¹ The Comptroller summarized the factual bases for the Rule ........................................................................ 36

² Whether the Comptroller substantially complied with the reasoned justification requirement in the APA.

³ Whether Rule 3.334 contravened Chapter 151 and sections 321.203 and 323.203 of the Texas Tax Code.

⁴ Whether Rule 3.334(a)(18), (b)(5), and (c) contravene sections 321.002(a)(3)(A), 321.203, and 323.203 of the Texas Tax Code.

⁵ The Comptroller did not substantially comply with the notice requirements under the Administrative Procedure Act (APA).

⁶ The Comptroller did not substantially comply with the “reasoned justification” requirement under the APA. 7. 34 TAC § 3.334 or its threatened application interferes with or impairs, or threatens to interfere with or impair, a legal right or privilege of the Coppell Plaintiffs. 8. 34 TAC § 3.334 or its threatened application interferes with or impairs, or threatens to interfere with or impair, a legal right or privilege of the Round Rock Plaintiff. Signed on the 30th day of December 2024. ____________________________________ KARIN CRUMP Judge Presiding, 250th District Court CONCLUSIONS OF LAW Cause No. D-1-GN-21-003198 (Consolidated) APPENDIX C The department has determined that the rule as proposed will The agency certifies that legal counsel has reviewed the pro- not affect rural communities, as it does not directly regulate any posal and found it to be within the state agency's legal authority rural community. to adopt. The department has not drafted a local employment impact Filed with the Office of the Secretary of State on April 8, 2024. statement under the Administrative Procedures Act, §2001.022, as the agency has determined that the rule as proposed will not TRD-202401417 impact local economies. James Murphy General Counsel The department has determined that Government Code, §2001.0225 (Regulatory Analysis of Major Environmental Texas Parks and Wildlife Department Rules), does not apply to the proposed rule. Earliest possible date of adoption: May 19, 2024 For further information, please call: (512) 389-4775 The department has determined that there will not be a taking of private real property, as defined by Government Code, Chapter ♦ ♦ ♦ 2007, as a result of the proposed rule. TITLE 34. PUBLIC FINANCE In compliance with the requirements of Government Code, §2001.0221, the department has prepared the following Govern- PART 1. COMPTROLLER OF PUBLIC ment Growth Impact Statement (GGIS). The rule as proposed, if adopted, will not create a government program; not result in ACCOUNTS an increase or decrease in the number of full-time equivalent employee needs; not result in a need for additional General CHAPTER 3. TAX ADMINISTRATION Revenue funding; not affect the amount of any fee; create a SUBCHAPTER O. STATE AND LOCAL SALES new regulation (to prohibit "canned" hunting of mountain lions and establish trapping rules); not expand an existing regulation; AND USE TAXES neither increase nor decrease the number of individuals subject 34 TAC §3.334 to regulation; and not positively or adversely affect the state's economy. The Comptroller of Public Accounts proposes the repeal of §3.334, concerning local sales and use taxes. The comptroller Comments on the proposed rule may be submitted to Richard repeals existing §3.334 to replace it with new §3.334. The Heilbrun, Texas Parks and Wildlife Department, 4200 Smith repeal of §3.334 will be effective the date the new §3.334 takes School Road, Austin, Texas 78744; (512) 389-8104; email: effect. [email protected] or via the department website at www.tpwd.texas.gov. Brief explanation of the proposed rulemaking. The new rule is proposed under the authority of Parks and It has been called to the comptroller's attention that the October Wildlife Code, §67.004, which requires the commission by 27, 2023 notice of proposed rulemaking did not contain a state- regulation to establish any limits on the taking, possession, ment of fiscal implications for small businesses or rural commu- propagation, transportation, importation, exportation, sale, or nities as required by Government Code, Chapter 2006. See (48 offering for sale of nongame fish or wildlife that the department TexReg 6340) (October 27, 2023). Therefore, the comptroller is considers necessary to manage the species. proposing to repeal the adopted rule as proposed in the October 27, 2023 notice of proposed rulemaking. The comptroller is si- The proposed new rule affects Parks and Wildlife Code, Chapter multaneously proposing to readopt the text of the rule effective 67. on January 5, 2024, with amendments, under the same num- §65.950. Mountain Lions (Puma concolor). ber and title, with the repeal to be effective as of the date of the adopted rule. (a) In this section "captivity" means the state of being held under control, or kept caged, penned, or trapped. Fiscal note. (b) No person in this state may: Brad Reynolds, Chief Revenue Estimator, has determined that repeal of the current rule is of no consequence apart from facilita- (1) hunt a mountain lion that is in captivity; tion of adoption of a new substitute §3.334 and has no fiscal im- (2) release a mountain lion from captivity for purposes of: plications in and of itself. The fiscal implications of the repeal are the same as the fiscal implication of the proposed new substitute (A) being hunted; §3.334. The statements in this fiscal note are supplemented by (B) training dogs; the additional statements in the preamble to the proposed new §3.334, which the comptroller will propose to adopt concurrently (3) allow a live mountain lion to be captured in a trap or with this proposed repeal. snare for more than 36 hours; or Brad Reynolds has determined the following for each year of the (4) conduct, promote, assist, or advertise an activity pro- first five years that the proposed repeal and the substitute new hibited by this subsection. rule will be in effect. (c) This section does not: The additional estimated cost to the state and to local govern- (1) prohibit a person from humanely dispatching a lawfully ments expected as a result of enforcing or administering the rule. trapped mountain lion; or There will be no additional estimated cost to the state and to local (2) apply to the use of snares designed to break away or governments expected as a result of enforcing or administering disassemble with 285 pounds of force or less. the proposed repeal of the existing rule and concurrent new rule. 49 TexReg 2440 April 19, 2024 Texas Register The proposed amendments explain the manner in which the affect local economic activity or employment would depend on comptroller intends to apply the consummation statutes. The ex- discretionary actions of the governing body or the electorate of planation should lead to greater taxpayer compliance, and less an affected jurisdiction, and cannot be determined. audit resources required to enforce or administer the rule. Government growth impact statement. The estimated reductions in costs to the state and to local gov- Brad Reynolds, Chief Revenue Estimator, has determined the ernments as a result of enforcing or administering the rule. following for each year of the first five years that the existing rule There will be no estimated reductions in costs to the state and to will be repealed and the proposed new rule will be in effect: the local governments as a result of enforcing or administering the amendment will not create or eliminate a government program; proposed repeal of the existing rule and the concurrent new rule. will not require the creation or elimination of employee positions; Local governments do not administer the tax, and the comptroller will not require an increase or decrease in future legislative ap- will not be reducing the size of its audit staff as a result of the rule. propriations to the comptroller; will not require an increase or decrease in fees paid to the comptroller; will not create a new The estimated loss or increase in revenue to the state or to local regulation; will increase the number of individuals subject to the governments as a result of enforcing or administering the rule, rule's applicability because sellers without a physical presence and the foreseeable implications relating to cost or revenues of in a local tax jurisdiction will be required to collect local use tax if the state or local governments. they are required to collect state use tax; and will not positively Change in sourcing of transactions subject to local sales taxation or adversely affect this state's economy. could result in net change in sales tax revenue of local taxing en- Economic impact statement and regulatory flexibility analysis. tities generally, which may be significant for some jurisdictions. Most, but not all, reductions in taxable transactions sourced to A "rural community" is a municipality with a population of less some jurisdictions would be increases in taxable transactions than 25,000. The comptroller estimates that there are 1,098 sourced to other jurisdictions. If the comptroller repeals the exist- such rural communities, of which 1,017 impose a sales tax and ing rule and concurrently adopts the proposed new rule, it is esti- may have revenue affected by compliance with the rule. mated that there could be a $28.5 million reduction in aggregate A "small business" is a legal entity, including a corporation, part- local sales tax levies sourced to unincorporated areas without lo- nership, or sole proprietorship, that: (A) is formed for the pur- cal sales tax or with cumulative local county and special district pose of making a profit; (B) is independently owned and oper- tax rates less than the cumulative local rates that applied at the ated; and (C) has fewer than 100 employees or less than $6 locations where the taxable transactions were formerly sourced. million in annual gross receipts. The Comptroller estimates that A $28.5 million reduction in aggregate local tax levies would re- there are 470,000 businesses with fewer than 100 employees, sult in reduced state service charge revenue of $570,000. and 377,000 businesses with annual gross receipts less than $6 Reliable estimates of net changes in revenue for each of the million; the sum of these two estimates would overstate the num- 1,759 local sales taxing jurisdictions that might stem from compli- ber of small businesses, as many businesses would be expected ance with the proposed repeal of the existing rule and concurrent to have both fewer than 100 employees and less than $6 million adoption of new rule cannot feasibly be produced by the comp- in annual gross receipts. troller. To the extent that the repeal of the existing rule and the adoption Public benefits and costs. of the proposed new rule leads to greater awareness and compli- ance with the local tax consummation standards, some vendors Brad Reynolds, Chief Revenue Estimator, has determined the may change their reporting methods, which might positively or following for each year of the first five years that the existing rule negatively affect the tax revenue of particular local tax jurisdic- will be repealed and the proposed new rule will be in effect. tions. As previously explained, the comptroller does not have The public will benefit from greater clarity regarding the consum- sufficient data on the business operations of each business to mation standards, making compliance easier. identify and quantify the businesses and transactions that might be affected, and the positive or negative revenue impact on each There may be additional economic costs to a person required to tax jurisdiction. comply with the proposed repeal of the existing rule and adoption of the new rule. The rule may cause some vendors to realize that It is conceivable that repeal of the existing rule and adoption of they are noncompliant. If the vendors come into compliance by the proposed new rule may cause some vendors, small or large, changing from single-location reporting to multiple-location re- to realize that they are noncompliant. If the vendors come into porting, their compliance burden may increase. And if vendors compliance by changing from single-location reporting to multi- change from multiple-location reporting to single-location report- ple-location reporting, their compliance burden may increase. ing, their compliance burden may diminish. The repeal of the existing rule and the adoption of the proposed Local employment impact statement. new rule will expand the local tax collection obligations of remote sellers - out-of-state sellers that collect state use tax must also For the first five years that the existing rule will be repealed collect local sales tax. The expansion of the remote seller local and the proposed new rule will be in effect, the effect on local tax collection obligation may benefit small businesses in Texas economies and employment, if any, cannot be determined. To by reducing the perception of customers that purchases from the extent that the repeal of the existing rule and the proposed out-of-state sellers are preferable because out-of-state sellers new rule leads to greater awareness and compliance with the charge less sales or use tax than the small businesses in Texas. local tax consummation standards, some vendors may change their reporting methods, which might positively or negatively af- The proposed new rule adds subsection (b)(6): fect the tax revenue of particular local tax jurisdictions. Whether "If a small business or a micro-business operates a single lo- a change in local tax revenue might increase or decrease the cation out of which it conducts all of its business activities, the provision of local government services to an extent that would PROPOSED RULES April 19, 2024 49 TexReg 2441 comptroller will presume that the location is a place of business 53) (January 5, 2024), (48 TexReg 391) (January 27, 2023), (45 of the seller." TexReg 3499) (May 22, 2020). The amendments implemented House Bill 1525, 86th Legislature, 2019, which placed local sales To the extent that repeal of the existing rule facilitates the adop- and use tax collection responsibilities on marketplace providers. tion of the proposed new rule, the repeal will simplify the collec- The amendments also implemented House Bill 2153, 86th Leg- tion of local sales tax for many small businesses and micro-busi- islature, 2019, which set a single local use tax rate that remote nesses. sellers may elect to use. The amendments also expanded the Public hearing local sales tax collection responsibilities of sellers based on the United States Supreme Court decision in South Dakota v. Way- The comptroller will hold a hearing to take public comments, on fair, Inc., 138 S. Ct. 2080 (June 21, 2018). These amendments May 9, 2024, at 9:00 a.m. in Room 2.034 of the Barbara Jordan have been noncontroversial. Building, 1601 Congress Avenue, Austin, Texas 78701. Inter- ested persons may sign up to testify beginning at 8:30 a.m. and The rulemaking made other revisions to the text, which are now testimony will be heard on a first come first serve basis begin- the subject of litigation in Cause No. D-1-GN-21-003198, City of ning at 9:00 a.m. All persons will have 10 minutes to present Coppell, Texas, et al. v. Glenn Hegar, in the 201st District Court their testimony and shall also provide their testimony in writing of Travis County Texas. The Plaintiff cities claim that the agency prior to their oral testimony. did not comply with the rulemaking procedures in Government Code, §2001.024 and Government Code, Chapter 2006. The Comments purpose of this rulemaking is to address those claims by propos- You may submit comments on the proposal to Jenny ing the readoption of the rule, with amendments, and a more Burleson, Director, Tax Policy Division, P.O. Box 13528 complete statement of the elements required by Government Austin, Texas 78711 or to the email address: tp.rule.com- Code, §2001.024 and Government Code, Chapter 2006. [email protected]. The comptroller must receive your The comptroller proposes to add the following definitions: comments no later than 30 days from the date of publication of the proposal in the Texas Register. "Micro-business--a legal entity, including a corporation, partner- ship, or sole proprietorship, that: Statement of the statutory or other authority under which the rule- making is proposed. (A) is formed for the purpose of making a profit; The repeal is proposed under Tax Code, §§111.002 (Comp- (B) is independently owned and operated; and troller's Rule; Compliance; Forfeiture), 321.306 (Comptroller's (C) has not more than 20 employees." Rules), 322.203 (Comptroller's Rules), and 323.306 (Comptrol- ler's Rules), which authorize the comptroller to adopt rules to "Small business--a legal entity, including a corporation, partner- implement the tax statutes. ship, or sole proprietorship, that: Sections or articles of the code affected. (A) is formed for the purpose of making a profit; The repeal affects Tax Code, §151.0595 (Single Local Tax Rate (B) is independently owned and operated; and for Remote Sellers); Tax Code, Chapter 321, Subchapters A, B, (C) has fewer than 100 employees or less than $6 million in an- C, D, and F; Tax Code, Chapter 322; and Tax Code, Chapter nual gross receipts." 