Texas judge mostly sides with cities in online sales tax rule challenge

A Texas judge ruled largely in favor of six cities that sued the state comptroller over a move that would have cost them millions of dollars in sales tax revenue annually.

The Texas cities challenged a rule change adopted by Comptroller Glenn Hegar's office in 2020 to shift sales taxes on intrastate online purchases to the buyer's location instead of the seller's in-state location where the order is processed or fulfilled.

Travis County District Court Judge Karin Crump this month permanently blocked enforcement of the altered rule's key provisions, finding they contravene state law, which already provides "a detailed statutory scheme for determining where a sale of taxable items is 'consummated.'" She also ruled the comptroller did not substantially comply with notice and "reasoned justification" requirements under the Texas Administrative Procedures Act.

Hegar's office, which was closed on Thursday for the Christmas holiday, did not immediately respond to a request for comment.

Craig Morgan, mayor of Round Rock, one of the cities that sued, said the ruling "upholds the importance of established sales tax allocation laws."

"This ruling protects critical funding that helps us provide public safety, infrastructure and other essential services for our residents," he said in a statement.

In its 2021 lawsuit, which was subsequently consolidated with litigation brought by the cities of Coppell, Humble, DeSoto, Carrollton, and Farmers Branch, Round Rock warned the comptroller's move would likely have a negative effect on its and other Texas cities' bond ratings.

Round Rock claimed its sales tax revenue would decrease by as much as $30 million annually based on fiscal 2020 collections.

The city of 130,400 north of Austin is home to the world headquarters of Dell Technologies (DELL), which generates "substantial" sales tax revenue that helps support city services and bonds, according to the lawsuit. The official statement for Round Rock's latest general obligation bond sale said Dell estimates the rule would impact 10% to 15% of total sales taxes it remits to the city.

In April, Round Rock extended an economic development agreement with Dell an additional 46 years to Dec. 31, 2099.

Dell accounts for nearly 15% of Round Rock's sales tax revenue, according to an April S&P Global Ratings report affirming the city's AAA ratings with stable outlooks.

"We expect Round Rock's strong management practices will allow the city to continue to monitor and manage its exposure to sales tax volatility, while maintaining a debt profile that we consider commensurate with overall economic growth," the rating agency said. "However, should significant and persistent volatility in sales taxes or an increased debt burden place undue pressure on the city's operating budget, resulting in material declines in reserves, we could lower the rating."

A temporary injunction blocked the comptroller's rule change from going into effect in 2021.