Rule changes around a seller's place of business are set to implement October 1, 2021.
Written by: Richard Fletcher, Vice President of Operations & Client Services (TX)
(August 10, 2021) — Texas local sales and use tax rules are complicated. The rules are complex due in part to mixed sourcing; origin-sourced sales are taxed where the seller is located, while destination-sourced sales are taxed at the location where the buyer takes possession of the item sold. Combine that with growing online consumerism and the implementation of the Wayfair Supreme Court decision, and it’s no surprise that in May 2020 the Texas Comptroller updated Rule 3.334, Local Sales and Use Taxes.
As expected, some local jurisdictions welcomed the updates, while others argued the updates overturned long-standing sales tax principles vital to local economic development. It has also been suggested the rule changes go beyond the authority of the Comptroller and would require legislative action to change.
Much of the rule change discussion focused on the definition of “place of business of seller”, a definition vital to the sourcing of local sales tax. The definition now clearly states that sales personnel of the seller must be present for a location to be considered a place of business of seller. It also states that a place of business of seller does not include a computer server, IP address, domain name, website, or software application.
To allow interested parties to address concerns through the 87th legislative session, the Texas Comptroller delayed implementation of two specific provisions that stem from the updated definition until October 1, 2021. The delayed provisions address orders received by salespersons while working away from their office and orders received by a shopping website or other shopping application.
Several sales and use tax bills were filed as vehicles to draw legislative attention to the rule changes. Only one bill, which proposed the overhaul of the current mixed sourcing system to a destination-only based system, was the subject of hearings before the House Ways and Means Committee. However, the bill failed to advance to the House floor.
With no legislative action taken to alter the rules adopted by the Comptroller, the rule changes are set to implement October 1, 2021. Sales tax associated with orders taken by salespersons while working away from their office will be sourced to the seller’s place of business from which the salesperson works. And sales tax from orders received by a shopping website or shopping application will be sourced to the Texas customer’s location unless fulfilled at a seller’s Texas place of business.
Meanwhile, the rule change debate continues and has now moved to the courts. Several cities recently filed lawsuits against the Texas Comptroller citing loss of sales tax revenues, burdens placed on business enterprises, and the Comptroller overstepping its rule-making authority as causes of action. Read more about the City of Round Rock's lawsuit HERE.
All rule changes have the potential to impact local jurisdictions. Taxpayers may need to adjust future reports to comply with updates and clarifications adopted by the Texas Comptroller. In our experience, the Texas Comptroller tends to accept in good faith that taxpayers generally want to do right and comply with rules. The adopted rule changes are such that the Comptroller is most likely to identify non-compliance through post-payment audits rather than upon report submission, a long process that can be delayed for years.
HdL is here for you. Our targeted, monthly, data-driven review processes, while also post-payment in nature, position it well to identify changes in payment patterns for taxpayer inquiry and resolution before formal audit activity. HdL welcomes the opportunity to be of continued meaningful support to local jurisdictions interested in maximizing sales and use tax revenue streams.
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