PART 1. COMPTROLLER OF PUBLIC ACCOUNTS
CHAPTER 3. TAX ADMINISTRATION
SUBCHAPTER O. STATE AND LOCAL SALES AND USE TAXES
The Comptroller of Public Accounts adopts an amendment to §3.334, concerning local sales and use taxes, without changes to the proposed text as published in the October 27, 2023, issue of the Texas Register (48 TexReg 6340). The rule will not be republished.
The comptroller adds subsection (c)(7) regarding the location where an order is received:
"The location where the order is received by or on behalf of the seller means the physical location of a seller or third party such as an established outlet, office location, or automated order receipt system operated by or on behalf of the seller where an order is initially received by or on behalf of the seller and not where the order may be subsequently accepted, completed or fulfilled. An order is received when all of the information from the purchaser necessary to the determination whether the order can be accepted has been received by or on behalf of the seller. The location from which a product is shipped shall not be used in determining the location where the order is received by the seller."
The text is taken from Section 3.10.1C5 of the Streamlined Sales and Use Tax Agreement (SSUTA). See https://www.streamlinedsalestax.org/docs/default-source/agreement/ssuta/ssuta-as-amended-through-05-24-23-with-hyperlinks-and-compiler-notes-at-end.pdf.
In its 2014 rulemaking, the comptroller proposed a definition of "receive," but deleted the proposed definition in response to concerns stated in oral and written comments. See (39 TexReg 4179) (May 30, 2014) (proposed rule amendment) and (39 TexReg 9598) (December 5, 2014) (adopted rule amendment).
In its January 2023 rulemaking, the comptroller again declined to adopt a definition of "receive" and instead, addressed the two circumstances that were most prominently debated - automated website orders and fulfillment warehouses. Subsection (b) of the adopted rule articulated the comptroller's interpretation that an automated website "receives" the order and that a fulfillment warehouse does not "receive" the order when it is forwarded from the website to the warehouse. See (48 TexReg 400) (January 27, 2023).
Since then, it has become apparent that other circumstances also require a clear articulation of the comptroller's interpretation of the term "received." Thus, the comptroller is adopting a general standard that is applicable to all situations, as well as to automated website orders and fulfillment warehouses.
The adopted standard comports with the ordinary usage of the terms, as evidenced by the fact that the standard has been approved by twenty-four states under the Streamlined Sales Tax Agreement. The adopted standard will also promote uniformity with those states that have elected or will elect origin-based sourcing.
The comptroller is currently in litigation with cities claiming that the location where an order is received should be the location where the vendor forwards the order for fulfillment, rather than the location where the order is received from the customer. See City of Coppell, Texas; the City of Humble, Texas; the City of DeSoto, Texas; the City of Carrollton, Texas; the City of Farmers Branch, Texas; and the City of Round Rock, Texas v. Glenn Hegar, Cause No. D-1-GN-21-003198 in Travis County, Texas District Court. However, as explained more fully in the January 2023 rulemaking, the legislative history indicates that the legislature did not intend a fulfillment warehouse to be the location where the order was received unless the fulfillment warehouse received the order directly from the customer. See (48 TexReg 398) (January 27, 2023).
In addition, as explained more fully in the January 2023 rulemaking (48 TexReg 396), the comptroller's current interpretation goes as far back as Comptroller's Decision No. 15,654 (1985), which stated:
"But it seems to the administrative law judge that the legislature was amending the law if not entirely in reaction to the then-pending case of Bullock v. Dunigan Tool & Supply Co., 588 S.W.2d 633 (Tex. Civ. App.-Texarkana, writ ref'd n.r.e.), at least partly in reaction to that case. And if that be so, then the legislature did not want warehousing and storage facilities (many of which are outside city limits) to be the places where sales were consummated for local sales tax purposes unless orders were actually received there by personnel working there, but wanted the office location out of which the salesman operated to be the place where the sales were consummated."
The comptroller expects this issue to be fully litigated. But in the interim, the comptroller must still apply the local tax consummation statutes to pending controversies, and taxpayers are entitled to understand the basis for the comptroller's rulings. Adoption of a definitive standard may also facilitate a more definitive decision from the courts.
