
Finding additional revenue
Missouri City’s sales tax revenue growth in 2018 was twofold: a change in the fiscal year from July to June to October to September, which added three extra months—and about $2 million in allocations—as well as new retail and development that came to fruition, Snipes said.
New retail developments included Sienna Crossing, which includes Academy Sports + Outdoors, as well as the H-E-B nearby.
Even though sales tax revenue accounts for a small portion of Missouri City’s annual budget at 9.3%, the city is studying ways to bring in additional revenue. The biggest revenue chunk is property taxes, 32.7%, according to the city’s budget.
Of the 1,664 businesses in Missouri City, only 664 of them generate sales tax revenue for the city, Snipes said. Service-oriented businesses, such as physicians, tattooing and nail salons, are not obligated to collect sales tax, he said. In contrast, Sugar Land has 4,734 businesses with a sales tax permit, according to Texas Comptroller data.
When Snipes began as city manager in 2015, he said there was not an economic development plan. The city welcomes all businesses, he said, but with the plan in place, it is also prioritizing new ways to build sales tax revenue.
“We have a redevelopment strategy that includes maximizing empty shopping centers,” Snipes said. “Activities are also on the rise, such as NewQuest Properties’ development on Hwy. 6 that will have a movie theater and retail.”
Retail experts said service-oriented businesses are becoming the norm as businesses seek out retail locations closer to residents.
Missouri City Mayor Yolanda Ford said the city needs to be intentional about branding itself to identify and attract businesses and major corporations geared toward management and professional services so residents can find employment within the city.
“Half of the city’s employment base is in management occupations, but the majority of our residents work outside the city,” Ford said. “[We need to] support and attract developers who are interested in creating destination locations that will encourage residents to spend money within the city and also encourage nonresidents to come to our city and spend money.”
Sales tax volatility
Any boost to sales tax revenue is good for cities, city officials said. Sales tax dollars go into cities’ general funds, which pay for government functions such as police, fire and parks and recreation. Texas’ sales tax is 6.25%, and depending on the local municipality, the tax could rise to a maximum of 8.25%.
Both Missouri City and Sugar Land have a 8.25% sales tax, which the Texas comptroller’s office collects and then allocates 2% to the cities. Missouri City received $9.85 million in 2018, up from $8.6 million in 2017, while Sugar Land received $53.23 million in 2018, an increase from $48.59 million in 2017, according to the comptroller’s office.
“Sales tax revenue is so volatile,” Sugar Land Director of Finance Jennifer Brown said. “We only build into next year’s budget the recurring amount that is available for us from the [First Colony] Mall, from retail and other businesses.”
Over the past decade, data showed the cities received anywhere from tens of thousands up to millions of dollars of difference between years. As a result, Missouri City and Sugar Land officials said they take a conservative stance when including that revenue in their budgets, despite how much they collect.
Missouri City also has a unique circumstance over neighboring cities in that its 2% sales tax allocation is split, with 1% going to the Metropolitan Transit Authority of Harris County for transportation services, and the other 1% going to the city, Snipes said.
“The 2018 launch of the daily Missouri City Community Connector and MCTX Flex services offered residents and visitors affordable and convenient transportation options,” Snipes said. “We will continue to review our partnership to identify other potential transit solutions that can benefit residents.”
Two new Texas laws aim to help the state capture even more sales tax revenue, especially from e-commerce purchases that were previously not taxed.
In June 2018, the U.S. Supreme Court ruled in South Dakota v. Wayfair Inc. that Texas businesses selling items or services into other states may be required to collect taxes for those states. In addition, sellers outside of Texas who were previously not required to collect and remit state sales and use tax may have to begin collecting tax on their sales into Texas.
Using that decision as a guide, the 86th Texas Legislature passed House Bills 2153 and 1525 related to collecting sales tax from marketplace and remote sellers. Both go into effect Oct. 1.
HB 1525 creates new tax responsibilities for marketplace providers and sellers, while HB 2153 provides a single local tax rate for remote sellers. The bills together are expected to generate about $850 million in tax revenue in two years, according to the Legislature.
“Wayfair is important because previously, the state of Texas wasn’t capturing sales tax dollars from citizens on internet purchases,” said Mary Thomas, an attorney and certified public accountant at Thomas, Thomas, & Thomas PC in Houston. “Not all money will be captured, but fewer dollars are going to fall through the cracks.”
These new laws come as the U.S. Census Bureau reports e-commerce sales are climbing steadily over the past decade. Based on a sample of 10,800 retail businesses, data shows online transactions increased 12.4% in the first quarter of 2019 versus the same period in 2018.
Missouri City was told by its economic development consultant in June that if there was no e-commerce, the city’s sales tax growth forecast of 7% and 4% for the next two years would have been higher. That is why Snipes said he remains conservative in this area.
“At any point, a business can close, and now that more people are using Amazon versus shopping locally, it can have an effect on sales tax,” he said.
E-commerce is top of mind for business owner Debra Lyman.
“It seems like companies are looking at their books and asking, ‘Do we have to keep all our brick-and-mortars open, or could we keep the same profit, reduce the number of stores, people will order online, and we could have one store in the area for people to pick up things?’” said Lyman, owner of Eudybelles Furniture Resale and Consignment in Missouri City.
A new normal
The new Texas bills are a continuation of the state working to put online retailers on a more even playing field with brick-and-mortar businesses. The state struck a deal with Amazon in 2012 for Texas consumers to pay standard sales tax on purchases.
Lyman said she is considering an e-commerce presence for her small business but would still need a physical store so people could bring in consignment items.
In addition, many of her customers still enjoy coming into the store.
“It is a social thing,” Lyman said. “I get a lot of ladies groups that meet for lunch and then stroll over here to shop. There is nostalgia for that strolling.”
The full effect of these new state bills is not yet known. Thomas said online shoppers will feel the 8.25% hit their wallet, but the tax will result in more money for the local government to spend to more fully fund existing programs or create new ones.
Snipes said he is also keeping an eye on what happens next.
“The new normal is to see an Amazon truck drive by their house every day,” he said. “We are monitoring what the Legislature means for us and how it might benefit Missouri City in the future.”