323. The definition of "independently owned and operated business" §3.334. Local Sales and Use Taxes. is taken from the Attorney General of Texas' Government Code The agency certifies that legal counsel has reviewed the pro- Chapter 2006 Small Businesses and Rural Communities Impact posal and found it to be within the state agency's legal authority Guidelines updated in December 2017. to adopt. The definitions of "micro-business" and "small business" are Filed with the Office of the Secretary of State on April 8, 2024. taken from Government Code, Chapter 2006. TRD-202401426 The comptroller further proposes to add subsection (b)(6): Jenny Burleson "If a small business seller or a micro-business seller operates a Director, Tax Policy Division single location out of which it conducts all of its business activi- Comptroller of Public Accounts ties, the comptroller will presume that the location is a place of Earliest possible date of adoption: May 19, 2024 business of the seller." For further information, please call: (512) 475-2220 Fiscal note. ♦ ♦ ♦ Brad Reynolds, Chief Revenue Estimator, has determined the 34 TAC §3.334 following for each year of the first five years that the rule will be in effect. The fiscal note considers the effect of the prior 2020, The Comptroller of Public Accounts proposes new §3.334, con- 2023, and 2024 amendments to the rule, as well as the amend- cerning local sales and use taxes. The comptroller proposes ments in this proposal. new §3.334 to readopt the text of existing §3.334 proposed for repeal, with the addition of paragraph (b)(6). The additional estimated cost to the state and to local govern- ments expected as a result of enforcing or administering the rule. Brief explanation of the proposed rule. There will be no additional estimated cost to the state and to local In January 2020, the comptroller initiated a rulemaking to update governments expected as a result of enforcing or administering its local sales and use tax rule. The comptroller subsequently the proposed rule. The proposed amendments explain the man- adopted amendments in 2020, 2023, and 2024. (49 TexReg 49 TexReg 2442 April 19, 2024 Texas Register ner in which the comptroller intends to apply the consummation The comptroller does not have sufficient data to verify these cal- statutes. The explanation should lead to greater taxpayer com- culations or to make similar estimates for other jurisdictions. The pliance, and less audit resources required to enforce or admin- agency does have data regarding the amount of sales tax re- ister the rule. ceipts that that a vendor reports to local jurisdictions. But, that data does not prove that the vendor is incorrectly reporting, that The estimated reductions in costs to the state and to local gov- the vendor would change its reporting as a result of the rule ernments as a result of enforcing or administering the rule. amendments, or that specific jurisdictions would gain or lose tax There will be no estimated reductions in costs to the state and to revenue as a result of the rule amendments. Those determi- local governments as a result of enforcing or administering the nations would require an understanding of the business opera- rule amendments. Local governments do not administer the tax, tions of the vendor to determine which business locations were and the comptroller will not be reducing the size of its audit staff "places of business" for purposes of local tax sourcing. Then, as a result of the rule. the comptroller would have to examine individual transactions to determine the location where the orders were received, the loca- The estimated loss or increase in revenue to the state or to local tion where the orders were fulfilled, and the location where the governments as a result of enforcing or administering the rule, order was delivered, since all three locations are potential sourc- and the foreseeable implications relating to cost or revenues of ing locations. Then, the comptroller would have to compare that the state or local governments. information with how the vendor has been reporting local tax on Change in sourcing of transactions subject to local sales taxa- each transaction, identify the circumstances, if any, that would tion could result in net change in sales tax revenue of local tax- require the vendor to change its methods of reporting as a result ing entities generally, with the net change quite significant for of the rule, and determine the dollar value for each transaction. some jurisdictions. Most, but not all, reductions in taxable trans- The comptroller does not have sufficient information on the indi- actions sourced to some jurisdictions would be increases in tax- vidual vendors to make this determination. able transactions sourced to other jurisdictions. But to the ex- The consultant's explanation of his methodology confirms that tent that transactions previously sourced within an incorporated the comptroller does not have sufficient data on hand, and that municipality would be sourced to an unincorporated area with- the comptroller could not reasonably acquire the necessary data out a cumulative local tax rate levied by municipal (pursuant to to perform a study for every jurisdiction. The consultant identified a limited purpose annexation agreement), county, and/or special and researched the "top tier" taxpayers for the cities in his study, purpose taxing authorities commensurate with the cumulative lo- and then conducted research to determine who they were selling cal tax rate levied by the municipal, county, and/or special pur- to and whether any sales were made other than through web- pose taxing authorities applicable where the transactions were sites. The research ranged from interviews with local employ- formerly sourced, there would be a reduction in aggregate lo- ees, to passive research on web pages, job postings, certificate cal sales tax levies and consequent reduction in state service of occupancy maps/filings, and in some instances, purchases charge revenues under §§ 321.503, 322.303, and 323.503, Tax were made as well as physical visits to the taxpayer's locations. Code. From this research, the consultant identified "suspect" taxpay- For reasons further discussed, reliable estimates of net changes ers and estimated the value of their shipment outside of the city. in revenue by individual jurisdictions for the 1,759 local sales tax- In doing this work, the consultant estimated that he spent forty ing jurisdictions that might stem from compliance with the rule hours per jurisdiction. The comptroller does not have the time or cannot feasibly be produced by the comptroller. Even if the req- resources to conduct what is essentially an audit of the tens of uisite audits of potentially affected sales tax permittees in every thousands of permitted taxpayers to identify noncompliant tax- jurisdiction could be timely performed to support such estima- payers and then estimate the extent of their noncompliance. tion, the sales tax permittees are not static entities. It would not With the exception of the City of Round Rock, the Plaintiff cities be plausible to assume that those who currently source local tax have alleged that their jurisdictions have a particular type of tax- to a location that is not a place of business as defined in the payer that is primarily affected - "fulfillment centers" that ship or- rule would not adjust their operations to qualify such locations as ders to customers. According to the cities, the fulfillment cen- places of business and consequently not be obligated to change ters are sourcing local tax to the cities in which they are located, the sourcing of local tax. pursuant to Tax Code, §321.203(c-1)(1), which provides that a Plaintiff cities allege that portions of the proposed rule are invalid, sale is consummated at the place of business of the retailer that the proposed rule "dramatically" or "fundamentally" changes from which the retailer ships or delivers the item. For subsec- the former rule, that compliance with the proposed rule will re- tion (c-1)(1) to apply, a fulfillment center has to be a "place of quire vendors to change to existing reporting methods, and that business of the retailer" for local sales tax sourcing purposes. the changes to existing reporting methods will result in the loss The term "place of business of the retailer" (hereinafter "place of of revenue to the cities. business") is defined by Tax Code, §321.002(a)(3)(A) to include a location at which three or more orders are received during a One consultant estimated that the City of Carrollton would have calendar year. a likely net loss of $1.1 to $2 million; that the City of Coppell would have a likely net loss of $18.8 million of $30.8 million, that The Plaintiff cities contend that the fulfillment centers are prop- the City of DeSoto would have a likely net loss of $5.1 million, erly sourcing local tax to the cities in which they are located be- that the City of Farmers Branch would have a likely net loss of cause every fulfillment center is automatically a "place of busi- $600,000 to $1.8 million, and the City of Humble would have ness." The theory is that a fulfillment center is automatically a a likely net loss of $5.6 million. The consultant did not provide "place of business" because it has to "receive" orders as a nec- the comptroller with data to support these calculations and he essary prerequisite to fulfilling the orders, and a fulfillment center declined to identify the vendors that he predicted would have to can be expected to "receive" three or more orders in a calendar change their reporting methods. year. PROPOSED RULES April 19, 2024 49 TexReg 2443 Subsection (c)(7) of the proposed rule now explicitly states that "(2) Distribution centers, manufacturing plants, storage yards, the location where an order is "received" for purposes of local warehouses, and similar facilities. sales tax sourcing is the location where the order is initially re- (A) A distribution center, manufacturing plant, storage yard, ceived. Therefore, under the proposed rule, a fulfillment cen- warehouse, or similar facility operated by a seller at which the ter that processes orders forwarded from another location is not seller receives three or more orders for taxable items during the automatically a "place of business" for local tax sourcing. The calendar year is a place of business. Plaintiff cities contend that if the fulfillment centers in their juris- diction begin sourcing local sales tax to other cities, they will lose (B) If a salesperson who receives three or more orders for tax- millions of dollars in tax revenue. able items within a calendar year is assigned to work from, or to work at, a distribution center, manufacturing plant, storage yard, The merits of the conflicting interpretations are discussed in the warehouse, or similar facility operated by a seller, then the facil- preambles of the previous rulemakings. The issue here is the ity is a place of business. effect on local tax revenue, and whether the comptroller can reli- ably estimate the effect on cities, individually or collectively. The (C) If a location that is a place of business of the seller, such estimates of the Plaintiff cities and the fulfillment centers in those as a sales office, is in the same building as a distribution center, cities cannot be reliably projected to other cities. The comptrol- manufacturing plant, storage yard, warehouse, or similar facility ler does not have data to identify the "fulfillment centers" in any operated by a seller, then the entire facility is a place of business particular jurisdiction or statewide - it is not a characteristic that of the seller." is reported to the agency. (41 TexReg 260, 263) (2016) (former 34 Tex. Admin. Code And, even if agency could identify "fulfillment centers" from its §3.334(e)(2), emphasis added); (39 TexReg 9597, 9605) (2014) data, the agency could not assume that the fulfillment centers (former 34 Tex. Admin. Code §3.334(e)(2), emphasis added). in other cities are sourcing local tax like the Plaintiff cities' ful- If a distribution center were automatically a "place of business" fillment centers purportedly are sourcing. For reasons enumer- for local tax sourcing as the Plaintiff cities contend, subpara- ated to the Revenue Estimating Division by agency counsel, it graphs (B) and (C) would not be required - there would be no is comptroller's opinion that a fulfillment center could reasonably need for a salesperson or a sales office to "then" make the dis- reach a different conclusion, and conclude that it was not auto- tribution center a "place of business" for local tax sourcing pur- matically a "place of business" for local tax sourcing purposes, poses. as claimed by the Plaintiff cities. Third, in addition to its rule, the comptroller distributed Publica- First, the text of former §3.334(h)(3) indicated that a fulfillment tion 94-105, sometimes called the "Local Sales and Use Tax center is not automatically a "place of business" for local sourcing Bulletin - Guidelines for Collecting Local Sales and Use Tax," (emphasis added): or "Tax Topics - Guidelines of Collecting Local Sales and Use "(3) Consummation of sale. The following rules, taken from Tax Tax" (Guidelines). These Guidelines were posted on the comp- Code, §321.203 and §323.203, apply to all sellers engaged in troller's website and indexed in the comptroller's State Tax Au- business in this state, regardless of whether they have a place tomated Research System. Since at least 2007, the Guidelines of business in Texas or multiple places of business in the state. referred to a "location within the state that is not a place of busi- ness (such as a warehouse or distribution center)." E.g., STAR ... Accession No. 200902596L (February 2009). The Guidelines (B) Order received at a place of business in Texas, fulfilled at were intended as a general guide and not as a comprehensive a location that is not a place of business. When an order that resource. But, an ordinary reader would not walk away with the is placed over the telephone, through the Internet, or by any impression that a taxpayer's fulfillment center was automatically means other than in person is received by the seller at a place a "place of business" for purposes of local tax sourcing. of business in Texas, and the seller fulfills the order at a loca- Fourth, in 2016, the comptroller rewrote the Guidelines to be tion that is not a place of business of the seller in Texas, such as even more specific regarding fulfillment centers: "The ware- a warehouse or distribution center, the sale is consummated at house from which the person ships those items is not a place of the place of business at which the order for the taxable item is business, unless the warehouse separately qualifies as a place received. of business." STAR Accession No. 201606995L (June 1, 2016). ... And, fifth, in 2019, a comptroller letter ruling discussed fulfillment (D) Order fulfilled within the state at a location that is not a place centers, referring to the former rule, then in effect: "Scenario of business. When an order is received by a seller at any location One: Taxpayer Retailer operates fulfillment centers in Texas that other than a place of business of the seller in this state, and are not open to the public. ... When an order is received at a lo- cation that is not a place of business and is fulfilled in Texas at the seller fulfills the order at a location in Texas that is not a place a location that is not a place of business, the sale is consum- of business of the seller, then the sale is consummated at the mated at the location in Texas to which the order is shipped. location in Texas to which the order is shipped or delivered, or See §3.334(h)(3)(D). For Scenario One, local sales and use tax the location where it is transferred to the purchaser." is due based on the location where the order is delivered." STAR (41 TexReg 260, 265) (2016) (former 34 Tex. Admin. Code Accession No. 201906015L (June 13, 2019) (emphasis added). §3.334(h)(3), emphasis added); (39 TexReg 9597, 9606) (2014) If the Plaintiff cities and their consultant's study are right about (former 34 Tex. Admin. Code §3.334(h)(3), emphasis added). how the various fulfillment centers in their cities reported local Second, the consummation rules in former §3.334(h)(3) were tax, those fulfillment centers must have either disregarded the augmented with an explicit provision for fulfillment centers, which comptroller's prior written guidance, overlooked the guidance, the former rule referred to as "distribution centers" (emphasis or interpreted the guidance as being the opposite of what the added): comptroller intended. But, it cannot be assumed that fulfillment 49 TexReg 2444 April 19, 2024 Texas Register centers in other cities have also disregarded, overlooked, or in- The City of Round Rock suggests that a single facility that con- terpreted the prior rulings in such a way that they will have to ducts all transactions through automated shopping cart software change their reporting as a result of the proposed rule. So, even may be affected, since a software application does not consti- if the comptroller could identify the permitted locations that are tute a "place of business." However, the threshold for becoming fulfillment centers, the revenue implications of the proposed rule a "place of business" is very low, including the receipt by sales cannot be reliably extrapolated from the study conducted on be- personnel of three or more orders per year. If a vendor occa- half of the Plaintiff cities. sionally engages with a customer directly, such as by telephone or email, as the final step in receiving an order under subsection Furthermore, the cities' calculations of revenue loss assume the (c)(7), the vendor's location should be a "place of business" for proposed rule would force fulfillment centers to begin sourcing local tax sourcing, even if orders are ordinarily processed by the local tax to other cities, when that is not the case. The