At issue is where state sales taxes on internet purchases are assessed and which municipalities should receive the money.
Currently, they’re assessed at the location of the seller’s place of business. That has led a relatively small number of Texas cities to enter into taxpayer-funded incentive agreements with big companies — Dell Technologies, in the case of Round Rock — to route millions of dollars in online purchases through facilities within their jurisdictions and then divvy up the ensuing sales tax bonanzas.
Come Oct. 1, however, most online sales taxes will be assessed at the location of the buyer, a system that Hegar has called fairer because online purchases are an increasingly significant chunk of overall retail sales.
Without the change, “more and more taxpayers will begin to ask the question: Why are they paying local sales taxes that are not going to their local communities and instead they’re going to some faraway city or, worse, (to) the bottom line of profit of a business?” Hegar said during a legislative hearing last year. “This is the ultimate case of taxation without representation.”
But Round Rock and other cities that are beneficiaries of the current system contend the sales tax-fueled incentive deals they’ve been able to forge have boosted the state’s economy by helping attract and keep major companies here.
“Because of Round Rock’s willingness to enter into this agreement (in August 1993) it is understood that Dell chose to locate in Round Rock rather than move its headquarters to Tennessee,” Round Rock’s lawsuit against Hegar states.
A Dell Technologies representative wasn’t immediately available for comment Monday,
Dell Technologies — which has a stock market value of about $70.5 billion — reaps about $10 million a year through its sales tax arrangement with Round Rock. The city has estimated that it will lose “at least” $30 million annually in sales tax revenue if Hegar’s plan is implemented, the bulk of which comes from taxes on Dell’s sales.
During the city’s most recent fiscal year, about $9.6 million was rebated to Dell, according to a Round Rock spokesman, while the city collected about $30.7 million in gross sales and use taxes from the deal.
Hegar’s planned change “is harmful to Round Rock because Round Rock will not have the incoming revenue it needs to provide the increasing level of support and services needed by the citizens and businesses located within its city limits,” its lawsuit states.
Round Rock “will be forced to reduce its ability to meet the needs of a rapidly growing city, including reductions in essential services such as police and fire protection, road maintenance, water, wastewater, park maintenance, to name only a few, in an effort to absorb this unexpected loss in revenue,” it says.
The city also said a big reduction in its sales tax revenue “will not escape the attention of the bond rating agencies,” probably resulting in downgrades that will end up costing it even more money if it attempts to issue new bonds.
Hegar said in a statement Monday that the lawsuits by Round Rock and the other cities regurgitate “the same arguments that were presented to my office during the rule-making process” and that also were put forth during various hearings over the issue.
The planned change to sales tax collections initially was intended to take effect last year, but Hegar delayed it because of the coronavirus pandemic and to give state lawmakers an opportunity to weigh in during this year’s legislative session, which concluded in May.
“The Legislature chose not to change our rules,” he said.