The comptroller held a public hearing on November 8, 2023. The comptroller received oral and written comments regarding adoption of the amendment. The commenters were the following persons:
Barbara Boulware, City Attorney for City of Goliad in support.
Mayor Clyde C. Hairston, Mayor Pro Tem Mitchell Cheatham, Deputy Mayor Pro Tem Betty Gooden-Davis, Councilmembers Carol Strain-Burk, Stanley Jaglowski, Marco Mejia, and Derrick Robinson, City of Lancaster against the proposed amendment.
Representative Ben Bumgarner against the proposed amendment.
Kyle Kasner, Texas City Services, against the proposed amendment.
John Kroll, HMWK, against the proposed amendment.
Jim Harris, on behalf of the Coalition for Appropriate Sales Tax Law Enactment and its members the cities of Coppell, Carrollton, Desoto, Farmers Branch, Humble, Lancaster, and Lewisville (the CASTLE group), against the proposed amendment.
Jack Newman against the proposed amendment.
Dan Butcher, Clark Hill, commented without taking a position for or against the proposed amendment.
City Manager Michael W. Kovacs of City of Fate in support of amendment.
Interim Director of Budget and Strategy-Budget Justyn Mejorado, City of Sugar Land without taking a position for or against the amendment.
Attorney for the City of Round Rock Stephan L. Sheets against the amendment.
Mayor TJ Gilmore, City of Lewisville against the amendment.
Mayor Josh Schroeder, City of Georgetown against the amendment.
City Manager Sam A. Listi, City of Belton against the amendment.
City Manager Rolin McPhee, City of Longview against the amendment.
Mayor David Bristol, City of Prosper against the amendment.
City Manager Mike Land, City of Coppell against the amendment.
In summary, most opponents of the rule amendment commented that the amendment is inconsistent with the statute and will impair the sourcing of local sales tax to fulfillment warehouses. Supporters of the rule amendment commented that the amendment will provide clarity and stability to local government institutions.
Summary of the Factual Bases for the Rule.
In some circumstances, the consummation of a sale for local sales tax purposes is determined by when and where an order is received. Controversies have arisen regarding this determination, but the consummation statutes provide no further guidance. Therefore, the comptroller is exercising its rule-making authority to articulate a uniform standard.
Reasons Why the Comptroller Disagrees With, and in Some Cases Agrees With, Party Submissions and Proposals.
The effect on fulfillment warehouses and similar facilities.
Most of the opponents of new subsection (c)(7) are concerned with the effect of the subsection on fulfillment warehouses and similar facilities. New subsection (c)(7) does not change the comptroller's existing rule regarding these facilities. Subsection (b)(1)(A) already provides: "Forwarding previously received orders to a facility for fulfillment does not make the facility a place of business." The text of new subsection (c)(7) is consistent with the existing text: "The location where an order is received ... means the physical location ... where an order is initially received ... and not where the order may be subsequently accepted, completed or fulfilled."
New subsection (c)(7) also supplements the preexisting rule by explicitly stating the criteria for determining when an order is received: "An order is received when all of the information from the purchaser necessary to the determination whether the order can be accepted has been received by or on behalf of the seller."
The criticisms of new subsection (c)(7) are similar to the criticisms that the comptroller previously received regarding subsection (b)(1)(A), and much of the comptroller's commentary in the January 2023 rulemaking is applicable here. See 48 TexReg 391 (January 27, 2023).
New subsection (c)(7) explicitly limits receipt to the location where the order is initially received, ruling out intermediate and final locations where an order might be accepted, completed, or fulfilled. The CASTLE group commented that the modifier "initially" is not present in the portion of definition of "place of business" that refers to the location at which orders "are received." The CASTLE group, as well as Mr. Kasner, also commented that the consummation statute in Tax Code, §321.203 sometimes refers to where the retailer "first receives" the order, implying that an order can be "received" at more than one place.