Legisla- vendor's automated software. To ease the burden on auditors, ture set a low threshold for a location to be a "place of business" and on small businesses and micro-businesses that operate out for local tax sourcing - the receipt of three or more orders dur- of a single location, proposed subsection (b)(6) presumes that is ing a calendar year. A fulfillment center that is not a "place of the case. business" under the proposed rule could easily become one by directly receiving three or more orders. The Plaintiff cities have Third, sales made by through a marketplace by a seller with a alleged that it is easier to source local tax to one jurisdiction than single place of business will not be affected because those or- to source to many. So, a fulfillment warehouse would have an ders are sourced to destination by Tax Code, §321.203(e-1). incentive to become a "place of business." And, a fulfillment cen- The City of Round Rock claims that Dell Technologies has a sin- ter with a tax sharing agreement with a city would have an even gle place of business in the city and suggests that Dell is sourc- greater incentive to make the minor adjustments required to be- ing all of its local sales tax collections to the City of Round Rock. come a "place of business," so as to maintain the return on its The city further claims that it will lose a significant amount of local revenue sharing agreement. Therefore, even if the potential tax sales tax revenue under the proposed rule. However, when the revenue loss from fulfillment centers could be reliably measured, comptroller served third party discovery on Dell to understand it is unreasonable to assume that no fulfillment center would take how Dell's current business operations would be affected by the remedial efforts to continue its sourcing procedures. proposed rule, both Round Rock and Dell objected. Dell insisted The City of Round Rock has asserted claims that are different that the inquiry should only be "conducted under the applicable from or in addition to the claims of the other Plaintiff cities. The sections of the Texas Tax Code" in Chapter 111 -- in other words, City has suggested that the proposed rule will radically change an audit. the way that Texas retailers with one place of business in This discovery dispute illustrates the impracticability of preparing Texas will source local tax. However, for enumerated reasons, a revenue impact estimate for the City of Round Rock - it would agency counsel advises that it should be assumed that in most require the audit of Dell and any other vendors from whom the instances, the proposed rule will not change the sourcing of city thinks there will be a revenue loss. A local sales tax audit products sold by Texas retailers with one place of business in of Dell would have to examine all the business locations of Dell Texas. to determine which, if any of the locations were a "place of busi- First, the proposed rule does not change the comptroller's previ- ness" for local tax sourcing purposes. And, if the comptroller ous application of the statute, which does not recognize special verified that Dell in fact operated a single "place of business" in treatment for vendors with a "single place of business" for pur- Texas, the comptroller would still have to audit the sourcing of poses of local tax sourcing. Proposed subsection (c) states in Dell's sales to determine which sales were compliant and which relevant part: sales were noncompliant with the proposed rule. For example, Dell purports to have a sales force in Round Rock. Assuming "The following rules, taken from Tax Code, §321.203 and that orders generated by that sales force are received in Round §323.203, apply to all sellers engaged in business in Texas, Rock and not fulfilled from a "place of business" elsewhere in regardless of whether they have no place of business in Texas, a Texas, those sales would still be sourced to Round Rock. And, single place of business in Texas, or multiple places of business any orders fulfilled from Dell's "place of business" in Round Rock in Texas." would still be sourced to Round Rock. And, any orders delivered The language in the proposed rule has the same effect as the in Round Rock would still be sourced to Round Rock. Therefore, language in the prior 2014 and 2016 versions of the rule - no to meaningfully determine the revenue impact of the proposed special treatment for vendors with a single "place of business": rule on the City of Round Rock, the comptroller would have to thoroughly audit Dell and any other vendors from whom Round "The following rules, taken from Tax Code, §321.203 and Rock thinks there will be a revenue loss. §323.203, apply to all sellers engaged in business in this state, regardless of whether they have a place of business in Texas or Repeating this audit exercise on a jurisdiction-by-jurisdiction ba- multiple places of business in the state." sis across the state is infeasible. Audits are not quick or easy. Considerable time and effort is required to acquire and analyze (41 TexReg 260, 265) (2016) (former 34 Tex. Admin. Code taxpayer data. Taxpayers are understandably reluctant to furnish §3.334(h)(3); (39 TexReg 9597, 9606) (2014) (former 34 Tex. confidential business data. And, the data varies in degree of ac- Admin. Code §3.334(h)(3)). cessibility. The average duration of an audit in fiscal year 2023 Second, the proposed rule should have little impact on most was 450 days, and the average number auditor hours spent on businesses that are a single place of business in the ordinary an audit was 80.5 hours. sense of the word - i.e., all operations are conducted at a single It is also possible that an audit of Dell or other vendors would location. If orders are received and fulfilled in a single facility, identify noncompliance with sourcing provisions that are not in- local sales tax will continue to be sourced to that location. A typ- volved in the disputed rulemaking. For example, if Dell were ical example would be a retail store. sourcing marketplace sales to the City of Round Rock rather than PROPOSED RULES April 19, 2024 49 TexReg 2445 to the delivery location specified by statute, Dell would have to 2023 rulemaking, the comptroller explained how the reference change its sourcing methods and the City of Round Rock would to sales personnel is a logical extension of prior comptroller suffer a revenue loss. But, that revenue loss should be attributed statements, including prior statements regarding fulfillment to the marketplace statute enacted by the Legislature, not the warehouses and computer servers. See (48 TexReg 391, 398) proposed comptroller rule. (2023). This possibility is real. During the 2020 rulemaking, the City Agency counsel has advised that there are several instances in of San Marcos filed comments claiming that the proposed rule which the rule proposed for readoption is substantively different would cause the city to lose $7-8 million in local sales tax rev- than the 2016 version of the rule. Subsection (c)(2)(B)(ii) pro- enue generated by a Best Buy call center, with the net effect of vides that a seller required to collect state use tax must also economic development incentive revenue loss estimated at $3.4 collect local use tax. This provision expands the collection re- million. Best Buy also filed comments stating that it created a sponsibilities of sellers, which, formerly were obligated to collect subsidiary called Best Buy Texas.com LLC and sourced the lo- local use tax only if they were engaged in business in the local cal tax for all of its Internet and telephone sales to the City of San jurisdiction. This provision should have a positive, but indeter- Marcos. This would mean that if a resident of the City of Houston minant revenue effect on all local jurisdictions. placed an online order from Houston and picked up the item at an The proposed rule, as compared with the 2016 version, adds affiliated Best Buy Stores outlet in Houston, Best Buy Texas.com provisions that the sourcing of marketplace sales is based on LLC would collect local sales tax for the City of San Marcos. destination, because the consummation statute was amended However, it appears that the Best Buy website was actually op- in 2019 by House Bill 1525 to require that result. The fiscal note erated by a different Best Buy affiliate, which would make it a for House Bill 1525 estimated a probable revenue gain for local marketplace provider as defined in Tax Code, §151.0242(a)(2). governments. However, because House Bill 1525 was already Under the marketplace statute, local tax is sourced to the loca- in effect, and rulemaking is not required to effectuate the legisla- tion where the item is shipped or delivered or at which posses- tion, the comptroller is assigning no fiscal implication to the rule sion is taken by the purchaser. Thus, any loss to the City of San revision incorporating House Bill 1525, other than a potential in- Marcos of local sales tax revenue from the sale to the Houston crease in compliance with the statute. resident would be the result of compliance with the marketplace statute. And the loss of tax revenue would not be attributable The proposed rule, as compared with the 2016 version, also to the rule. The loss resulting from compliance with the statute adds provisions for remote sellers to apply a single local tax rate, would occur without regard to whether the proposed rule was as authorized by House Bill 2153 in 2019. The fiscal note for adopted. House Bill 2153 stated: The comptroller has considered various other comments of the "There would be no significant fiscal implications for local gov- Plaintiff cities and others to the effect that the proposed rule ernments in the aggregate; there could be some variance in dis- will dramatically change local tax sourcing and concluded that tribution of revenue among jurisdictions compared with the distri- the comments do not accurately apply the proposed rule. The bution that would occur were all remote sellers required to collect comptroller disagrees with the allegation that the proposed rule and remit tax at applicable local combined rates, but the extent of will "dramatically change where a sale is consummated if the such variance cannot be determined and would not be expected Comptroller interprets the change to require destination sourc- to be significant in relation to the total allocations of local sales ing when a sale is made online using a retailer's website, even and use tax revenues." if the retailer has only one place of business." And, the comp- The comptroller is assigning no fiscal implication to the rule re- troller disagrees with the allegation that "sales made by way of vision incorporating House Bill 2153, since the statute went into websites using the Internet are treated as having been consum- effect before the rulemaking, and rulemaking was not required mated where the taxable item is delivered to the buyer instead to implement the statute. of where the order for the item is received and fulfilled by the seller." The consummation hierarchy in subsection (c) does not The proposed rule, as compared with the 2016 version, alters require the alleged results. the treatment of a "traveling salesperson," which was previously defined as: "A seller, or an agent or employee of a seller, who The comptroller has amended the definition of "place of business visits potential purchasers in person to solicit sales, and who of the seller" in subsection (a)(18) to provide that the term does does not carry inventory ready for immediate sale, but who may not include a computer server, Internet protocol address, domain carry samples or perform demonstrations of items for sale." For- name, website, or software application. While the discussion of mer §3.334(h)(4) provided: "Orders taken by traveling sales- computer servers was added to the rule in 2020, the comptroller persons are received by the seller at the administrative office had previously advised taxpayers that the location of the server or other place of business from which the traveling salesperson does not create a "place of business" for purposes of the local tax operates." (41 TexReg 260, 265) (2016) (former 34 Tex. Admin. collection and that orders placed on a website or though applica- Code §3.334(h)(4)). The former rule did not further explain the tions and processed and routed by servers are not "received at" a location from which the traveling salesperson operates. place of business. See STAR Accession Nos. 200510723L (Oc- tober 6, 2005), 200605592L (May 17, 2006), and 201906015L Subsection (b)(4) of the proposed rule replaces the traveling (June 13, 2019). salesperson language with a provision for an order that is re- ceived by a salesperson who is not at a place of business when The comptroller has also amended the definition of "place of the salesperson receives the order. Subsection (b)(4) provides business of the seller" in subsection (a)(18) to provide that that the order is treated as being received at the location from staffing by one or more sales personnel is usually required. which the salesperson operates. Subsection (b)(4) further The statement is not a requirement, but an objective criterion provides that the location from which the salesperson operates that will often be an important factor in determining whether an is the principal fixed location where the salesperson conducts outlet, office, or location is a "place of business." In the January work-related activities. 49 TexReg 2446 April 19, 2024 Texas Register Commenters have reported that the orders from some traveling Public benefits and costs. salespersons have been sourced to the location to which the Brad Reynolds, Chief Revenue Estimator, has determined the traveling salesperson is "assigned," even though the traveling following for each year of the first five years that the rule will be salesperson may conduct principal work-related activities from in effect. another location. In these situations, the proposed rule might result in a change to local tax sourcing. However, the signifi- The public will benefit from greater clarity regarding the consum- cance of this change is indeterminant. The comptroller does not mation standards, making compliance easier. have data to identify traveling salespersons as defined under the There may be additional economic costs to a person required to former rule, and does not have data to identify the instances in comply with the rule. It is conceivable that the rule may cause which a traveling salesperson has been "assigned" to a location some vendors to realize that they are noncompliant. If the ven- from which the salesperson does not conduct principal work-re- dors come into compliance by changing from single-location re- lated activities. And, if the agency could identify those instances, porting to multiple-location reporting, their compliance burden without conducting extensive audits, the agency would still not may increase. And if vendors change from multiple-location re- know which instances would result in a change of sourcing. For porting to single-location reporting, their compliance burden may example, if the order is fulfilled from a "place of business," the diminish. location of the salesperson is irrelevant. Local employment impact statement. In summary, due to both to the number of taxing jurisdictions and lack of pertinent, detailed information regarding the specific For the first five years that the rule will be in effect, the effect on circumstances of the myriad businesses reporting local sales local economies and employment, if any, cannot be determined. and use taxes, estimation of fiscal effects of the proposed rule, To the extent that the proposed rule leads to greater awareness whether of dollar amounts or merely sign of change, on an indi- and compliance with the local tax consummation standards, vidual jurisdiction by jurisdiction basis is infeasible of execution. some vendors may change their reporting methods, which might positively or negatively affect the tax revenue of particular The comptroller recognizes that compliance with the proposed local tax jurisdictions. Whether a change in local tax revenue rule could result in changes to the local tax reporting methods might increase or decrease the provision of local government of some vendors. As a result, there could be loss or increase in services to an extent that would affect local economic activity revenue to individual local governments. A revenue loss to one or employment would depend on discretionary actions of the local government will often but not always be a revenue gain to governing body or the electorate of an affected jurisdiction, and others. There will also be revenue gains experienced by all lo- cannot be determined. cal tax jurisdictions from the expansion of the use tax collection obligations of remote, out-of-state sellers. For the reasons pre- Government growth impact statement. viously stated, the aggregate net gain or loss cannot be reliably Brad Reynolds, Chief Revenue Estimator, has determined the estimated by the comptroller from available or reasonably acces- following for each year of the first five years that the rule will be sible data. in effect: the amendment will not create or eliminate a govern- The comptroller has been provided with estimates that some ment program; will not require the creation or elimination of em- cities will experience net revenue losses. However, the comp- ployee positions; will not require an increase or decrease in fu- troller has not been provided with sufficient information to verify ture legislative appropriations to the comptroller; will not require the