Dino Marcaccio
President
Former Texas Comptroller State Tax Auditor
Note: The Comptroller will hold public hearings on this matter on October 17, 2022 at 9:00am in Room 170 of the Stephen F. Austin Building, 1700 Congress Ave., Austin, Texas 78701.
The Background. The Comptroller of Public Accounts has proposed significant additions / amendments to Sales Tax Rule §3.334 which wouldrequire certain online retailers to collect ‘local’ sales tax based on the location of the buyer vs. the seller’s location (i.e., city claimed as a ‘Place of Business’ (POB)).
Those affected online sellers are out of State retailers which have claimed a specific Texas City as their ‘Place of Business’ (POB) / Fulfillment Center (FC) and are collecting and reporting local sales for that ‘seller’ POB/FC city on all sales shipped around the State of Texas.
These online sellers base this contention on the fact that they built ‘qualifying’ facilities in a city which, in their opinion, meets the threshold requirements for a ‘Place of Business’ POB and Fulfillment Center – as found in Tax Rule 3.334 sub-sections (16) and (9), respectively. These online sellers are referring to these sub-sections before the current major changes / revisions proposed by the Texas Comptroller’s Office.
In some cases, these online retailers have made ‘sales tax revenue sharing’ agreements with those POB (partner) to split the sales tax collected for that city with that online seller. These deals are obvious the incentive for online sellers to locate their facilities / distribution centers in those jurisdictions.
The Issue. The Comptroller wants to re-define the definition of a POB and a FC (i.e., Place of Business and Fulfilment Center). It should be noted that the POB (Place of Business) is defined in 3.334 (16) and the FC (Fulfillment Center) is defined in 3.334 (9). A city must qualify as both a POB and a FC for the online seller to collect that city’s local tax on all Texas sales.
3.334 (16) – Place of Business. This sub-section defines a POB and contains the additional proposed subjective language. The potential problem with the new language is that it allows the agency complete discretion to determine what is a POB. For example, the following statement is made within Tax Rule 3.334 (16) sub-section:
- An outlet, office, facility, or any location that contracts with a retail or commercial business to process for that business invoices, purchase orders, bills of lading, or other equivalent records onto which sales tax is added, including an office operated for the purpose of buying and selling taxable goods to be used or consumed by the retail or commercial business, is not a place of business of the seller if the comptroller determines that the outlet, office, facility, or location functions or exists to avoid the tax legally due under Tax Code, Chapters 321, 322, and 323 or exists solely to rebate a portion of the tax imposed by those chapters to the contracting business. An outlet, office, facility, or location does not exist to avoid the tax legally due under Tax Code, Chapters 321, 322, and 323 or solely to rebate a portion of the tax imposed by those chapters if the outlet, office, facility, or location provides significant business services, beyond processing invoices, to the contracting business, including logistics management, purchasing, inventory control, or other vital business services.
The sub section above contains the troublesome statement that if the comptroller determines that the outlet, office, facility, or location functions or exists to avoid the tax legally due under Tax Code then the agency can simply deny the POB status.
What if the general conditions of a POB are met by the online seller such as:
- Owning / operating a warehouse or facility that stores taxable items for sale and distribution and
- Operating a physical location where 3 or more orders are taken per calendar year in that city. Normally these conditions would be acceptable criteria for a POB status.
However, the proposed language would seem to suggest that if the online seller has a sales tax sharing agreement with that POB qualifying city then can the agency simply deny the otherwise qualifying POB status. This would seem unequal treatment (i.e., the city can be a POB for the online seller if they don’t share / split any of the local city sales tax collected). This would defeat the point of the online seller building or operating a distribution / order taking center in that city.
I have heard of a possible case of a 3 rd party consulting firm charging a fee or a percentage of local sales tax collected by acting as a type of broker between an online seller and the prospective POB city. If this 3-way arrangement has happened (and might happen again in the future) then I still do not see it as a reason for a qualifying city to be denied POB status. The point is not if the city receives 100% of the local tax collected but if the online seller has created sufficient presence and activities to qualify as a POB.
In my opinion, this proposed language in this sub section allows the agency too much discretion when defining a POB (Place of Business). If this proposal is passed in this form and without any grandfather provisions, it could force many existing online sellers to switch from collecting local sales from the POB/DC city (i.e., origin-based taxation) to the buyer’s city (i.e., destination-based taxation). This could cause the online sellers to possibly sue the city and the agency for unequal treatment.
