Audit reveals massive overpayments by Dell
An accounting error on the part of Dell Inc. is forcing the City of Round Rock to pay the state back for millions of dollars of tax collections the city never should have received.
According to an audit completed Jan. 24 by the office of Susan Combs, Texas comptroller of public accounts, between October 2006 and December 2010, Dell overpaid more than $38 million in sales and use taxes to the State of Texas. After receiving the overpayments from Dell, the state forwarded more than $9.2 million to the City of Round Rock for its local portion of taxes—an amount the state is now demanding the city reimburse.
"An audit was conducted by the Texas comptroller of public accounts [in 2012], and they found that we had paid state and local taxes on transactions that turns out were not taxable in Texas," said Jess Blackburn, Dell spokesman for Corporate Affairs. "The state subsequently refunded the overpayment directly to Dell. We have cooperated with both the state and with the City of Round Rock and appreciate the work done by the comptroller's office to identify the overpayment."
Blackburn declined to elaborate on exactly what errors occurred that resulted in the significant overpayments.
"We wouldn't really want to go into that level of detail," he said. "For the specifics on what the overpayment was and any arrangements for how it is going to be paid, I am going to defer to the City of Round Rock."
The comptroller's office also would not go into the details of the audit beyond confirming it had occurred and Dell had received a refund.
"We have to adhere to confidentiality in the tax code," said RJ DeSilva, a spokesman for the comptroller. "We are very careful about getting into any details regarding audits. We have to stick to that as an agency."
Defining the problem
Officials from the City of Round Rock, however, were willing to discuss their interpretation of how the city has ended up owing millions of dollars for tax collections city officials were never supposed to be responsible for monitoring.
Round Rock Finance Director Cheryl Delaney said she has been in contact with representatives of the comptroller's office and Dell since February to try and gain an understanding of what occurred.
"We started hearing rumblings in February, but we didn't officially receive anything from the state until March," Delaney said. "They broke everything down in numbers, and they gave me a general idea of what happened."
Delaney said her understanding of the situation is the vast majority of the errors came from Dell's overpayment of use taxes. In layman's terms, use taxes are utilized by the State of Texas for collecting taxes from out-of-state vendors who sell products in Texas. For example, when a Round Rock business purchases a product from a vendor in Oklahoma, the local business must pay the State of Texas a use tax. The state then passes on the local portion—equaling up to 2 percent of the total purchase—to the local taxing district where the item was received.
In Texas, it is the responsibility of the purchaser—in this case Dell—to monitor and pay the correct amount of use taxes for items not originating in Texas.
"In general, [purchasers] are responsible for the use tax when they buy taxable goods and services [from outside Texas] for use in Texas and the seller does not charge Texas sales tax or does not charge the correct amount of Texas sales tax," DeSilva said.
The errors with Dell's tax receipts apparently arose from the fact that even though the company is based in Round Rock, a significant amount of its purchases from out-of-state vendors never end up in Texas, thus removing the state's tax burden on the purchases.
"Dell has employees all over the world," Delaney said. "So they may have ordered and paid for something here in Round Rock, but the actual product is not used here in Texas.
"This actually provided us extra revenue that really didn't exist. That is the problem. On those transactions, [Dell] should have never been paying that tax because they were sales that were not taxable in Texas."
Dell's debt
Compounding the complexity of the situation is the sales tax incentive agreement shared between the city and Dell. Under the agreement, Dell receives 31.25 percent of all Round Rock sales tax receipts collected from the sale of Dell products within Texas. The audit found that Dell had been overpaid $766,399 by the city, an amount Dell has since refunded.
"Because we were collecting too much, Dell got too much in that incentive, so they are having to pay us back," said Will Hampton, City of Round Rock public information officer.
The mistakes may never have been noticed had it not been for the state's decision to conduct an audit on Dell's sales and use tax payments.
"In talking with Dell, they have said this was definitely a state-initiated audit," Delaney said.
The fallout
The comptroller's office has already issued a refund to Dell for the $38.3 million in overpayments it collected. Likewise, Delaney said Dell has repaid the city for the more than $700,000 it mistakenly received through its incentive package.
All that is left now to even the books is for the City of Round Rock to pay back the state for its more than $9.2 million excess tax receipts. Delaney said the city has already begun the process of repayment by forwarding the amount it received from Dell to the state.
The city's leadership is now working on a deal to pay off the remaining balance of more than $8.4 million. Delaney confirmed the city is proposing paying off its debt in four annual installments of $2,103,398.58 beginning in September.
"I have not formalized it, but we have spoken with the state and tentatively this is the plan we are proposing," Delaney said.
The city is planning to repay the state from its general fund and Type B Corporation, both of which receive revenue from sales and use taxes. Hampton said because the city has been diligent in maintaining and building a "rainy day fund," the impact to the city should be minimal.
"The good thing is we have set aside money year after year in that rainy day fund in case something unforeseen should happen with Dell," Hampton said. "So we are able to absorb it without saying, 'Here is $8.4 million [in debt]—[now] we have to lay off half of the police force.'"
Delaney said the city's current rainy day fund balance is approximately $12.3 million.
Delaney said she has already been in discussions with Dell about the company revising its accounting systems to avoid a reoccurrence of overpayments.
"We obviously don't know what Dell buys. They aren't going to share that with anybody," she said. "We could not have done anything to have foreseen this occurrence.
"They have let us know that the process they are currently using is going to be changed so that we won't be receiving this revenue we were never supposed to receive in the first place. They are working to fix that process, and I believe those changes may already be put in place."