estimates, and the data from the estimates cannot be extrap- an increase or decrease in fees paid to the comptroller; will not olated to other local tax jurisdictions. That said, the estimates of create a new regulation; will increase the number of individuals anticipated revenue losses provided by Plaintiffs and others in subject to the rule's applicability because sellers without a phys- comments to proposed rulemakings are accepted as valid good ical presence in a local tax jurisdiction will be required to collect faith estimates and may serve as a basis for estimating a min- local use tax if they are required to collect state use tax; and will imum amount of revenue from online sales associated with lo- not positively or adversely affect this state's economy. cations that are not places of business as defined in the rule, Economic impact statement and regulatory flexibility analysis. that will be subject to different sourcing if the affected sales tax permittees cannot or choose not to modify their procedures in or- A statement of fiscal implications for small businesses or rural der to qualify such business locations as places of business for communities under Government Code, Chapter 2006 is normally purposes of local sales tax sourcing. As those estimates were not required for a comptroller rule because the rule is proposed constructed from 2020 data and there has been significant infla- under Tax Code, Title 2. In this instance, the rule is proposed tion as well as real economic growth since then, they are scaled under both Title 2 (State Taxation) and Title 3 (Local Taxation). up by a factor of 1.35 to yield a minimum estimate of $110 million So, the comptroller provides the following statement. on a current annual basis that may be lost to those cities, plus A "rural community" is a municipality with a population of less another $80 million that may be lost to the other local taxing juris- than 25,000. The comptroller estimates that there are 1,098 dictions imposing tax at the affected locations, for a total of $190 such rural communities, of which 1,017 impose a sales tax and million of gross revenue reductions, of which 85% or $161.5 mil- may have revenue affected by compliance with the rule. lion would be estimated gains to other local taxing jurisdiction, and 15% or $28.5 million would be reduction in aggregate local A "small business" is a legal entity, including a corporation, part- sales tax levies sourced to unincorporated areas without local nership, or sole proprietorship, that: (A) is formed for the pur- sales tax or with cumulative local county and special district tax pose of making a profit; (B) is independently owned and oper- rates less than the cumulative local rates that applied at the lo- ated; and (C) has fewer than 100 employees or less than $6 cations where the taxable transactions were formerly sourced. A million in annual gross receipts. The Comptroller estimates that $28.5 million reduction in aggregate local tax levies would result there are 470,000 businesses with fewer than 100 employees, in reduced state service charge revenue of $570,000. and 377,000 businesses with annual gross receipts less than $6 million; the sum of these two estimates would overstate the num- PROPOSED RULES April 19, 2024 49 TexReg 2447 ber of small businesses, as many businesses would be expected ers charge less sales or use tax than the small businesses in to have both fewer than 100 employees and less than $6 million Texas. in annual gross receipts. Since the comptroller initiated its rulemaking in 2020, the agency To the extent that the proposed rule leads to greater awareness has considered ways to minimize the potential adverse impact on and compliance with the local tax consummation standards, small businesses. In the fall of 2020, the agency added a multi- some vendors may change their reporting methods, which address search capability to its local sales tax rate locator. And might positively or negatively affect the tax revenue of particular in the spring of 2021, the agency added downloadable address local tax jurisdictions. As previously explained, the comptroller files to determine local tax rates. And, in the winter of 2023, the does not have sufficient data on the business operations of agency added map search and latitude/longitude search options. each business to identify and quantify the businesses and In addition, the comptroller is proposing to add subsection (b)(6): transactions that might be affected, and the positive or negative revenue impact on each tax jurisdiction. "If a small business or a micro-business operates a single lo- cation out of which it conducts all of its business activities, the Although the fiscal implications for local tax jurisdictions can- comptroller will presume that the location is a place of business not be quantified without additional information, several obser- of the seller." vations can be made. First, the cities asserting that the clarifica- tions provided by the rule will result in changes in sourcing and The comptroller cannot make a location a "place of business" reporting of local taxes, with consequent reductions in their rev- by rule if the statute does not allow it. But, the agency can pre- enues, tend to be cities with Local Government Code, Chapter sume that a location is a "place of business" based on indicative 380 agreements involving rebates of local sales and use tax rev- facts, such as a small, independent business that conducts all of enues. And, cities with Government Code, Chapter 380 agree- its business operations out of a single location. If extraordinary ments involving distribution or fulfillment centers tend to be larger facts are presented to the agency, the presumption may be re- than rural communities. Of the 1,017 rural communities impos- butted. ing sales tax, 45 have Chapter 380 agreements involving sales The agency has considered other alternatives to reduce the ad- tax on file with the comptroller. Almost all of those involve re- verse impact on small businesses and micro-businesses, such bates of sales tax to physical shopping centers or restaurants, or as allowing small or micro-businesses to source local sales tax of sales tax paid on equipment or building materials, and would to their principal place of business, or establishing a single lo- unlikely be affected by a change in sourcing of online sales as- cal sales tax rate for small or micro-businesses that would be sociated with locations that are not places of business; two of distributed similar to the distribution of the single local sales tax the 45 communities that are not party to the suit against the collected by remote sellers. However, because these proposals comptroller appear to involve distribution or fulfillment centers would require amendments to the consummation statutes, the and could be affected if the centers will not qualify as places comptroller does not have the regulatory flexibility to implement of business (in Grand Prairie and Waxahachie). Five of the six these proposed methods. cities currently suing the Comptroller have populations greater than 25,000. The comptroller has not verified the assertions of Public hearing revenue shifting. But, if the assertions are correct, the revenue The comptroller will hold a hearing to take public comments, on shifting away from cities with Chapter 380 agreements may re- May 9, 2024, at 9:00 a.m. in Room 2.034 of the Barbara Jordan sult in positive revenues for the smaller rural communities from Building, 1601 Congress Avenue, Austin, Texas 78701. Inter- whom the revenues have been diverted. ested persons may sign up to testify beginning at 8:30 a.m. and Second, although the comptroller does not have sufficient infor- testimony will be heard beginning at 9:00 a.m. on a first come mation to determine the number of small businesses that may first serve basis. All persons will have 10 minutes to present their change their local tax reporting as a result of greater awareness testimony and shall also provide their testimony in writing prior and compliance with the local tax consummation standards, it is to their oral testimony. reasonable to assume that many small businesses will not be Comments affected. A small business that has all of its operations at a sin- gle location in Texas, including sales and fulfillment, is probably You may submit comments on the proposal to Jenny reporting local sales tax to the taxing jurisdiction where it is lo- Burleson, Director, Tax Policy Division, P.O. Box 13528 cated, and it will continue that reporting. Non-marketplace or- Austin, Texas 78711 or to the email address: tp.rule.com- ders fulfilled from that location will continue to be consummated [email protected]. The comptroller must receive your at that location pursuant to §3.334(c)(1) or (c)(2)(A). And, sales comments no later than 30 days from the date of publication of of a small business that are through a marketplace are already the proposal in the Texas Register. subject to destination sourcing performed by the marketplace Statement of the statutory or other authority under which the rule provider. Nevertheless, in some circumstances, it is conceivable is proposed to be adopted. that the rule may cause some vendors, small or large, to realize that they are noncompliant. If the vendors come into compli- Tax Code, §§111.002 (Comptroller's Rule; Compliance; Forfei- ance by changing from single-location reporting to multiple-loca- ture), 321.306 (Comptroller's Rules), 322.203 (Comptroller's tion reporting, their compliance burden may increase. Rules), and 323.306 (Comptroller's Rules) authorize the comp- troller to adopt rules to implement the tax statutes. Third, the proposed rule expands the local tax collection obliga- tions of remote sellers - out-of-state sellers that collect state use Sections or articles of the code affected. tax must also collect local sales tax. The expansion of the remote Tax Code, §151.0595 (Single Local Tax Rate for Remote Sell- seller local tax collection obligation may benefit small businesses ers); Tax Code, Chapter 321, Subchapters A, B, C, D, and F; Tax in Texas by reducing the perception of customers that purchases Code, Chapter 322; and Tax Code, Chapter 323 are affected. from out-of-state sellers are preferable because out-of-state sell- 49 TexReg 2448 April 19, 2024 Texas Register §3.334. Local Sales and Use Taxes. sells items through vending machines is also an itinerant vendor. A (a) Definitions. The following words and terms, when used salesperson that operates out of a place of business in this state is not in this section, shall have the following meanings, unless the context an itinerant vendor. clearly indicates otherwise. (12) Kiosk--A small stand-alone area or structure: (1) Cable system--The system through which a cable ser- (A) that is used solely to display merchandise or to sub- vice provider delivers cable television or bundled cable service, as mit orders for taxable items from a data entry device, or both; those terms are defined in §3.313 of this title (relating to Cable Televi- sion Service and Bundled Cable Service). (B) that is located entirely within a location that is a place of business of another seller, such as a department store or shop- (2) City--An incorporated city, municipality, town, or vil- ping mall; and lage. (C) at which taxable items are not available for imme- (3) City sales and use tax--The tax authorized under Tax diate delivery to a purchaser. Code, §321.101(a), including the additional municipal sales and use tax authorized under Tax Code, §321.101(b), the municipal sales and (13) Local taxes--Sales and use taxes imposed by any local use tax for street maintenance authorized under Tax Code, §327.003, taxing jurisdiction. the Type A Development Corporation sales and use tax authorized un- (14) Local taxing jurisdiction--Any of the following: der Local Government Code, §504.251, the Type B Development Cor- poration sales and use tax authorized under Local Government Code, (A) a city that imposes sales and use tax as provided §505.251, a sports and community venue project sales and use tax under paragraph (3) of this subsection; adopted by a city under Local Government Code, §334.081, and a mu- (B) a county that imposes sales and use tax as provided nicipal development corporation sales and use tax adopted by a city un- under paragraph (5) of this subsection; der Local Government Code, §379A.081. The term does not include the fire control, prevention, and emergency medical services district (C) a special purpose district created under the Special sales and use tax authorized under Tax Code, §321.106, or the munic- District Local Laws Code or other provisions of Texas law that is autho- ipal crime control and prevention district sales and use tax authorized rized to impose sales and use tax by the Tax Code or other provisions under Tax Code, §321.108. of Texas law and as governed by the provisions of Tax Code, Chapters 321 or 323 and other provisions of Texas law; or (4) Comptroller's website--The comptroller's website concerning local taxes located at: https://comptrol- (D) a transit authority that imposes sales and use tax as ler.texas.gov/taxes/sales/. authorized by Transportation Code, Chapters, 451, 452, 453, 457, or 460 and governed by the provisions of Tax Code, Chapter, 322. (5) County sales and use tax--The tax authorized under Tax Code, §323.101, including a sports and community venue project (15) Marketplace provider--This term has the meaning sales and use tax adopted by a county under Local Government Code, given in §3.286 of this title. §334.081. The term does not include the county health services sales (16) Micro-business--A legal entity, including a corpora- and use tax authorized under Tax Code, §324.021, the county landfill tion, partnership, or sole proprietorship, that: and criminal detention center sales and use tax authorized under Tax Code, §325.021, or the crime control and prevention district sales and (A) is formed for the purpose of making a profit; use tax authorized under Tax Code, §323.105. (B) is independently owned and operated; and (6) Drop shipment--A transaction in which an order is re- (C) has not more than 20 employees. ceived by a seller at one location, but the item purchased is shipped by the seller from another location, or is shipped by the seller's third-party (17) Order placed in person--An order placed by a pur- supplier, directly to a location designated by the purchaser. chaser with the seller while physically present at the seller's place of business regardless of how the seller subsequently enters the order. (7) Engaged in business--This term has the meaning given in §3.286 of this title (relating to Seller's and Purchaser's Responsibil- (18) Place of business of the seller - general definition--A ities). place of business of the seller must be an established outlet, office, or location operated by a seller for the purpose of receiving orders for (8) Extraterritorial jurisdiction--An unincorporated area taxable items from persons other than employees, independent con- that is contiguous to the corporate boundaries of a city as defined in tractors, and natural persons affiliated with the seller. An "established Local Government Code, §42.021. outlet, office, or location" usually requires staffing by one or more (9) Fulfill--To complete an order by transferring possession sales personnel. The term does not include a computer server, Inter- of a taxable item to a purchaser, or to ship or deliver a taxable item net protocol address, domain name, website, or software application. to a location designated by the purchaser. The term does not include The "purpose" element of the definition may be established by proof receiving or tracking an order, determining shipping costs, managing that the sales personnel of the seller receive three or more orders for inventory, or other activities that do not involve the transfer, shipment, taxable items at the facility during the calendar year. Additional crite- or delivery of a taxable item to the purchaser or a location designated ria for determining when a location is a place of business of the seller by the purchaser. are provided in subsection (b) of this section for distribution centers, manufacturing plants, storage yards, warehouses and similar facilities; (10) Independently owned and operated business--A self- kiosks; and purchasing offices. An outlet, office, facility, or any loca- controlling entity that is not a subsidiary of another entity or otherwise tion that contracts with a retail or commercial business to process for subject to control by another entity, and that is not publicly traded. that business invoices, purchase orders, bills of lading, or other equiva- (11) Itinerant vendor--A seller who travels to various loca- lent records onto which sales tax is added, including an office operated tions for the purpose of receiving orders and making sales of taxable for the purpose of buying and selling taxable goods to be used or con- items and who has no place of business in this state. A person who sumed by the retail or commercial business, is not a place of business PROPOSED RULES April 19, 2024 49 TexReg 2449 of the seller if the comptroller determines that the outlet, office, facil- county transit authority (CTA), regional mobility authority (RMA) or ity, or location functions or exists to avoid the tax legally due under Tax coordinated county transportation authority created under Transporta- Code, Chapters 321, 322, and 323 or exists solely to rebate a portion of tion Code, Chapters 370, 451, 452, 453, 457, or 460. the tax imposed by those chapters to the contracting