The CASTLE group also argued that the dictionary defines "receive" as "to take into one's possession, to take delivery of a thing, to get, or to come by," and a fulfillment warehouse cannot fulfill an order unless it gets or comes by the order. This argument may seem reasonable in the abstract, but not in context. When the statute and its legislative history are considered as a whole, the proper construction is the opposite - a fulfillment warehouse does not receive an order for purposes of the local sales tax statutes merely because fulfillment information has been sent to the warehouse.
With regard to statutory construction, the Texas Supreme Court has stated: "We must analyze statutory language in its context, considering the specific sections at issue as well as the statute as a whole. {Citation omitted}. While 'it is not for courts to undertake to make laws "better" by reading language into them,' we must make logical inferences when necessary 'to effect clear legislative intent or avoid an absurd or nonsensical result that the Legislature could not have intended.'" Castleman v. Internet Money Ltd., 546 S.W.3d 684, 688 (Tex. 2018), quoting Cadena Comercial USA Corp. v. Tex. Alcoholic Beverage Comm'n, 518 S.W.3d 318, 338 (Tex. 2017).
Considering the local sales tax statute sections as a whole, the term "received" must be limited to the location where an order is initially received. This construction effects the clear legislative intent and avoids an absurd or nonsensical result that the legislature could not have intended.
The legislature did not define "receiving," "received," or "order." So, the terms must be construed in the context in which they are used. One context is the definition of "place of business of the retailer" in Tax Code, §321.002(3)(A). A "place of business of a retailer" is a location operated "for the purpose of receiving orders." One might say, as does the CASTLE group, that a purpose of a fulfillment warehouse is to receive the order because receipt is a necessary step in fulfillment. However, one might also reasonably say that while a sales office is operated for the "purpose of receiving orders," a fulfillment warehouse without sales personnel is not operated for such a purpose - the purpose is only fulfillment, which does not require the receipt of the entire order containing price and payment terms. The only necessary information is delivery information - the product description, quantity, and delivery location. Because there are at least two reasonable interpretations, the terms in this context are ambiguous.
In another context the meaning becomes clearer. That context is the consummation statute in Tax Code, §321.203. Consider Tax Code, §321.203(d):
"(d) If the retailer has more than one place of business in this state and Subsections (c) and (c-1) do not apply, the sale is consummated at:
(1) the place of business of the retailer in this state where the order is received; or
(2) if the order is not received at a place of business of the retailer, the place of business from which the retailer's agent or employee who took the order operates."
Assume a situation in which the retailer has multiple retail stores in Texas (more than one place of business in the state), but a customer calls in an order to a Texas sales office and the order is fulfilled from a location outside of Texas, so that Tax Code, §321.203(c) and (c-1) indisputably do not apply. Also assume that information from the order is forwarded to the retailer's executive office in Texas for approval, to the retailer's Texas credit office for a credit check, to the retailer's Texas manufacturing facility for assembly, to the retailer's Texas storage lot for bundled shipping to a fulfillment center, to the retailer's fulfillment center for fulfillment to the customer, to the retailer's Texas accounting office for billing, and to the retailer's Texas controller for collection on the account.
In the sense proposed by the CASTLE group, all these locations "received" the "order" to complete their assigned tasks. But this interpretation leads to absurd results. If the "order" was "received" at multiple locations, so that each location became a "place of business," it would be impossible to identify the particular location where the local tax should be sourced.
Furthermore, Tax Code, §321.203(d) refers to "the place of business ... where the order is received," indicating that there is a singular location where the order is received. The most reasonable singular location, and perhaps the only reasonable singular location, is where the information necessary to accept the order is initially received as provided in subsection (c)(7). In the example above, the location where the order is received would be the Texas sales office.
This example regarding Tax Code, §321.203(d) also illustrates the need for additional clarity. Subsection (b)(1)(A) explicitly provides that a fulfillment center is not a "place of business" simply because orders may be forwarded to the facility for fulfillment. But subsection (b)(1)(A) does not explicitly eliminate the possibility that other locations are "places of business," such as locations where orders are accepted or otherwise completed. New subsection (c)(7) explicitly eliminates those possibilities. There is a single location where an order is received - the initial location where all the information necessary for acceptance has been received. With this clarification, the consummation statute can be applied with greater certainty.
