Changes To State, Local Sales & Use Taxes Could Cost San Marcos Millions

By Terra Rivers | Managing Editor

Texas Comptroller Glenn Hegar is proposing to close up a loophole and make clarifications to Rule 3.334 in the Texas Sales Tax code, which could cost San Marcos millions of dollars in Tax Revenue.

According to Glenn Hegar, several cities throughout Texas are benefitting from a loophole in the rule with or without their knowledge.

“Some cities and businesses have cut deals to source local sales tax on internet sales solely to particular cities. In exchange, those cities may rebate local tax dollars to the business – in some cases, 75 percent of the money.”

If a San Marcos resident buys a computer online from Dell, then the sales tax revenue goes to the City of Round Rock, which is where Dell’s headquarters are located.

Hegar said this is a case of taxation without representation; Texans are paying local sales taxes that are used in cities where they have no rights as voters.

The City of San Marcos has a 380 agreement with businesses like the Best Buy Call Center.

In 2016, the city council approved a 380 Economic Incentives agreement with the retailer, which grants Best Buy a 75 percent sales tax rebate. The remaining 25 percent San Marcos keeps.

The Sales Tax rebate can be extended for up to two additional 10-year terms if the request is approved by city officials.

Best Buy’s agreement states that the facility’s primary focus would be internet retail sales operations.

“Cities still have questions about exactly how the new rule would be applied,” Heather Hulbert, Director of Finance for the City of San Marcos, said.

Hulbert said at present, the city thinks Best Buy will be the only business, whose 380 agreement, would be directly affected; the company provides $2 million in sales tax revenue to the city’s general fund, which would be lost as of 2023 if the changes are approved.

“This new ruling would shift sales taxes collections from the point of origination of the sale to the point of destination of the product for any sale that is made by a business that cannot meet the new definition of a place of business or that receives the sale through the internet,” Hulbert said.

Under the changes, the sales tax revenue from online purchases would go to the city in which the products were delivered instead of where it was made or shipped from.

According to the Texas Secretary of State, Hegar is proposing changes to rule 3.334, which include clarifying that local sales taxes are tied to the business from which internet orders are fulfilled or the location its products are being delivered or shipped.

In addition, the comptroller proposes defining words or phrases such as “remote seller,” “internet order,” and “marketplace provider” among others, deleting repetitive language and adding new subsections. 

The full list of proposed changes can be read here.

“The impact that it will have to our community if the comptroller moves forward with this change is a major loss in tax revenue for the City of San Marcos,” Jason Mock, President of the San Marcos Area Chamber of Commerce, said. “From a business standpoint, it is that we have to potentially find new tools when making these deals and looking at business and recruiting them to come to our community.”

Mock said the downside is that the comptroller is “changing the rules of the game while the game is being played”; if this rule changes, in two years, the 380 agreements that many cities and counties can be changed at any moment.

“What we would like is for those 380 agreements to be grandfathered in,” Mock said. “And moving forward, if the legislature wants to change how those agreements are worked, let the legislative work that out in 2021.”

Hulbert said the City of San Marcos will hold their first budget policy workshop for the Fiscal Year 2021 on Feb. 20; the proposed changes to Rule 3.334 will be among the topics of discussion as the city will have to look for new ways to generate additional revenue.  

“The proposed changes would dissolve any agreement a community has in place used to secure the location or expansion of a back-office operation conducting online sales in Texas,” said Jason Giulietti, Interim President of the Greater San Marcos Partnership. “There is a significant risk to damaging the reputation of these communities as well as the State of Texas. I hope the Texas Comptroller understands the full magnitude of this decision which will impact the State’s ability to attract future investments that create jobs.”