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Texas Sales Tax Update: Texas Comptroller Changes Local Tax Rule to Undermine Economic Development Agreements

Local governments, like cities and counties, collect local taxes to finance their governmental operations. Generally, local governments receive local sales taxes based upon orders that local businesses receive within their boundaries. Local governments may also receive local use taxes when goods are delivered to customers within their boundaries. A seller collects local use taxes only when the local sales tax where the item is sold is less than the maximum rate (2%) and the local use tax is not of the same type (such as a city tax or a county tax) as the local sales tax that applied. This may occur, for example, when a seller receives an order outside city limits and sells the product for delivery to a customer residing within city limits.

Generally, local governments want businesses to relocate within their boundaries. In doing so, the relocated businesses provide jobs, goods, services and generate sales and property taxes for the local government’s operations.

To induce a business to relocate to a particular city, the city may offer the business incentives, often in the form of shared local sales tax revenues. These offers are authorized under Chapter 380 of the Texas Local Government Code and are commonly known as “Chapter 380” agreements.

As an example, Apple decides to leave California and relocate its headquarters to Texas. To induce Apple to choose Austin, the City of Austin offers Apple a Chapter 380 agreement under which the City will give Apple one-half of the sales tax revenue Apple collects for the City for a five-year period.

Prior to the rule’s amendment, whenever a customer places an order on the internet for a new iPhone, Apple would treat the order as received in Austin, and collect sales tax that it would split, for a five-year period, with the City of Austin under the Chapter 380 agreement. This result would follow regardless of where in Texas the customer lives.

Comptroller Hegar says that these types of arrangements are unfair to the local tax jurisdictions where the customers live, so he amended his rule to say the local tax revenue goes to the customer’s location, where the item is shipped. Hegar penned an op-ed in the Dallas Morning News in an effort to justify his agency taking the initiative to change Texas’ local sales tax rule without a change in the law. Hegar claims that taxpayers and cities use a Chapter 380 “loophole” to create sham facilities to “manipulate local sales taxes to their own benefit at the expense of other cities.”1

When a Texas customer makes a purchase from a company’s website, or by using its mobile app, Comptroller Hegar says the local tax should go to the location where that customer receives the product, since he or she lives there and receives the local governmental services there, which the local sales tax revenues should help fund. Instead, taxes have been split between the local government where the seller has its business and the seller itself.

Although the amended rule becomes effective May 30, 2020, Comptroller Hegar has provided for a transition period through September 2021. He did this to allow the e-retailers adequate time to adjust their systems to collect local tax at the rate in effect at their customer’s location and to give interested parties a chance to get the Texas Legislature to craft a different solution when it convenes for the next regular session in January 2021.2

1. Glenn Hegar, How Some Texas Cities and Retailers Are Using a Tax Loophole to Snatch Sales Tax Revenue from Other Communities, Dallas Morning News, Feb. 4, 2020, available at

2. 45 Tex. Reg. 3505 (“. . . giving interested parties an opportunity to seek a legislative change.”).