business. An out- (27) Two percent cap--A reference to the general rule that, let, office, facility, or location does not exist to avoid the tax legally due except as otherwise provided by Texas law and as explained in this under Tax Code, Chapters 321, 322, and 323 or solely to rebate a por- section, a seller cannot collect, and a purchaser is not obligated to pay, tion of the tax imposed by those chapters if the outlet, office, facility, more than 2.0% of the sales price of a taxable item in total local sales or location provides significant business services, beyond processing and use taxes for all local taxing jurisdictions. invoices, to the contracting business, including logistics management, purchasing, inventory control, or other vital business services. (28) Use--This term has the meaning given in §3.346 of this title. (19) Purchasing office--An outlet, office, facility, or any lo- cation that contracts with a retail or commercial business to process for (29) Use tax--A tax imposed on the storage, use or other that business invoices, purchase orders, bills of lading, or other equiva- consumption of a taxable item in this state. lent records onto which sales tax is added, including an office operated (b) Determining the place of business of a seller. for the purpose of buying and selling taxable goods to be used or con- sumed by the retail or commercial business. (1) Distribution centers, manufacturing plants, storage yards, warehouses, and similar facilities. (20) Remote Seller--As defined in §3.286 of this title, a re- mote seller is a seller engaged in business in this state whose only ac- (A) A distribution center, manufacturing plant, storage tivity in the state is: yard, warehouse, or similar facility operated by a seller for the purpose of selling taxable items where sales personnel of the seller receive three (A) engaging in regular or systematic solicitation of or more orders for taxable items during the calendar year from persons sales of taxable items in this state by the distribution of catalogs, other than employees, independent contractors, and natural persons af- periodicals, advertising flyers, or other advertising, by means of print, filiated with the seller is a place of business of the seller. Forwarding radio, or television media, or by mail, telegraphy, telephone, computer previously received orders to the facility for fulfilment does not make data base, cable, optic, microwave, or other communication system the facility a place of business. for the purpose of effecting sales of taxable items; or (B) If a location that is a place of business of the seller, (B) soliciting orders for taxable items by mail or such as a sales office, is in the same building as a distribution center, through other media including the Internet or other media that may be manufacturing plant, storage yard, warehouse, or similar facility op- developed in the future. erated by a seller, then the entire facility is a place of business of the (21) Seller--This term has the meaning given in §3.286 of seller. this title and also refers to any agent or employee of the seller. (2) Kiosks. A kiosk is not a place of business of the seller (22) Small business--A legal entity, including a corpora- for the purpose of determining where a sale is consummated for local tion, partnership, or sole proprietorship, that: tax purposes. A seller who owns or operates a kiosk in Texas is, how- ever, engaged in business in this state as provided in §3.286 of this title. (A) is formed for the purpose of making a profit; (3) Purchasing offices. (B) is independently owned and operated; and (A) A purchasing office is not a place of business of the (C) has fewer than 100 employees or less than $6 mil- seller if the purchasing office exists solely to rebate a portion of the lo- lion in annual gross receipts. cal sales and use tax imposed by Tax Code, Chapters 321, 322, or 323 (23) Special purpose district--A local governmental entity to a business with which it contracts; or if the purchasing office func- authorized by the Texas legislature for a specific purpose, such as crime tions or exists to avoid the tax legally due under Tax Code, Chapters control, a local library, emergency services, county health services, or 321, 322, or 323. A purchasing office does not exist solely to rebate a county landfill and criminal detention center. a portion of the local sales and use tax or to avoid the tax legally due under Tax Code, Chapters 321, 322, or 323 if the purchasing office pro- (24) Storage--This term has the meaning given in §3.346 vides significant business services to the contracting business beyond of this title (relating to Use Tax). processing invoices, including logistics management, purchasing, in- (25) Temporary place of business of the seller--A location ventory control, or other vital business services. operated by a seller for a limited period of time for the purpose of sell- (B) In making a determination under subparagraph (A) ing and receiving orders for taxable items and where the seller has in- of this paragraph, as to whether a purchasing office provides signif- ventory available for immediate delivery to a purchaser. For example, icant business services to the contracting business beyond processing a person who rents a booth at a weekend craft fair or art show to sell invoices, the comptroller will compare the total value of the other busi- and take orders for jewelry, or a person who maintains a facility at a ness services to the value of processing invoices. If the total value of job site to rent tools and equipment to a contractor during the construc- the other business services, including logistics management, purchas- tion of real property, has established a temporary place of business. A ing, inventory control, or other vital business services, is less than the temporary place of business of the seller includes a sale outside of a value of the service to process invoices, then the purchasing office will distribution center, manufacturing plant, storage yard, warehouse, or be presumed not to be a place of business of the seller. similar facility of the seller in a parking lot or similar space sharing the same physical address as the facility but not within the walls of the (C) If the comptroller determines that a purchasing of- facility. fice is not a place of business of the seller, the sale of any taxable item is deemed to be consummated at the place of business of the seller from (26) Transit authority--A metropolitan rapid transit author- whom the purchasing office purchased the taxable item for resale and ity (MTA), advanced transportation district (ATD), regional or subre- local sales and use taxes are due according to the following rules. gional transportation authority (RTA), city transit department (CTD), 49 TexReg 2450 April 19, 2024 Texas Register (i) When taxable items are purchased from a Texas (i) Order fulfilled at a place of business of the seller seller, local sales taxes are due based on the location of the seller's place in Texas. When an order is received at a place of business of the seller of business where the sale is deemed to be consummated, as determined in Texas and is fulfilled at a place of business of the seller in Texas, the in accordance with subsection (c) of this section. sale is consummated at the place of business where the order is fulfilled. (ii) When the sale of a taxable item is deemed to be (ii) Order not fulfilled at a place of business of the consummated at a location outside of this state, local use tax is due seller in Texas. When an order is received at a place of business of the based on the location where the items are first stored, used or consumed seller in Texas and is fulfilled at a location that is not a place of business by the entity that contracted with the purchasing office in accordance of the seller in Texas, the sale is consummated at the place of business with subsection (d) of this section. where the order is received. (4) An order that is received by a salesperson who is not (2) Consummation of sale - order not received at a place of at a place of business of the seller when the salesperson receives the business of the seller in Texas. order is treated as being received at the location from which the sales- (A) Order fulfilled at a place of business of the seller person operates. Examples include orders that a salesperson receives in Texas. When an order is received at a location that is not a place by mail, telephone, including Voice over Internet Protocol and cellular of business of the seller in Texas or is received outside of Texas, and phone calls, facsimile, and email while traveling. The location from is fulfilled from a place of business of the seller in Texas, the sale is which the salesperson operates is the principal fixed location where the consummated at the place of business where the order is fulfilled. salesperson conducts work-related activities. The location from which a salesperson operates will be a place of business of the seller only if (B) Order not fulfilled from a place of business of the the location meets the definition of a "place of business of a seller" in seller in Texas. subsection (a)(16) of this section on its own, without regard to the or- (i) Order fulfilled in Texas. When an order is re- ders imputed to that location by this paragraph. ceived at a location that is not a place of business of the seller in Texas (5) A facility without sales personnel is usually not a "place and is fulfilled from a location in Texas that is not a place of business of business of the seller." A vending machine is not "an established of the seller, the sale is consummated at the location in Texas to which outlet, office, or location," and does not constitute a "place of business the order is shipped or delivered, or at which the purchaser of the item of the seller." Instead, a vending machine sale is treated as a sale by takes possession. an itinerant vendor. See subsections (a)(10) and (c)(6) of this section. (ii) Order not fulfilled in Texas. When an order is However, a walk-in retail outlet with a stock of goods available for im- received by a seller at a location that is not a place of business of the mediate purchase through a cashier-less point of sale terminal at the seller in Texas, and is fulfilled from a location outside of Texas, the outlet would be "an established outlet, office, or location" so as to con- sale is not consummated in Texas. However, a use is consummated stitute a "place of business of the seller" even though sales personnel at the first point in Texas where the item is stored, used, or consumed are not required for every sale. A computer that operates an automated after the interstate transit has ceased. A taxable item delivered to a shopping cart software program is not an established outlet, office, or point in Texas is presumed to be for storage, use, or consumption at that location," and does not constitute a "place of business of the seller." point until the contrary is established. Local use tax should be collected A computer that operates an automated telephone ordering system is as provided in subsection (d) of this section. Except as provided in not "an established outlet, office, or location," and does not constitute subsection (i)(3) of this section, a remote seller required to collect state a "place of business of the seller." use tax under §3.286(b)(2) of this title must also collect local use tax. (6) If a small business or a micro-business operates a sin- (3) Exception for qualifying economic development gle location out of which it conducts all of its business activities, the agreements entered into before January 1, 2009, pursuant to Tax Code, comptroller will presume that the location is a place of business of the §321.203(c-4) - (c-5) or §323.203(c-4) - (c-5). This paragraph is seller. effective until September 1, 2024. If applicable, the local sales tax due (c) Local sales tax - Consummation of sale - determining the on the sale of a taxable item is based on the location of the qualifying local taxing jurisdictions to which sales tax is due. Except for the spe- warehouse, which is a place of business of the seller, from which the cial rules applicable to remote sellers in subsection (i)(3) of this section, item is shipped or delivered or at which the purchaser of the item takes direct payment permit purchases in subsection (j) of this section, and possession. certain taxable items, including taxable items sold by a marketplace (4) Local sales taxes are due to each local taxing jurisdic- provider, as provided in subsection (k) of this section, each sale of a tion with sales tax in effect where the sale is consummated. Local use taxable item is consummated at the location indicated by the provisions tax may also be due if the total amount of local sales taxes due does not of this subsection. The following rules, taken from Tax Code, §321.203 reach the two percent cap, and the item purchased is shipped or deliv- and §323.203, apply to all sellers engaged in business in Texas, regard- ered to a location in one or more different local taxing jurisdictions, as less of whether they have no place of business in Texas, a single place provided in subsection (d) of this section. of business in Texas, or multiple places of business in Texas. (5) Multiple special purpose district taxes, multiple transit (1) Consummation of sale - order received at a place of authority sales taxes, or a combination of the two may apply to a single business of the seller in Texas. transaction. If the sale of a taxable item is consummated at a location (A) Order placed in person. Except as provided by within the boundaries of multiple special purpose districts or transit paragraph (3) of this subsection, when an order for a taxable item is authorities, local sales tax is owed to each of the jurisdictions in effect placed in person at a seller's place of business in Texas, including at a at that location. For example, a place of business of the seller located in temporary place of business of the seller in Texas, the sale of that item the city of San Antonio is within the boundaries of both the San Antonio is consummated at that place of business of the seller, regardless of Advanced Transportation District and the San Antonio Metropolitan the location where the order is fulfilled. Transit Authority, and the seller is required to collect sales tax for both transit authorities. Similarly, a place of business of the seller in Flower (B) Order not placed in person. Mound is located within the boundaries of two special purpose districts, PROPOSED RULES April 19, 2024 49 TexReg 2451 the Flower Mound Crime Control District and the Flower Mound Fire with the earliest effective date, until the two percent cap is met. The Control District, and the seller is responsible for collecting sales tax for effective dates of all special purpose district taxes are available on the both special purpose districts. comptroller's website. However, if the collection or accrual of use tax for the district with the earliest effective date would exceed the two (6) Itinerant vendors; vending machines. percent cap, the tax for that district is not due and the seller or purchaser (A) Itinerant vendors. Sales made by itinerant vendors should determine, following the criteria in subparagraphs (A) - (C) of are consummated at, and itinerant vendors must collect sales tax based this paragraph, whether use tax is due for the district that next became upon, the location where the item is delivered or at which the purchaser effective. of the item takes possession. Itinerant vendors do not have any respon- (i) If the competing special purpose district taxes be- sibility to collect use tax. came effective on the same date, the special purpose district taxes are (B) Vending machines. Sales of taxable items made due in the order of the earliest date for which the election in which the from a vending machine are consummated at the location of the vend- district residents authorized the imposition of sales and use tax by the ing machine. See §3.293 of this title (relating to Food; Food Prod- district was held. ucts; Meals; Food Service) for more information about vending ma- (ii) If the elections to impose the local taxes were chine sales. held on the same date, the special purpose district taxes are due in the (7) The location where the order is received by or on be- order of the earliest date for which the enabling legislation under which half of the seller means the physical location of a seller or third party each district was created became effective. such as an established outlet, office location, or automated order re- (E) Collection or accrual of use tax for multiple transit ceipt system operated by or on behalf of the seller where an order is authorities. If more than one transit authority use tax is in effect at initially received by or on behalf of the seller and not where the order the location where use of an item occurs, and the two percent cap has may be subsequently accepted, completed or fulfilled. An order is re- not been met, the transit authority taxes are due in the order of their ceived when all of the information from the purchaser necessary to the effective dates, beginning with the earliest effective date, until the two determination whether the order can be accepted has been received by percent cap is met. The effective dates of all transit authority taxes or on behalf of the seller. The location from which a product is shipped are available on the comptroller's website. However, if the collection shall not be used in determining the location where the order is received or