In addition, there is no guarantee that any new distribution centers would ever be built in a city if a sales tax revenue sharing agreement existed since the agency could simply deny the POB status.
3.334 (9) – Fulfill. This is not a long sub-section and it is shown in its entirety below:
- (9) Fulfill–To complete an order by transferring a taxable item directly to a purchaser at a Texas location, or to ship or deliver a taxable item to a location in Texas designated by the purchaser. The term does not include tracking an order, determining shipping costs, managing inventory, or other activities that do not involve the transfer, shipment, or delivery of a taxable item to the purchaser or a location designated by the purchaser.
This sub-section has more clear language and is easier to understand. The agency will require the online seller to ‘physically’ deliver the taxable item directly to the buyer’s location or to a location determined by the buyer. This does not allow the online sellers to store taxable items outside the seller city location.
For instance, the if BEST BUY sells a TV online and that sale is made from their POB located in San Marcus, then BEST BUY must deliver the TV from the San Marcus POB to the buyer’s city (i.e., let’s say Houston). This would not allow BEST BUY to store the TV in their Houston BEST BUY store and simply let the Houston buyer come and pick up the TV. The TV would have to be delivered from the San Marcus Fulfillment Center either directly to the buyer’s location or possibly to the BEST BUY located in Houston for pickup by the buyer. I am not certain if this last scenario would be allowed.
There are other lengthy amendments / changes concerning where the place of business of the seller. These are found in other sub-sections of tax rule. Keep in mind Tax Rule 3.334 tax rule is 15 single spaced pages long and contains over 10,500 words (click here – attachment #1). It is long and can be confusing.
In short, this is an argument about whether sales taxes on certain internet sales should be based on the buyer’s location rather than on the online retailer seller’s Place of Business (POB) city. There has been a lot of past debate (for and against) concerning what the Texas Comptroller is proposing. The Comptroller will hold public hearings on October 17, 2022 at 9:00am in Room 170 of the Stephen F. Austin Building, 1700 Congress Ave., Austin, Texas 78701.
Argument for Local Tax collection based on Buyer’s City. It is understandable that the buyer’s cities believe that they are not getting the sales tax made paid by purchasers in their jurisdictions because other cities have had online retailers build certain types of facilities and collect local sales tax for that city.
Another problem is Tax Rule 3.334 was written a long time ago. And back then the definition of a ‘Place of Business’ was not so clearly defined. Basically, the online retailer just had to build some type of improvement such as a warehouse, distribution, fulfilment and/or call center and then start collected collecting the 6.25% State tax for that city.
There should be some minimum requirements set for a city to qualify as a POB and FC. And it is true that many of these POB cities share the local sales tax collected with the online retailer.
But on the other hand, that online seller may have spent significant amounts of money to build and maintain those facilities. What is fair? That is the complicated part. I believe that something will be worked out. It is possible that some solid definitions will be written into the tax rule and not leave it to the complete discretion of the agency to deny a claim for a seller’s POB city just because the online seller and the POB city have a sales tax sharing agreement. That is not fair.
This is truly a difficult argument because there is no middle ground. And if passed these proposals could cause much confusion and possibly cause many OOS businesses not to want to locate their POBs / Fulfillment centers in Texas. And what about existing long term ‘sales tax sharing’ agreements that caused certain online retailer to build significant facilities or hire local residents in order to comply with these binding contracts. If the proposed Tax Rule 3.334 changes are passed would these agreements simply be cancelled, and the online retailer get nothing in return for their investments in those POB cities?
Bottom line, these retailers also want to build their FC near transportation Hubs, where they can truck the purchased items as efficiently as possible. If a city will give them 1/2% or 1% rebate of local taxes, and/or abate property taxes (preferred) they may choose that city if it meets the accessibility to major highways.
*The Comptroller will hold public hearings on this matter October 17, 2022 at 9:00am in Room 170 of the Stephen F. Austin Building, 1700 Congress Ave., Austin, Texas 78701.
See proposed Tax rule:
(attachment #1) View file by clicking here
(attachment #2 ) View file by clicking here
NOTE: For an excellent article and analysis of this subject please click this link. This article is written by GORDON MARTENS of the law firm Martens, Todd & Leonard. Gordan is a leader on Texas Sales/Use tax subjects.
Dino Marcaccio, President (ex-Texas Comptroller Auditor, 16 Years)
TEXAS TAX GROUP, INC.
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