The CASTLE group commented: "For all practical purposes an order placed on a website is typically received at the same time at various locations, including fulfillment centers." However, for the practical purpose of sourcing local tax, there is a single location where a website order is initially received - the Web server. According to a report from the group's own expert, Amit Basu: "...the Buyer places the online order by communicating with a Web server that manages the Seller's Web site. ... The Web server transmits the order electronically to the Seller's e-Commerce software program."
Mr. Kroll commented that it may be impossible to determine the location of initial receipt: "Some companies will have multiple redundant server/data center operations spread across multiple geographic locations." The comptroller agrees. As pointed out in the 2020 rulemaking, a computer server may be situated on the seller's premises, it may be situated at a co-location facility operated by a third party, or it may be situated at a web hosting facility operated by a third party. The computer server may be one of multiple servers that serve the same website from different physical addresses as part of a cloud distribution network. The computer server may route the order to multiple other servers for load balancing purposes. Conversely, a single computer server may serve multiple websites. The seller may or may not know the physical address of the server receiving the order. But, if the seller does not know the physical location of the server, an ordinary person would not consider the physical location of the computer server to be a place of business of the seller. So, the best way to treat these orders consistently and coherently is to treat them uniformly as being received at locations that are not places of business of the seller. If a server is not a "place of business" of the seller, then the exact location of the server does not have to be determined because the location will not determine the sourcing of local sales tax.
The comptroller's construction of the statute is supported by statutory history. Prior to 1979, the consummation statute had no provision for sourcing to where an "order" was "received," and the statute provided:
"If the retailer has more than one place of business in the State, the place or places at which retail sales, leases, and rentals are consummated shall be the retailer's place or places where the purchaser or lessee takes possession and removes from the retailer's premises the articles of tangible personal property, or if the retailer delivers the tangible personal property to a point designated by the purchaser or lessee, then the sales, leases, or rentals are consummated at the retailer's place or places of business from which tangible personal property is delivered to the purchaser or lessee." Acts 1969, 61st Leg., 2nd C.S., Ch. 1. Art. 1 § 42.
In 1979, the Texas Legislature added a definition of "place of business of the retailer," which was previously undefined. The definition required that the location be operated "for the purpose of receiving orders." Acts 1979, 66th Legislature, Ch. 624, Art. 1, §3 (amended Article 1066c(B)(1)). The legislature also added a sourcing provision based on where the order is received, comparable to current Tax Code, §321.203(d):
"If neither possession of tangible personal property is taken at nor shipment or delivery of the tangible personal property is made from the retailer's place of business within this State, the sale, lease, or rental is consummated at the retailer's place of business within the State where the order is received or if the order is not received at a place of business of the retailer, at the place of business from which the retailer's salesman who took the order operates."
Acts 1979, 66th Legislature, Ch. 624, Art. 1, §3 (amended Article 1066c(B)(1)(c)). Like current Tax Code, §321.203(d), the legislature referred to "the place of business ... where the order is received," contemplating a single location, and not multiple locations. And like the current statute, the 1979 sourcing statute would be unworkable if an "order" could be "received" at multiple locations where order information might be sent for processing.
The 1979 amendments were originally set to expire on August 31, 1981. But, following an October 2, 1980, Interim Report of the House Ways and Means Committee, the legislature made the 1979 amendments permanent. Acts 1981, 67th Legislature, Ch. 838, §1.
Mr. Kroll commented that the comptroller "misremembers the legislative history." The comptroller disagrees. During the 1979 session of the legislature, a House Study Group analysis stated that the "bill is necessary to protect the state from possible consequences of the pending court suits." The analysis specifically referenced "Dunigan Tool and Supply v. Bullock" as one of those suits. The analysis is available at the Legislative Reference Library website at https://lrl.texas.gov/scanned/hroBillAnalyses/66-0/SB582.pdf.
