On December 3, 2024, Texas District Court Judge Karin Crump issued a Final Judgment invalidating several parts of a regulation issued by the Comptroller of Public Accounts that dealt with sourcing local sales tax. The ruling declares that the regulation contravenes statutory language, its passage did not comply with the Administrative Procedures Act, and its threatened application interferes with or impairs a legal right or privilege of the six Texas cities that brought the consolidated cases to court. The case is City of Coppell et al. v. Glenn Hegar, Case Number D-1-GN-21-003198, District Court of Travis County.
In addition to Coppell, the case was brought by the cities of Humble, DeSoto, Carrollton, Farmers Branch, and Round Rock. The cities are homes to warehouses, sales centers, or offices of large corporations (like Dell Technologies in Round Rock) that benefit from statutory rules about where a sale takes place for purposes of local sales tax. The regulation would have restricted application of statutory rules that base local taxes on the location of the seller, known as origin sourcing. Instead, it would have required the use of destination sourcing for many online sales, which would apply local taxes in effect at the customer’s location. This would have interfered with sales tax sharing agreements, like the one between Dell and Round Rock, which give a portion of the proceeds of local sales taxes back to large retailers as an incentive to lure big businesses to the cities.
The Comptroller originally adopted the regulation in 2020, but that was invalidated after an earlier ruling that the proper procedures were not followed in making the new rule. The regulation was updated in 2024, leading to the current judgment.
The judgment enjoins the Comptroller from enforcing parts of the new regulation because it added a non-statutory definition and additional provisions that contravened the statutory scheme for determining where a sale of a taxable item is “consummated.” Under the statute, a fulfillment center that uses computers or other automated systems to accept at least three orders per year qualifies as a place of business to which local taxes can be sourced. The regulation would have disqualified locations that receive website orders but do not have sales personnel, requiring destination sourcing instead.
The court also declined a request from the cities to prospectively declare retailer fulfillment centers receiving website orders to be places of business because the statute requires a determination that at least three orders were received at those locations in a calendar year.
It remains to be seen whether or not the Comptroller will appeal the ruling.
If you have questions about your local sales tax obligations in Texas, or if you believe you may have overpaid sales tax as a result of Comptroller regulations, contact a Ryan expert listed below today.
TECHNICAL INFORMATION CONTACTS:
Josh Cohen
Principal
Ryan
972.934.0022
josh.cohen@ryan.com
Alan Decker
Principal
Ryan
972.934.0022
alan.decker@ryan.com
Maher Maso
Principal
Ryan
972.934.0022
maher.maso@ryan.com
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