Sales Tax Incentive Deals

Round Rock, Texas, is expecting to lose $30 million a year if a small change to the sales tax laws goes into effect in Texas.
The change? Sales tax will be calculated and collected based on the location where the goods are being delivered, not the location of the transaction. This is destination-based sales tax, and it is the most common way of doing things. Most states have destination-based sales tax.When a product is bought at a store and the customer carries it out in a bag, the product reaches its destination — the customer — in the store. This means that retailers usually just collect sales tax for the location of their store.However, when goods are shipped elsewhere, the seller must collect the sales tax on behalf of the location they’re shipping to — that’s the destination.

Why does it matter?

There are plenty of reasons this can matter, but for Round Rock, it’s all about a sales tax incentive.

Texas is an origin-based state, meaning that sales tax is collected based on the point of origin. Dell, the electronics giant, located in Round Rock largely because Round Rock gives part of the corporation’s sales tax payments back to the company. Estimates suggest that it comes to about $10 million for Dell.

That sales tax incentive was part of the city’s successful wooing of the corporation years ago.

If Texas changes to a destination-based system, Dell will lose that benefit, and Round Rock will lose all those sales tax revenues.

Round Rock is suing

The city of Round Rock is suing to keep that change from taking place.

The state of Texas so far is not budging. They say that they are not actually changing from a destination-based system to an origin-based system. The rule applies only to online purchases. They take the position that someone who buys a Dell computer online is not making a transaction in any particular location. There is no origin for that transaction, they say.

Currently, Dell’s location is Round Rock, so its transactions take place, officially, in Round Rock. Dell collects sales tax on that basis and files and remits to the city of Round Rock. Round Rock then gives them a rebate refunding part of the sales tax. Round Rock gets  most of the sales tax from an enormous operation and Dell gets a break on taxes.

If the sales tax begins to go to the purchaser’s home states and cities, Round Rock loses out on that revenue and Dell loses the rebates.

This is the reason for the lawsuit. Round Rock isn’t pretending that it has some legal objection or a philosophical beef with the new rule. They’re saying straight up that they can’t afford to lose the money.

What’s the best plan?

The state says that people living in other towns shouldn’t have to pay local sales tax to Round Rock. With remote sales accounting for an estimated 15% of Texans’ shopping this year, the destination-based formula looks to the state like a matter of common sense.

Common sense isn’t actually enough to sort out the complexities of sales tax compliance.

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