In the Dunigan litigation, sales personnel took orders that were forwarded to pipe storage facilities where the orders were fulfilled. At the time of the 1979 legislation, the district court had ruled that the transactions should be sourced to the pipe storage facilities. Bullock v. Dunigan Tool & Supply Co., 588 S.W.2d 633, 635 (Tex. Civ. App. - Austin, Sept. 6, 1979, writ ref'd n.r.e.). Therefore, when the 1979 House Study Group bill analysis stated that the bill was intended to protect the state from the consequences of the Dunnigan litigation, the analysis meant that the legislation was intended to reduce the circumstances in which transactions would be sourced to fulfillment warehouses, which at the time were often located in rural areas not subject to local sales tax. The legislature accomplished this objective by adding a definition of "place of business" that was limited to a location operated "for the purpose of receiving orders," and by adding a provision for sourcing transactions to where the order was received. Acts 1979, 66th Legislature, Ch. 624, Art. 1, §3.
Mr. Kasner commented that the proposed rule reverses the effect of the Dunigan decision. He is correct, because the rule attempts to follow the subsequent legislation, which was intended to reverse the effect of the Dunigan decision.
In the subsequent October 2, 1980, Interim Report of the House Ways and Means Committee, the committee considered whether to allow the recently adopted statutory definition of "place of business" to expire. The committee described the consequence: "The location of sale would no longer be tied to permitted outlets, salesmen's locations, or sales offices." Interim Report at 20. The committee understood that the phrase "operated for the purpose of receiving orders" meant sales activities and not ancillary activities necessary to subsequently effectuate the sale.
To be clear, under the 1979 legislation and today, a fulfillment warehouse could be and can be a "place of business." The legislature set a low threshold: "A warehouse, storage yard, or manufacturing plant may not be considered a 'place of business of the retailer' unless three or more orders are received by the retailer in a calendar year at such warehouse, storage yard, or manufacturing plant." Acts 1979, 66th Legislature, Ch. 624, Art. 1, §3. A typical warehouse, storage yard, or manufacturing plant would almost certainly process more than three orders in a calendar year. So, this explicit threshold requirement is an additional indication that the legislature did not intend for these facilities to automatically be "places of business" simply because they processed order information that was previously received at other locations. Instead, the legislature set a low threshold yet still expected these facilities to engage in at least some sales activities.
Mr. Gilmore commented: "This is a major revision to a state practice that has been in place for more than 50 years." The CASTLE group commented that the amendment is "inconsistent with his {the comptroller's} pre-2019 application of the statutory definition of 'place of business.'" The comptroller disagrees with these comments.
The comptroller's treatment of fulfillment warehouses goes as far back as Comptroller's Decision No. 15,654 (1985), which stated (emphasis added):
"But it seems to the administrative law judge that the legislature was amending the law if not entirely in reaction to the then-pending case of Bullock v. Dunigan Tool & Supply Co., 588 S.W.2d 633 (Tex. Civ. App.-Texarkana, writ ref'd n.r.e.), at least partly in reaction to that case. And if that be so, then the legislature did not want warehousing and storage facilities (many of which are outside city limits) to be the places where sales were consummated for local sales tax purposes unless orders were actually received there by personnel working there, but wanted the office location out of which the salesman operated to be the place where the sales were consummated."
The CASTLE group commented: "The Comptroller misreads the decision." But the text speaks for itself and is an accurate quotation from the decision.
The 2014 version of §3.334 (39 TexReg 9597 at 9605) (STAR Accession No. 201501004R) also discussed fulfillment warehouses:
"(2) Distribution centers, manufacturing plants, storage yards, warehouses, and similar facilities.
(A) A distribution center, manufacturing plant, storage yard, warehouse, or similar facility operated by a seller at which the seller receives three or more orders for taxable items during the calendar year is a place of business.
(B) If a salesperson who receives three or more orders for taxable items within a calendar year is assigned to work from, or to work at, a distribution center, manufacturing plant, storage yard, warehouse, or similar facility operated by a seller, then the facility is a place of business.
