The city of Coppell on Tuesday filed a lawsuit against Texas Comptroller Glenn Hegar following his decision to change a state rule that relates to the receipt of local sales tax on online sales.

For years Texas has used an origin sourcing system in which local sales tax on Internet sales is collected at the point where orders are received and from where good are shipped. That has been key for cities like Coppell that have a significant amount of warehouses, distribution centers, etc. But with the change in the rule the sales tax would go to where the good are delivered, or destination sourcing.

City officials say that violates state law, goes against what the state has always done and puts a financial strain on many cities, including Coppell.

“If the comptroller’s action in rewriting what is known as rule 3.334 as it relates to receipt of local sales tax on Internet sales is allowed to go into effect on Oct. 1, 2021, the change could cost Coppell as much as approximately $26 million or about 18% of its annual revenue,” said Coppell Mayor Wes Mays.

City leaders say the change would reverse the direction many cities have taken knowing that origin sourcing was in place.

“Cities such as Coppell adopted local sales taxes and promoted warehouse and distribution centers in their communities based on a law providing that local sales tax generated from Internet sales at these locations would support the cost of supporting those facilities,” said Coppell City Manager Mike Land. “The Comptroller’s actions amount to changing the law without legislative approval in the middle of the game.”

City leaders said this change is similar to many local control issues municipalities have been fighting for years.

“The comptroller’s new position is the equivalent of removing a municipality’s authority to levy the local sales tax authorized by state law and adopted by a vote of the citizens in our community,” Mays said. “Our elected officials made decisions in the best interest of our community based on the comptroller’s long-standing approach, consistent with state law, to allocate local sales tax to communities that have provided a home to fulfillment centers that rely on the Internet.”

Officials worry that businesses would also be impacted because they would have to perform separate sourcing processes for Internet sales. That would mean investing in software and updating accounting systems. Businesses would have to calculate the appropriate tax rate based on the sourcing. City leaders said they project that could cost businesses $1,500 to $50,000 a year to implement these changes.

“In talking with local Coppell businesses, we have found that the rule also creates a significant burden and confusion for companies to comply with the new rule,” Mays said. 

While Coppell stands to lose $26 million in annual revenue if the change goes into effect Oct. 1, the city could face an even bigger impact if a proposal that died at this year’s Texas Legislature resurfaces in 2023.

House Bill 4072 called for all transactions that are not made in person to be destination sourcing. The bill did not pass, but there is concern from leaders from various cities it will be brought up again in two years.

Tuesday’s lawsuit requests a declaratory judgment by the court to declare the rule 3.334 invalid as it applies to Internet sales.

“Our citizens and elected officials made financial commitments and planned for the future in good faith,” Land said. “We are asking the courts to intervene on behalf of our citizens who have voted for the sales taxes we levy in and based on longstanding state law that hasn’t changed in over a decade.”

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