accrual of use tax for the authority with the earliest effective date by the seller. would exceed the two percent cap, the tax for that authority is not due (d) Local use tax. The provisions addressing the imposition and the seller or purchaser should determine, following the criteria in of state use tax in §3.346 of this title also apply to the imposition of subparagraphs (A) - (D) of this paragraph, whether use tax is due for local use tax. For example, consistent with §3.346(e) of this title, all the authority that next became effective. taxable items that are shipped or delivered to a location in this state that (i) If the competing transit authorities became effec- is within the boundaries of a local taxing jurisdiction are presumed to tive on the same date, the transit authority taxes are due in the order of have been purchased for use in that local taxing jurisdiction as well as the earliest date for which the election in which the authority residents presumed to have been purchased for use in the state. authorized the imposition of sales and use tax by the authority was held. (1) General rules. (ii) If the elections to impose local taxes were held (A) When local use taxes are due in addition to local on the same date, the transit authority use taxes are due in the order of sales taxes as provided by subsection (c) of this section, all applicable the earliest date for which the enabling legislation under which each use taxes must be collected or accrued in the following order until the authority was created became effective. two percent cap is reached: city, county, special purpose district, and (2) General use tax rules applied to specific situations. The transit authority. If more than one special purpose district use tax is due, following fact patterns explain how local use tax is to be collected or all such taxes are to be collected or accrued before any transit authority accrued and remitted to the comptroller based on, and subject to, the use tax is collected or accrued. See subparagraphs (D) and (E) of this general rules in paragraph (1) of this subsection. paragraph. (A) Sale consummated outside the state, item delivered (B) If a local use tax cannot be collected or accrued at from outside the state or from a location in Texas that is not operated by its full rate without exceeding the two percent cap, the seller cannot the seller - local use tax due. Except as provided in subsection (i)(3) of collect it, or any portion of it, and the purchaser is not responsible for this section, if a sale is consummated outside of this state according to accruing it. the provisions of subsection (c) of this section, and the item purchased (C) If a seller collects a local sales tax on an item, or a is either shipped or delivered to a location in this state as designated purchaser accrues a local sales tax on an item, a use tax for the same by the purchaser from a location outside of the state, or if the order type of jurisdiction is not due on the same item. For example, after a is drop shipped directly to the purchaser from a third-party supplier, city sales tax has been collected or accrued for an item, no use tax is local use tax is owed based upon the location in this state to which due to that same or a different city on that item, but use tax may be due the order is shipped or delivered or at which the purchaser of the item to a county, special purpose district, or transit authority. Similarly, if takes possession. The seller is responsible for collecting the local use one or more special purpose district sales taxes have been collected or tax due on the sale. If the seller does not collect the local use taxes due accrued for an item, no special purpose district use tax is due on that on the sale, the purchaser is responsible for accruing such taxes and item, and if one or more transit authority sales taxes have been collected remitting them directly to the comptroller according to the provisions in or accrued for an item, no transit authority use tax is due on that item. paragraph (1) of this subsection. For example, if an order for a taxable item is received by a seller at a location outside of Texas, and the order (D) Collection or accrual of use tax for multiple special is shipped to the purchaser from a location outside of the state, local purpose districts. If more than one special purpose district use tax is in use tax is due based upon the location to which the order is shipped or effect at the location where use of an item occurs, the special purpose delivered or at which the purchaser of the item takes possession. district taxes are due in the order of their effective dates, beginning 49 TexReg 2452 April 19, 2024 Texas Register (B) Sale consummated in Texas outside a local taxing cal taxes to the comptroller shall also apply to a purchaser if the seller jurisdiction, item delivered into one or more local taxing jurisdictions - does not collect local taxes that are due. The comptroller may proceed local use tax due. If a sale is consummated at a location in Texas that is against the seller or purchaser for the local tax owed by either. outside of the boundaries of any local taxing jurisdiction according to (f) Tax rates. Except as otherwise provided by law, no local the provisions of subsection (c) of this section, and the order is shipped governmental entity may adopt or increase a sales and use tax if, as a or delivered to the purchaser at a location in this state that is within the result of the adoption or increase of the tax, the combined rate of all boundaries of one or more local taxing jurisdictions, local use tax is sales and use taxes imposed by local taxing jurisdictions having terri- due based on the location to which the items are shipped or delivered tory in the local governmental entity would exceed 2.0% at any location or at which the purchaser of the item takes possession. The seller is within the boundaries of the local governmental entity's jurisdiction. responsible for collecting the local use taxes due on the sale, regardless The following are the local tax rates that may be adopted. of the location of the seller in Texas. If the seller fails to collect any local use taxes due, the purchaser is responsible for accruing such taxes (1) Cities. Cities may impose sales and use tax at a rate of and remitting them directly to the comptroller. up to 2.0%. (C) Sale consummated in any local taxing jurisdictions (2) Counties. Counties may impose sales and use tax at imposing less than 2.0% in total local taxes - local sales taxes and use rates ranging from 0.5% to 1.5%. taxes due. If a sale is consummated at a location in Texas where the (3) Special purpose districts. Special purpose districts may total local sales tax rate imposed by the taxing jurisdictions in effect at impose sales and use tax at rates ranging from 0.125% to 2.0%. that location does not equal 2.0% according to the provisions of sub- section (c) of this section, and the item is shipped or delivered to the (4) Transit authorities. Transit authorities may impose purchaser at a location in this state that is inside the boundaries of a sales and use tax at rates ranging from 0.25% to 1.0%. different local taxing jurisdiction, additional local use tax may be due (g) Jurisdictional boundaries, combined areas, and city tax im- based on the location to which the order is shipped or delivered or at posed through strategic partnership agreements. which the purchaser of the item takes possession, subject to the two percent cap. The seller is responsible for collecting any additional lo- (1) Jurisdictional boundaries. cal use taxes due on the sale, regardless of the location of the seller in (A) City boundaries. City taxing jurisdictional bound- Texas. See subsection (i) of this section. If the seller fails to collect the aries cannot overlap one another and a city cannot impose a sales and additional local use taxes due, the purchaser is responsible for accruing use tax in an area that is already within the jurisdiction of another city. such taxes and remitting them directly to the comptroller. (B) County boundaries. County tax applies to all loca- (i) Example one - if an order is received in person at tions within that county. a place of business of the seller, such that the sale is consummated at the location where the order is received as provided under subsection (C) Special purpose district and transit authority bound- (c)(1)(A) of this section, and the local sales tax due on the sale does aries. Special purpose districts and transit authorities may cross or not meet the two percent cap, additional local use taxes are due based share boundaries with other local taxing jurisdictions and may encom- on the location to which the order is shipped or delivered or at which pass, in whole or in part, other local taxing jurisdictions, including the purchaser of the item takes possession, subject to the provisions in cities and counties. A geographic location or address in this state may paragraph (1) of this subsection. lie within the boundaries of more than one special purpose district or more than one transit authority. (ii) Example two - if a seller receives an order for a taxable item at a seller's place of business in Texas, and the seller ships (D) Extraterritorial jurisdictions. Except as otherwise or delivers the item from an out-of-state location to a location in this provided by paragraph (3) of this subsection concerning strategic part- state as designated by the purchaser, local sales tax is due based upon nership agreements and subsection (l)(5) of this section concerning the the location of the place of business of the seller where the order is City of El Paso and Fort Bliss, city sales and use tax does not apply to received. If the local sales tax due on the item does not meet the two taxable sales that are consummated outside the boundaries of the city, percent cap, use taxes, subject to the provisions in paragraph (1) of this including sales made in a city's extraterritorial jurisdiction. However, subsection, are due based upon the location where the items are shipped an extraterritorial jurisdiction may lie within the boundaries of a spe- or delivered or at which the purchaser of the item takes possession. cial purpose district, transit authority, county, or any combination of the three, and the sales and use taxes for those jurisdictions would ap- (e) Effect of other law. ply to those sales. (1) Tax Code, Title 2, Subtitles A (General Provisions) and (2) Combined areas. A combined area is an area where the B (Enforcement and Collection), Tax Code, Chapter 141 (Multistate boundaries of a city overlap the boundaries of one or more other local Tax Compact) and Tax Code, Chapter 151 (Limited Sales, Excise, and taxing jurisdictions as a result of an annexation of additional territory Use Tax) apply to transactions involving local taxes. Related sections by the city, and where, as the result of the imposition of the city tax of this title and comptroller rulings shall also apply with respect to local in the area in addition to the local taxes imposed by the existing tax- taxes. This includes authorities such as court cases and federal law ing jurisdictions, the combined local tax rate would exceed 2.0%. The that affect whether an item is taxable or is excluded or exempt from comptroller shall make accommodations to maintain a 2.0% rate in any taxation. combined area by distributing the 2.0% tax revenue generated in these (2) Permits, exemption certificates, and resale certificates combined areas to the local taxing jurisdictions located in the combined required by Tax Code, Chapter 151, shall also satisfy the requirements areas as provided in Tax Code, §321.102 or Health and Safety Code, for collecting and remitting local taxes, unless otherwise indicated by §775.0754. Combined areas are identified on the comptroller's web- this section or other sections of this title. For example, see subsection site. Sellers engaged in transactions on which local sales or use taxes (n) of this section concerning prior contract exemptions. are due in a combined area, or persons who must self-accrue and re- mit tax directly to the comptroller, must use the combined area local (3) Any provisions in this section or other sections of this code when reporting the tax rather than the codes for the individual title related to a seller's responsibilities for collecting and remitting lo- PROPOSED RULES April 19, 2024 49 TexReg 2453 city, county, special purpose districts, or transit authorities that make real property repair and remodeling job sites, refer to §3.357 of this up the combined area. title (relating to Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance). (3) City tax imposed through strategic partnership agree- ments. (i) Sellers' and purchasers' responsibilities for collecting or ac- cruing local taxes. (A) The governing bodies of a district, as defined in Local Government Code, §43.0751, and a city may enter into a lim- (1) Sale consummated in Texas; seller responsible for col- ited-purpose annexation agreement known as a strategic partnership lecting local sales taxes and applicable local use taxes. When a sale agreement. Under this agreement, the city may impose sales and use of a taxable item is consummated at a location in Texas as provided by tax within all or part of the boundaries of a district. Areas within a dis- subsection (c) of this section, the seller must collect each local sales tax trict that are annexed for this limited purpose are treated as though they in effect at the location. If the total rate of local sales tax due on the sale are within the boundaries of the city for purposes of city sales and use does not reach the two percent cap, and the seller ships or delivers the tax. item into another local taxing jurisdiction, then the seller is required to collect additional local use taxes due, if any, based on the location to (B) Counties, transit authorities, and special purpose which the item is shipped or delivered or at which the purchaser of the districts may not enter into strategic partnership agreements. Sales item takes possession, regardless of the location of the seller in Texas. and use taxes imposed by those taxing jurisdictions do not apply in For more information regarding local use taxes, refer to subsection (d) the limited-purpose annexed area as part of a strategic partnership of this section. agreement between a city and an authorized district. However, a county, special purpose district, or transit authority sales and use tax, or (2) Out-of-state sale; seller engaged in business in Texas. any combination of these three types of taxes, may apply at locations Except as provided in paragraph (3) of this subsection, when a sale is included in a strategic partnership agreement between a city and an not consummated in Texas, a seller who is engaged in business in this authorized district if the tax is imposed in that area by the applicable state is required to collect and remit local use taxes due, if any, on orders jurisdiction as allowed under its own controlling authorities. of taxable items shipped or delivered at the direction of the purchaser into a local taxing jurisdiction in this state based upon the location in (C) Prior to September 1, 2011, the term "district" was this state to which the item is shipped or delivered or at which the defined in Local Government Code, §43.0751 as a municipal utility purchaser of the item takes possession as provided in subsection (d) district or a water control and improvement district. The definition of this section. was amended effective September 1, 2011, to mean a conservation and reclamation district operating under Water Code, Chapter 49. (3) Local use tax rate for remote sellers. (h) Places of business of the seller and job sites crossed by (A) A remote seller required to collect and remit one or local taxing jurisdiction boundaries. more local use taxes in connection with a sale of a taxable item must compute the amount using: (1) Places of business of the seller crossed by local taxing jurisdiction boundaries. If a place of business of the seller is crossed by (i) the combined tax rate of all applicable local use one or more local taxing jurisdiction boundaries so that a portion of the taxes based on the location to which the item is shipped or delivered or place of business of the seller is located within a taxing jurisdiction and at which the purchaser of the item takes possession; or the remainder of the place of business of the seller lies outside of the (ii) at the remote seller's election, the single local use taxing jurisdiction, tax is due to the local taxing jurisdictions in which tax rate published in the Texas Register. the sales office is located. If there is no sales office, sales tax is due to the local taxing jurisdictions in which any cash registers are located. (B) A remote seller that is storing tangible personal property in Texas to be used for fulfillment at a facility of a market- (2) Job sites. place provider that has certified that it will assume the rights and duties (A) Residential repair and remodeling; new construc- of a seller with respect to the tangible personal property, as provided tion of an improvement to realty. When a contractor is improving real for in §3.286 of this title, may elect the single local use tax rate under property under a separated contract, and the job site is crossed by the subparagraph (A)(ii) of this paragraph. boundaries of one or more local taxing jurisdictions, the local taxes due (C) Notice to the comptroller of election and revocation on any separately stated charges for taxable items incorporated into the of election. real property must be allocated to the local taxing jurisdictions based on the total square footage of the real property improvement located within (i) Before using the single local use tax rate, a re- each jurisdiction, including the square footage of any standalone struc- mote seller must notify the comptroller of its election using a form pre- tures that are part of the construction, repair, or remodeling project. scribed by the comptroller. A remote seller may also notify the comp- For more information about tax due on materials used at residential troller of the election on its use tax permit application form. The remote and new construction job sites, refer to §3.291 of this title (relating to seller must use the single local use tax rate for all of its sales of taxable Contractors). items until the election is revoked as provided in clause (ii) of this sub- paragraph. (B) Nonresidential real property repair and improve- ment. When taxable services are performed to repair, remodel, or (ii) A remote seller may revoke its election by filing restore nonresidential real property, including a pipeline, transmission a form prescribed by the comptroller. If the comptroller receives the line, or parking lot, that is crossed by the boundaries of one or more notice by October 1, the revocation will be effective January 1 of the local taxing jurisdictions, the local taxes due on the taxable services, following year. If the comptroller receives the notice after October 1, including materials and any other charges connected to the services the revocation will be effective January 1 of the year after the follow- performed, must be allocated among the local taxing jurisdictions ing year. For example, a remote seller must notify the comptroller by based upon the total mileage or square footage, as appropriate, of the October 1, 2020, for the revocation to be effective January 1, 2021. If repair, remodeling, or restoration project located in each jurisdiction. the comptroller receives the revocation on November 1, 2020, the re- For more information about tax due on materials used at nonresidential vocation will be effective January 1, 2022. 