Cities File Suit Against Texas Comptroller Over Sourcing Rule Change

The City of Round Rock, Texas has filed a petition for declaratory judgment against the Texas Comptroller over regulatory changes to local tax sourcing rules that will come into effect on October 1, 2021. The changes put in place by the Comptroller will exclude computer servers, internet protocol addresses, domain names, websites, and software applications from the definition of a place of business, and will define orders placed over the internet as occurring at a location other than the seller’s place of business. The effect of these changes will be to change the sourcing of internet-based transactions for Texas retailers, shifting them from an origin-based to a destination-based sourcing model.

The City of Round Rock cites in its claim that these changes violate the origin-based sourcing defined in the Texas Tax Code and are therefore an unlawful extension of the Comptroller’s authority. The city also refers to bills that were considered by the Texas Legislature in their most recent session that would have created destination-based sourcing for online sales, but which were ultimately not passed, as evidence that the ability to change these sourcing rules lies with the legislature. The petition claims that the city stands to lose up to thirty million dollars of revenue annually from these sourcing changes, and that the loss of this revenue will leave them unable to finance economic incentives they offered to large businesses while these rules were in place. Round Rock specifically names the headquarters of Dell Technologies, the computer hardware and software company, as one of their sources of revenue that would be affected. The city has requested a temporary injunction delaying the rule change from coming into effect, citing irreversible harm to their revenues if the rules become effective on October 1st.

The Texas cities of Coppell, DeSoto, and Humble have also filed similar suits against the Comptroller. It remains to be seen if the new rules will become effective in October as planned, but it appears that the disputes over Texas’s local sourcing rules may just be getting started. “City files suit seeking to overturn sales tax rule change”, July 12 2021, City of Round Rock; 34 TAC § 3.334.

UPDATE: The City of Round Rock and the Texas Comptroller of Public Accounts came to an agreement on August 31, 2021 that prohibits the state from implementing the new sales tax sourcing rule, pending a final hearing that will take place June 13, 2022.

Posted on August 18, 2021