(C) If a location that is a place of business of the seller, such as a sales office, is in the same building as a distribution center, manufacturing plant, storage yard, warehouse, or similar facility operated by a seller, then the entire facility is a place of business of the seller."
If a distribution center was automatically a "place of business," as suggested by the CASTLE group, there would be no reason for subparagraph (C).
In 2016, STAR Accession No. 201606995L (June 1, 2016) also discussed fulfillment warehouses:
"The warehouse from which the person ships those items is not a place of business, unless the warehouse separately qualifies as a place of business."
And, in 2019, STAR Accession No. 201906015L (June 13, 2019) discussed fulfillment warehouses:
"Scenario One: Taxpayer Retailer operates fulfillment centers in Texas that are not open to the public. ... When an order is received at a location that is not a place or business and is fulfilled in Texas at a location that is not a place of business, the sale is consummated at the location in Texas to which the order is shipped. See Rule 3.334(h)(3)(D). For Scenario One, local sales and use tax is due based on the location where the order is delivered."
Again, a fulfillment warehouse is not automatically a place of business.
Each of these documents, which the comptroller indexed and made available for public inspection on the State Tax Automated Research (STAR) System, is consistent with the statement in the rule that the location from which a product is shipped shall not be used in determining the location where the order is received by the seller.
Commenters, including Representative Bumgarner (District 63), Mayor Gilmore (Lewisville), City Manager McPhee (Longview), Mayor Schroeder (Georgetown), Mayor Bristol (Prosper), City Manager Land (Coppell), Justyn Mejorado (Interim Director of Budget and Strategy - Budget for the City of Sugar Land), and Jack Newman (unknown city) expressed concern about revenue loss, particularly with regard to local sales taxes generated by fulfillment warehouses within their jurisdictions. Some requested more study. The comptroller received similar comments in the previous rulemaking. The comptroller's previous responses remain applicable.
Since 1985, the comptroller's interpretation has been that a fulfillment warehouse is not automatically a "place of business." To be a "place of business," the warehouse must receive at least three orders during the calendar year. A company that sources local sales tax to a warehouse location is representing to the comptroller that the warehouse is a "place of business" that has received three or more orders. The representation may or may not be correct. The comptroller does not know unless a misrepresentation is discovered during an audit. Without that knowledge, the comptroller cannot say whether the company would or would not change its reporting as a result of the rule's explicit statement of the comptroller's existing policy. An individual jurisdiction may be able to conduct a detailed study for companies in its jurisdiction to determine the effect. But the comptroller does not have the resources to conduct such a study for every reporting location in the state.
The clarifications in the adopted rule will likely cause some vendors to recognize their noncompliance and change their reporting methods, with some cities gaining and some losing. But the validity of the rule does not turn on whether there will or will not be revenue losses or gains to particular cities, the extent of such losses or gains, or whether the outcome is fair or unfair. The validity of the rule turns on whether it follows the statute.
Response to comments regarding use of language from the SSUTA.
Mr. Kroll commented: "The Texas Legislature, (the entity with constitutional responsibility for the state's Tax Policy), has had nine regular sessions to adopt the SSUTA's preferred origin sourcing model found in SSUTA 3.10.1. The Legislature has not acted, even in 2013 when then Senator Hegar was chairing the Senate Finance, Subcommittee on Fiscal Matters with Tax policy responsibility."
The CASTLE group similarly commented: "the Legislature, in general, rejected the Comptroller's efforts to become a member and be subject to the Agreement, and, more specifically, declined to adopt the language of 3.10.1 and change the definition of what is a 'place of business.'"
Mr. Land (Coppell) commented: "By not adopting the agreement, the legislature was rejecting the very language the Comptroller proposes to adopt..."
Mayor Hairston (Lancaster) commented: "Rule changes refer to the Streamline Sales and Use Tax Agreement. States participating in this agreement do not seem to have similar economic issues as the State of Texas. If the intent of the rule change is to position the state to participate in the Sales and Use Tax Agreement, further research is needed to better support the rationale for this action."