49 TexReg 2454 April 19, 2024 Texas Register (D) Single local use tax rate. (5) Local tax is due on the sales price of a taxable item, as defined in Tax Code, §151.007, in the report period in which the taxable (i) The single local use tax rate in effect for the pe- item is purchased or the period in which the taxable item is first stored, riod beginning October 1, 2019, and ending December 31, 2019, is used, or otherwise consumed in a local taxing jurisdiction. 1.75%. (6) A purchaser is not liable for additional local use tax if (ii) The single local use tax rate in effect for the pe- the purchaser pays local use tax using the rate elected by an eligible re- riod beginning January 1, 2020, and ending December 31, 2020, is mote seller according to paragraph (3) of this subsection. The remote 1.75%. seller must be identified on the comptroller's website as electing to use (E) Annual publication of single local use tax rate. Be- the single local use tax rate. A purchaser must verify that the remote fore the beginning of a calendar year, the comptroller will publish no- seller is listed on the comptroller's website. If the remote seller is not tice of the single local use tax rate in the Texas Register that will be in listed on the comptroller's website, the purchaser will be liable for ad- effect for that calendar year. ditional use tax due in accordance to paragraph (4) of this subsection. (F) Calculating the single local use tax rate. The single (j) Items purchased under a direct payment permit. local use tax rate effective in a calendar year is equal to the estimated (1) When taxable items are purchased under a direct pay- average rate of local sales and use taxes imposed in this state during the ment permit, local use tax is due based upon the location where the preceding state fiscal year. As soon as practicable after the end of a state permit holder first stores the taxable items, except that if the taxable fiscal year, the comptroller must determine the estimated average rate items are not stored, then local use tax is due based upon the location of local sales and use taxes imposed in this state during the preceding where the taxable items are first used or otherwise consumed by the state fiscal year by: permit holder. (i) dividing the total amount of net local sales and (2) If, in a local taxing jurisdiction, storage facilities con- use taxes remitted to the comptroller during the state fiscal year by the tain taxable items purchased under a direct payment exemption certifi- total amount of net state sales and use tax remitted to the comptroller cate and at the time of storage it is not known whether the taxable items during the state fiscal year; will be used in Texas, then the taxpayer may elect to report the use tax (ii) multiplying the amount computed under clause either when the taxable items are first stored in Texas or are first re- (i) of this subparagraph by the rate provided in Tax Code, §151.051; moved from inventory for use in Texas, as long as use tax is reported and in a consistent manner. See also §3.288(i) of this title (relating to Direct Payment Procedures and Qualifications) and §3.346(g) of this title. (iii) rounding the amount computed under clause (ii) of this subparagraph to the nearest .0025. (3) If local use tax is paid on stored items that are subse- quently removed from Texas before they are used, the tax may be re- (G) Direct refund. A purchaser may request a refund covered in accordance with the refund and credit provisions of §3.325 based on local use taxes paid in a calendar year for the difference be- of this title and §3.338 of this title (relating to Multistate Tax Credits tween the single local use tax rate paid by the purchaser and the amount and Allowance of Credit for Tax Paid to Suppliers). the purchaser would have paid based on the combined tax rate for all applicable local use taxes. Notwithstanding the refund requirements (k) Special rules for certain taxable goods and services. Sales under §3.325(a)(1) of this title (relating to Refunds and Payments Un- of the following taxable goods and services are consummated at, and der Protest), a non-permitted purchaser may request a refund directly local tax is due based upon, the location indicated in this subsection. from the comptroller for the tax paid in the previous calendar year, no (1) Amusement services. Local tax is due based upon the earlier than January 1 of the following calendar year within the statute location where the performance or event occurs. For more information of limitation under Tax Code, 111.104 (Refunds). on amusement services, refer to §3.298 of this title (relating to Amuse- (H) Marketplace providers. Notwithstanding subpara- ment Services). graph (A) of this paragraph, marketplace providers may not use the (2) Cable services. When a service provider uses a cable single local use tax rate and must compute the amount of local use tax system to provide cable television or bundled cable services to cus- to collect and remit using the combined tax rate of all applicable local tomers, local tax is due as provided for in §3.313 of this title. When use taxes. a service provider uses a satellite system to provide cable services to (4) Purchaser responsible for accruing and remitting local customers, no local tax is due on the service in accordance with the taxes if seller fails to collect. Telecommunications Act of 1996, §602. (A) If a seller does not collect the state sales tax, any (3) Florists. Local sales tax is due on all taxable items sold applicable local sales taxes, or both, on a sale of a taxable item that by a florist based upon the location where the order is received, regard- is consummated in Texas, then the purchaser is responsible for filing less of where or by whom delivery is made. Local use tax is not due on a return and paying the tax. The local sales taxes due are based on deliveries of taxable items sold by florists. For example, if the place of the location in this state where the sale is consummated as provided in business of the florist where an order is taken is not within the bound- subsection (c) of this section. aries of any local taxing jurisdiction, no local sales tax is due on the item and no local use tax is due regardless of the location of delivery. (B) A purchaser who buys an item for use in Texas from If a Texas florist delivers an order in a local taxing jurisdiction at the a seller who does not collect the state use tax, any applicable local use instruction of an unrelated florist, and if the unrelated florist did not taxes, or both, is responsible for filing a return and paying the tax. The take the order within the boundaries of a local taxing jurisdiction, local local use taxes due are based on the location where the item is first use tax is not due on the delivery. For more information about florists' stored, used, or consumed by the purchaser. sales and use tax obligations, refer to §3.307 of this title (relating to (C) For more information about how to report and pay Florists). use tax directly to the comptroller, see §3.286 of this title. PROPOSED RULES April 19, 2024 49 TexReg 2455 (4) Landline telecommunications services. Local taxes due §321.105, any city that adopted a local sales and use tax effective Oc- on landline telecommunications services are based upon the location of tober 1, 1979, or later is prohibited from imposing tax on the residential the device from which the call or other transmission originates. If the use of natural gas and electricity. See §3.295 of this title. seller cannot determine where the call or transmission originates, local (B) Imposition of tax allowed in certain cities. Cities taxes due are based on the address to which the service is billed. For that adopted local sales tax prior to October 1, 1979, may, in accor- more information, refer to §3.344 of this title (relating to Telecommu- dance with the provisions in Tax Code, §321.105, choose to repeal the nications Services). exemption for residential use of natural gas and electricity. The comp- (5) Marketplace provider sales. Local taxes are due on troller's website provides a list of cities that impose tax on the residen- sales of taxable items through a marketplace provider based on the lo- tial use of natural gas and electricity, as well as a list of those cities that cation in this state to which the item is shipped or delivered or at which do not currently impose the tax, but are eligible to do so. the purchaser takes possession. For more information, refer to §3.286 (C) Effective January 1, 2010, a fire control, preven- of this title. tion, and emergency medical services district organized under Local (6) Mobile telecommunications services. Local taxes due Government Code, Chapter 344 that imposes sales tax under Tax Code, on mobile telecommunications services are based upon the location of §321.106, or a crime control and prevention district organized under the customer's place of primary use as defined in §3.344(a)(8) of this Local Government Code, Chapter 363 that imposes sales tax under Tax title, and local taxes are to be collected as indicated in §3.344(h) of this Code, §321.108, that is located in all or part of a municipality that im- title. poses a tax on the residential use of natural gas and electricity as pro- vided under Tax Code, §321.105 may impose tax on residential use of (7) Motor vehicle parking and storage. Local taxes are due natural gas and electricity at locations within the district. A list of the based on the location of the space or facility where the vehicle is parked. special purpose districts that impose tax on residential use of natural For more information, refer to §3.315 of this title (relating to Motor gas and electricity and those districts eligible to impose the tax that do Vehicle Parking and Storage). not currently do so is available on the comptroller's website. (8) Natural gas and electricity. Any local city and special (2) Telecommunication services. Telecommunications ser- purpose taxes due are based upon the location where the natural gas vices are exempt from all local sales taxes unless the governing body or electricity is delivered to the purchaser. As explained in subsection of a city, county, transit authority, or special purpose district votes (l)(1) of this section, residential use of natural gas and electricity is to impose sales tax on these services. However, since 1999, under exempt from all county sales and use taxes and all transit authority sales Tax Code, §322.109(d), transit authorities created under Transporta- and use taxes, most special purpose district sales and use taxes, and tion Code, Chapter 451 cannot repeal the exemption unless the repeal many city sales and use taxes. A list of the cities and special purpose is first approved by the governing body of each city that created the districts that do impose, and those that are eligible to impose, local local taxing jurisdiction. The local sales tax is limited to telecommuni- sales and use tax on residential use of natural gas and electricity is cations services occurring between locations within Texas. See §3.344 available on the comptroller's website. For more information, also refer of this title. The comptroller's website provides a list of local taxing to §3.295 of this title (relating to Natural Gas and Electricity). jurisdictions that impose tax on telecommunications services. (9) Nonresidential real property repair and remodeling ser- (3) Emergency services districts. vices. Local taxes are due on services to remodel, repair, or restore nonresidential real property based on the location of the job site where (A) Authority to exclude territory from imposition of the remodeling, repair, or restoration is performed. See also subsection emergency services district sales and use tax. Pursuant to the provi- (h)(2)(B) of this section and §3.357 of this title. sions of Health and Safety Code, §775.0751(c-1), an emergency ser- vices district wishing to enact a sales and use tax may exclude from the (10) Residential real property repair and remodeling and election called to authorize the tax any territory in the district where the new construction of a real property improvement performed under a sales and use tax is then at 2.0%. The tax, if authorized by the voters separated contract. When a contractor constructs a new improvement eligible to vote on the enactment of the tax, then applies only in the to realty pursuant to a separated contract or improves residential real portions of the district included in the election. The tax does not apply property pursuant to a separated contract, the sale is consummated at to sales made in the excluded territories in the district and sellers in the the job site at which the contractor incorporates taxable items into the excluded territories should continue to collect local sales and use taxes customer's real property. See also subsection (h)(2)(A) of this section for the local taxing jurisdictions in effect at the time of the election un- and §3.291 of this title. der which the district sales and use tax was authorized as applicable. (11) Waste collection services. Local taxes are due on (B) Consolidation of districts resulting in sales tax garbage or other solid waste collection or removal services based on sub-districts. Pursuant to the provisions of Health and Safety Code, the location at which the waste is collected or from which the waste is §775.018(f), if the territory of a district proposed under Health and removed. For more information, refer to §3.356 of this title (relating Safety Code, Chapter 775 overlaps with the boundaries of another to Real Property Service). district created under that chapter, the commissioners court of each (l) Special exemptions and provisions applicable to individual county and boards of the counties in which the districts are located may jurisdictions. choose to create a consolidated district in the overlapping territory. If two districts that want to consolidate under Health and Safety Code, (1) Residential use of natural gas and electricity. §775.024 have different sales and use tax rates, the territory of the (A) Mandatory exemptions from local sales and use tax. former districts located within the consolidated area will be designated Residential use of natural gas and electricity is exempt from most lo- as sub-districts and the sales tax rate within each sub-district will cal sales and use taxes. Counties, transit authorities, and most special continue to be imposed at the rate the tax was imposed by the former purpose districts are not authorized to impose sales and use tax on the district that each sub-district was part of prior to the consolidation. residential use of natural gas and electricity. Pursuant to Tax Code, (4) East Aldine Management District. 