Stop Glenn Hegar’s sales tax switcheroo

Texas tax law is about to make a big change this fall that will move DeSoto’s revenue to Highland Park and counter the business-friendly reputation of our state.

Starting October 31, municipal sales taxes for online purchases will be remitted to the city where the buyer lives, rather than where the seller operates. Four cities are suing the change, including Coppell and DeSoto.

Auditor Glenn Hegar announced the change in early 2020, saying it would not go into effect for more than a year, which gives lawmakers a chance to respond. Several bills on the matter were tabled during the regular session of the Legislature, but none were passed. Hegar takes this as confirmation of his plan and moves forward.

There are two problems with Hegar’s approach.

First, it is a transgression of authority.

John Kroll, partner at HMWK, explained that sales tax experts roughly subdivide states into the categories “Origin Sourcing” and “Destination Sourcing”. 35 states use destination sourcing, which means they generally divert tax revenue to the buyer’s community rather than the seller. Twelve states, which represent nearly 50% of the U.S. population, including Texas, generally use search-by-origin, which means taxes are collected where the company operates, Kroll said. Texas has been in the origin sourcing group since the introduction of sales tax in 1961. It is a far-reaching political decision for the legislature.

Chris Wallace of the North Texas Commission told us, “This is a significant change and requires thorough planning and discussion from all concerned.”

The second problem has to do with who could benefit from this change and who could lose. The losers will be business-friendly cities where online sellers are based. (Think warehouses and Etsy craftsmen.) The winners will be shared apartments, especially those where residents spend a lot of money online. (Think Highland Park or Southlake.)

Cities like Coppell and DeSoto are against this change as these communities have invested heavily in attracting businesses that sell online. To attract a distribution district, cities often have to invest millions in things like wider roads for trucks or upgraded fire fighting equipment for warehouses. They are ready to make these investments to bring jobs and trade to their city. But these businesses, jobs, and commerce will be worth significantly less if the city can’t collect tax revenue from the commerce there. In short, this step devalues ​​companies.

Several spokesmen for the auditor’s office told us that warehouses should not be “counted” as business locations because the public cannot go in and buy anything over the counter. The internet is not a place, Hegar insisted in a comment we posted when he announced the change last year. “You can’t call the internet. You can’t go on the internet, ”wrote Hegar.

But that is an archaic understanding of modern business models. In 2021, the back end of a company – be it a data center, call center or warehouse – will be just as much a part of the business as the counter through which a customer hands over a product.

It is anachronistic to insist that Amazon is not present in Coppell because the millions of square feet of warehouse it operates there contain neither a counter nor a cash register. And it’s silly to insist that an Etsy craftswoman have no business office at all unless she invites customers into her living room.

If all of this comes out of this change, we expect the real winners will be big online companies like Amazon. Currently, 93% of all Texan businesses, approximately 614,000 businesses, apply a single rate to all of their sales, according to an analysis by the North Texas Commission. Once this change goes into effect, these companies will need to track and calculate taxes for more than 1,600 tax-collecting entities across the state. It’s easy to see how this adds to the cost. Smaller stores will have to pay for a service to provide this feature, and large companies like Amazon will be there to meet that need. Note that it is not Amazon that is suing this.

Hegar’s spokesman aimed at 380 agreements, which are tax treaties between cities and companies. In some cases, cities agree to repay a significant portion of corporate taxes to them. In fact, Coppell spokeswoman Hannah Cook confirmed the city has a 380 agreement with Amazon, but added that the city has not yet given the company any sales tax rebates.

It could be that cities are giving too much away on these deals. This is a legitimate criticism of the local government and a reason for residents to pay attention to the offers of their local politicians. But removing economic development tools from every city in Texas is not the right solution to this problem.

Sales tax is a complicated world in itself that most of us pay little attention to. But an unchecked shift to obscure public order can easily cause permanent damage to an economy. As one of the most business-friendly states in the nation, Texas has built a strong tradition of economic growth. We hope the state will find a way to protect this and avoid this change.

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