And, Mr. McPhee (Longview) commented: "This sentiment runs counter to the story of Texas. Yes, we should look to and learn from other states, but Texas should lead and not follow. We should not implement statewide policies because 'everyone else is doing it.'"
Mayor Bristol (Prosper) had similar comments.
Although the legislature declined to adopt the SSUTA, it would be an overstatement to suggest that the legislature specifically rejected the language of a single subsection of the SSUTA. As the CASTLE group points out in its comments: "Therefore, prior to December 31, 2007, the Legislature had to agree to the quoted 3.10.1 language, as a step in allowing Texas to be subject to the Agreement. But doing so would have required not only that the Legislature radically revise the statutory definition of "place of business" but make many other changes to the sections of the Tax Code addressing sales and use tax."
Texas has a unique, composite consummation statute, in which sales are sometimes sourced to where the order is received, sometimes sourced to where the order is fulfilled, and sometimes sourced to where the order is delivered. Adoption of the SSUTA would require fundamental changes to this composite consummation statute, which the comptroller is not advocating or promoting. However, there is one area of overlap. Both systems use the receipt of an order as a factor in sourcing. In this area of overlap, it is entirely appropriate to consider how the SSUTA does it.
The comptroller has considered the language in the SSUTA and concluded that it is a reasonable and practical method of determining where and when an order is received. And, the SSUTA language has the added benefit of being a concept that other states have acknowledged, and a concept with which many taxpayers will already be familiar.
Responses to other comments.
Mr. Butcher commented that the comptroller should provide that businesses with economic development agreements will be able to receive the benefits for their remaining terms. Mr. Bristol commented that the comptroller should provide rules to curb abusive economic development agreements while providing cities the abilities to provide for true economic development. The comptroller responds that the agency will not adopt any special provisions for economic development agreements in this rulemaking. The economic development statutes determine what is and is not allowable under such agreements, and the comptroller cannot by rule prevent revenue shifting that is permissible under the consummation statutes.
Mayor Hairston (Lancaster) commented that "the contemplated shift from origin-based to destination-based sales tax sourcing represents a significant alteration of existing law." The comptroller disagrees with this comment. There cannot be a wholesale shift because the consummation statutes have never been solely origin-based. From 1979 to the present, there have been four sourcing possibilities. Local taxes may be sourced to the point where the order was received, the point from which the order was shipped or delivered, the point to which the order was shipped or delivered, or the first point in the state where the item is stored, used, or consumed. See Acts 1979, 66th Legislature, Ch. 624; Tax Code, §321.203 and §321.205. Even the expression "origin" sourcing is something of a misnomer, since local taxes have never been based on the point where a product was designed, developed, or manufactured.
With regard to the reference in subsection (c)(7) to "on behalf of the seller," Mr. Kasner commented that "a clear comparison/distinction needs to be provided on this term in light of TTC {Texas Tax Code} using the term 'agent.'" The comptroller responds that no additional rule text is needed. The local sales and use tax statute uses the term "agent" to determine whether a location is a "place of business" - a "place of business" must be a location "operated by the retailer or the retailer's agent or employee." However, under the statute, an order may be "received" at a location that is not a place of business. There is no requirement in subsection (c)(7), explicit or implied, that an order can only be received by the retailer, the retailer's agent, or the retailer's employee. The adopted paragraph simply references the location where the order is received "by or on behalf of the seller," and further states that it may be the location of a "seller or a third party." No agency is required and no comparison or distinction between the terms is needed.
Mr. Kasner commented that the definition of "'order received' needs to broaden to address orders received directly by the retailer, its employees, and/or its agents." The comptroller responds that the reference in subsection (c)(7) to an order received "by or on behalf of the seller" is sufficient to cover orders received directly by the retailer, its employees, and/or its agents.
Mr. Kasner commented that a definition of "automated order receipt system" needs to be provided, and asks whether the term is the same as a "computer server, Internet protocol address, domain name, website or software application." The comptroller responds that the term is not the same, and it is sufficiently specific without further definition. For example, a website may or may not be automated to receive orders, and an automated order system might be a telephonic system that does not use any of the listed items.
Mr. Kasner commented that the proposed definition needs to emphasize the "hierarchy of sales consummation." The comptroller responds that this hierarchy is already explained in the other paragraphs of subsection (c).
Mr. Kroll commented that "Destination sourcing ... is the Comptroller's preferred method of local sales tax sourcing." The comptroller disagrees with this comment. The comptroller's objective is to apply the statutes, and as previously stated, the statutes have four sourcing possibilities, only one of which is destination sourcing.
Mr. Listi (Belton) commented that new subsection (c)(7) adds another layer to the hierarchy of sale consummation. Mr. Listi further stated that subsection (c)(7) sources a sale to the location where the "order is initially received" and not "where the order may be subsequently accepted, completed, or fulfilled." The comptroller responds that subsection (c)(7) only determines where an order is received and does not determine where a sale is consummated. A sale may still be consummated at a location where the order is fulfilled.
Mr. McPhee (Longview) commented that a "similar issue" was considered by the 2021 legislature in House Bill 4072 and the 2023 legislature with House Bill 5089. The comptroller responds that these bills are dissimilar because they would have radically changed the consummation hierarchy. Subsection (c)(7) does not change the consummation hierarchy.
Mayor Schroeder (Georgetown) commented that the proposed rule change imposes an unnecessary burden on small businesses. The comptroller responds that subsection (c)(7) may reduce the burden on small businesses and other taxpayers by providing more definitive guidelines on when and where an order is received.
Mr. Sheets commented by resubmitting his prior comments made on Oct. 24, 2022. The comptroller responds that its previous responses remain responsive.
Implications for the pending litigation.
Representative Bumgarner commented that the proposed rule change should be paused indefinitely to allow the pending litigation to be fully litigated before attempting to make any additional changes to local sales tax sourcing. The comptroller responds that the rule amendment should facilitate the litigation by explicitly stating the comptroller's interpretation of the statute, enabling a more definitive ruling from the courts.
During the pendency of the lawsuit, the comptroller is temporarily enjoined from enforcing §3.334(b)(5). Subsection (b)(5) provides guidance on whether certain facilities are or are not "places of business." A fulfillment warehouse without sales personnel may be affected by subsection (b)(5). While the temporary injunction is in place, the agency will not attempt to reallocate local taxes allocated to such facilities based on subsection (b)(5).
New subsection (c)(7) provides guidance on a different issue - when and where an order is received. This issue affects the consummation of sales to locations other than fulfillment warehouses, as the preceding discussion regarding Tax Code, §321.203(d) illustrates. For example, is a sale consummated at the sales office that receives the order, or is the sale consummated at the home office that approves the order forwarded by the sales office? The comptroller is currently resolving issues like this example, and the rulemaking should not be delayed until the litigation is concluded.
Statements in support.
Ms. Boulware (Goliad) commented that the amendment would provide some clarity and stability to the local governmental institutions that received sales taxes, and Mr. Kovacs (Fate) commented that the amendment is consistent with earlier efforts to promote good governance and sound economic principles in the administration of sales tax.
The comptroller adopts the amendment under Tax Code, §§111.002 (Comptroller's Rule; Compliance; Forfeiture); 321.306 (Comptroller's Rules); 322.203 (Comptroller's Rules); 323.306 (Comptroller's Rules), which authorize the comptroller to adopt rules to implement the tax statutes.
The amendment to this section implements Tax Code, Chapter 321, Subchapters A, B, C, D, and F; Tax Code, Chapter 322; Tax Code, Chapter 323.
The agency certifies that legal counsel has reviewed the adoption and found it to be a valid exercise of the agency's legal authority.
Filed with the Office of the Secretary of State on December 20, 2023.
TRD-202304936
Jenny Burleson
Director, Tax Policy Division
Comptroller of Public Accounts
Effective date: January 9, 2024
Proposal publication date: October 27, 2023
For further information, please call: (512) 475-2220