49 TexReg 2456 April 19, 2024 Texas Register (A) Special sales and use tax zones within district; (B) pursuant to the obligation of a bid or bids submitted separate sales and use tax rate. As set out in Special District Local prior to the effective date of any local tax if the bid or bids and contract Laws Code, §3817.154(e) and (f), the East Aldine Management entered into pursuant thereto are at a fixed price and not subject to District board may create special sales and use tax zones within the withdrawal, change, or modification because of the tax. boundaries of the District and, with voter approval, enact a special (2) Annexations. Any annexation of territory into an exist- sales and use tax rate in each zone that is different from the sales and ing local taxing jurisdiction is also a basis for claiming the exemption use tax rate imposed in the rest of the district. provided by this subsection. (B) Exemptions from special zone sales and use tax. (3) Local taxing jurisdiction rate increase; partial exemp- The sale, production, distribution, lease, or rental of; and the use, stor- tion for certain contracts and bids. When an existing local taxing ju- age, or other consumption within a special sales and use tax zone of; a risdiction raises its sales and use tax rate, the additional amount of tax taxable item sold, leased, or rented by the entities identified in clauses that would be due as a result of the rate increase is not due on the sale, (i) - (vi) of this subparagraph are exempt from the special zone sales use, storage, or other consumption in this state of taxable items used: and use tax. State and all other applicable local taxes apply unless oth- erwise exempted by law. The special zone sales and use tax exemption (A) for the performance of a written contract executed applies to: prior to the effective date of the tax rate increase if the contract may not be modified because of the tax; or (i) a retail electric provider as defined by Utilities Code, §31.002; (B) pursuant to the obligation of a bid or bids submitted prior to the effective date of the tax rate increase if the bid or bids and (ii) an electric utility or a power generation company contract entered into pursuant thereto are at a fixed price and not subject as defined by Utilities Code, §31.002; to withdrawal, change, or modification because of the tax. (iii) a gas utility as defined by Utilities Code, (4) Three-year statute of limitations. §101.003 or §121.001, or a person who owns pipelines used for transportation or sale of oil or gas or a product or constituent of oil or (A) The exemption in paragraph (1) of this subsection gas; and the partial exemption in paragraph (3) of this subsection have no effect after three years from the date the adoption or increase of the tax (iv) a person who owns pipelines used for the trans- takes effect in the local taxing jurisdiction. portation or sale of carbon dioxide; (B) The provisions of §3.319 of this title apply to this (v) a telecommunications provider as defined by subsection to the extent they are consistent. Utilities Code, §51.002; or (C) Leases. Any renewal or exercise of an option to (vi) a cable service provider or video service extend the time of a lease or rental contract under the exemptions pro- provider as defined by Utilities Code, §66.002. vided by this subsection shall be deemed to be a new contract and no (5) Imposition of city sales tax and transit tax on certain exemption will apply. military installations; El Paso and Fort Bliss. Pursuant to Tax Code, (5) Records. Persons claiming the exemption provided by §321.1045 (Imposition of Sales and Use Tax in Certain Federal Military this subsection must maintain records which can be verified by the Installations), for purposes of the local sales and use tax imposed under comptroller or the exemption will be lost. Tax Code, Chapter 321, the city of El Paso includes the area within the boundaries of Fort Bliss to the extent it is in the city's extraterritorial (6) Exemption certificate. An identification number is re- jurisdiction. However, the El Paso transit authority does not include quired on the prior contract exemption certificates furnished to sellers. Fort Bliss. See Transportation Code, §453.051 concerning the Creation The identification number should be the person's 11-digit Texas tax- of Transit Departments. payer number or federal employer's identification (FEI) number. (m) Restrictions on local sales tax rebates and other economic The agency certifies that legal counsel has reviewed the pro- incentives. Pursuant to Local Government Code, §501.161, Section 4A posal and found it to be within the state agency's legal authority and 4B development corporations may not offer to provide economic to adopt. incentives, such as local sales tax rebates authorized under Local Gov- ernment Code, Chapters 380 or 381, to persons whose business consists Filed with the Office of the Secretary of State on April 8, 2024. primarily of purchasing taxable items using resale certificates and then TRD-202401427 reselling those same items to a related party. A related party means a Jenny Burleson person or entity which owns at least 80% of the business enterprise to which sales and use taxes would be rebated as part of an economic in- Director, Tax Policy centive. Comptroller of Public Accounts Earliest possible date of adoption: May 19, 2024 (n) Prior contract exemptions. The provisions of §3.319 of this For further information, please call: (512) 475-2220 title (relating to Prior Contracts) concerning definitions and exclusions apply to prior contract exemptions. ♦ ♦ ♦ (1) Certain contracts and bids exempt. No local taxes are TITLE 43. TRANSPORTATION due on the sale, use, storage, or other consumption in this state of tax- able items used: PART 3. MOTOR VEHICLE CRIME (A) for the performance of a written contract executed PREVENTION AUTHORITY prior to the effective date of any local tax if the contract may not be modified because of the tax; or PROPOSED RULES April 19, 2024 49 TexReg 2457 APPENDIX D TITLE 34. PUBLIC FINANCE Jenny Burleson Director, Tax Policy Division PART 1. COMPTROLLER OF PUBLIC Comptroller of Public Accounts ACCOUNTS Effective date: July 4, 2024 Proposal publication date: April 19, 2024 CHAPTER 3. TAX ADMINISTRATION For further information, please call: (512) 475-2220 SUBCHAPTER O. STATE AND LOCAL SALES ♦ ♦ ♦ AND USE TAXES 34 TAC §3.334 34 TAC §3.334 The Comptroller of Public Accounts adopts new §3.334, con- The Comptroller of Public Accounts adopts the repeal of §3.334, cerning local sales and use taxes, without changes to the pro- concerning local sales and use taxes, without changes to the posed text as published in the April 19, 2024, issue of the Texas proposed text as published in the April 19, 2024, issue of the Register (49 TexReg 2442). The rule will not be republished. The Texas Register (49 TexReg 2440). The rule will not be repub- comptroller adopts new §3.334 to replace the existing §3.334 lished. The comptroller repeals existing §3.334 to replace it with that the comptroller is repealing. The new §3.334 includes the new §3.334. The repeal of §3.334 will be effective the date the text of existing §3.334, with the addition of subsection (b)(6) and new §3.334 takes effect. supporting definitions. Brief explanation of the rulemaking. In addition to soliciting written comments, the comptroller held a public hearing on May 9, 2024. The comptroller received oral It has been called to the comptroller's attention that the October and/or written comments regarding adoption of the rule from the 27, 2023, notice of proposed rulemaking did not contain a state- following persons: ment of fiscal implications for small businesses or rural commu- nities as required by Government Code, Chapter 2006. See (48 John Christian, Ryan, LLC, against the rule. TexReg 6340) (October 27, 2023). Therefore, the comptroller re- TJ Gilmore, Mayor of the City of Lewisville, against the rule. peals the adopted rule as proposed in the October 27, 2023, no- tice of proposed rulemaking. The comptroller is simultaneously Jim Harris, on behalf of the Coalition for Appropriate Sales readopting the text of the rule effective on January 5, 2024, with Tax Law Enactment (CASTLE) and its members, the cities amendments, under the same number and title, with the repeal of Coppell, Farmers Branch, Grand Prairie, Humble, Kilgore, to be effective as of the date the adopted rule. Lancaster, and Lewisville, against the rule. Comments John Kroll, HMWK, against the rule. The comptroller received comments from James Harris on behalf Mike Land, City Manager of the City of Coppell, against the rule. of the Coalition for Appropriate Sales Tax Law and its members, Wes Mays, Mayor of the City of Coppell, against the rule. the cities of Coppell, Carrollton, Desoto, Farmers Branch, Hum- ble, Kilgore, Lancaster, and Lewisville, in favor of the repeal of Stephan L. Sheets, Attorney for the City of Round Rock, against all revisions to the rule, starting with the version adopted in May the rule. 2020. The comptroller addresses the criticisms of the revisions Rich Whitehead, Mayor of the City of Helotes, against the rule. in §3.334 in the preamble of the new §3.334, which the comp- troller will adopt to be effective concurrently with this repeal. Summary of the Principal Reasons For and Against Adoption of the Rule Statement of the statutory or other authority under which the rule- making is adopted. The comptroller's principal reason for adoption of the rule is to provide guidance to taxpayers and auditors regarding the appli- The repeal is adopted under Tax Code, §§111.002 (Comp- cation of the local sales and use tax consummation statutes. troller's Rule; Compliance; Forfeiture), 321.306 (Comptroller's Rules), 322.203 (Comptroller's Rules), and 323.306 (Comptrol- The principal reasons alleged against adoption are: that the rule ler's Rules), which authorize the comptroller to adopt rules to is not needed, that the rule will hurt cities and taxpayers, that the implement the tax statutes. rule is a departure from prior comptroller policy, that the stated reasons for adoption have no factual basis, that the rule is incon- Sections or articles of the code affected. sistent with the local sales and use tax consummation statutes, The repeal affects Tax Code, §151.0595 (Single Local Tax Rate and that the notice of rulemaking did not comply with the require- for Remote Sellers); Tax Code, Chapter 321, Subchapters A, B, ments of the Administrative Procedure Act. C, D, and F; Tax Code, Chapter 322; and Tax Code, Chapter The subsequent discussion provides the reasons for adopting 323. the rule without changes related to the comments received. The agency certifies that legal counsel has reviewed the adop- Summary of the Factual Bases for the Rule - Background tion and found it to be a valid exercise of the agency's legal au- thority. In January 2020, the comptroller initiated rulemaking to update its local sales and use tax rule. The comptroller subsequently Filed with the Office of the Secretary of State on June 14, 2024. adopted amendments in 2020, 2023, and 2024. (49 TexReg 53) (January 5, 2024), (48 TexReg 391) (January 27, 2023), (45 TRD-202402640 TexReg 3499) (May 22, 2020). The amendments implemented House Bill 1525, 86th Legislature, 2019, which placed local sales and use tax collection responsibilities on marketplace providers. ADOPTED RULES June 28, 2024 49 TexReg 4797 The amendments also implemented House Bill 2153, 86th Leg- Ultimately, the statutory test is a combination of elements -- islature, 2019, which set a single local use tax rate that remote whether a facility is an established outlet, office, or location op- sellers may elect to use. The amendments also expanded the erated by a seller for the purpose of receiving orders for taxable local sales tax collection responsibilities of sellers based on the items. The statutory references to an "established outlet, office, United States Supreme Court decision in South Dakota v. Way- or location," operation "by the retailer or the retailer's agent or fair, Inc., 138 S. Ct. 2080 (June 21, 2018). These amendments employee," and "receiving orders for taxable items" all suggest have been noncontroversial. that the presence of sales personnel is a reasonable criterion for evaluating whether a facility is a "place of business." The rulemaking made other revisions to the text, which are now the subject of litigation in Cause No. D-1-GN-21-003198, City of Subsection (a)(18) defines "place of business of the seller" as Coppell, Texas, et al. v. Glenn Hegar, in the 201st District Court follows: of Travis County Texas. The Plaintiff cities claim that the agency "(18) Place of business of the seller - general definition--A place did not comply with the rulemaking procedures in Government of business of the seller must be an established outlet, office, or Code, §2001.024 and Government Code, Chapter 2006. The location operated by a seller for the purpose of receiving orders comptroller initiated this rulemaking to address those claims by for taxable items from persons other than employees, indepen- proposing the readoption of the rule, with amendments, along dent contractors, and natural persons affiliated with the seller. An with a more complete statement of the elements required by 'established outlet, office, or location' usually requires staffing by Government Code, §2001.024 and Government Code, Chapter one or more sales personnel. The term does not include a com- 2006. puter server, Internet protocol address, domain name, website, The comptroller is addressing comments received in the current or software application. The 'purpose' element of the definition rulemaking, as well as the prior local tax rulemakings in 2020, may be established by proof that the sales personnel of the seller 2023, and 2024. The orders adopting the prior rulemakings are receive three or more orders for taxable items at the facility dur- available for inspection in the Texas Register, and contain addi- ing the calendar year. Additional criteria for determining when a tional explanations that augment this document. location is a place of business of the seller are provided in sub- section (b) of this section for distribution centers, manufacturing Summary of the Factual Bases for the Rule - Subsection (a)(18) plants, storage yards, warehouses and similar facilities; kiosks; - The definition of "place of business of the seller." and purchasing offices. An outlet, office, facility, or any location Local sales and use taxes are generally sourced to where a sale that contracts with a retail or commercial business to process or use is "consummated." Tax Code, §321.203 and §321.205. for that business invoices, purchase orders, bills of lading, or There are about three dozen sourcing provisions. Id. And, there other equivalent records onto which sales tax is added, including are three potential locations where local sales tax can be soured: an office operated for the purpose of buying and selling taxable the location where the order was received, the location where the goods to be used or consumed by the retail or commercial busi- order was fulfilled, and the location where the order was deliv- ness, is not a place of business of the seller if the comptroller ered to the customer. Id. The sourcing outcome can be affected determines that the outlet, office, facility, or location functions or by whether an order is placed in person at, received at, or ful- exists to avoid the tax legally due under Tax Code, Chapters 321, filled at a seller's "place of business" in Texas. 322, and 323 or exists solely to rebate a portion of the tax im- posed by those chapters to the contracting business. An outlet, Tax Code, §321.002(3)(A) uses 82 words to define "place of busi- office, facility, or location does not exist to avoid the tax legally ness of the retailer": due under Tax Code, Chapters 321, 322, and 323 or solely to "(3)(A) 'Place of business of the retailer' means an established rebate a portion of the tax imposed by those chapters if the out- outlet, office, or location operated by the retailer or the retailer's let, office, facility, or location provides significant business ser- agent or employee for the purpose of receiving orders for taxable vices, beyond processing invoices, to the contracting business, items and includes any location at which three or more orders are including logistics management, purchasing, inventory control, received by the retailer during a calendar year. A warehouse, or other vital business services." storage yard, or manufacturing plant is not a 'place of business The first sentence of subsection (a)(16) states: "A place of busi- of the retailer' unless at least three orders are received by the ness of the seller must be an established outlet, office, or lo- retailer during the calendar year at the warehouse, storage yard, cation operated by a seller for the purpose of receiving orders or manufacturing plant." for taxable items from persons other than employees, indepen- The term "place of business of the retailer" is a term of art be- dent contractors, and natural persons affiliated with the seller." cause the term is more limited than its plain and ordinary mean- This definition tracks the statutory definition but adds a qualifier ing. Many business activities can be conducted at a location from the prior rule that allows a facility to make in-house cour- without that location becoming a "place of business" for local tesy sales without becoming a place of business. tax sourcing. The definition specifically includes the concept of The second sentence of the definition of "place of business of receiving orders for taxable items. For example, the corporate the seller" in subsection (a)(16) states: "An 'established out- headquarters of a company may not be a "place of business" if no let, office, or location' usually requires staffing by one or more orders are received there. Additionally, a location is not a "place sales personnel." The word "usually" clarifies that the presence of business" simply because it receives orders. If that were the of sales personnel is not an absolute requirement, but rather, case, the legislature could have defined the phrase with those an important factor that will often determine whether an outlet, very few words, which can be counted on one hand. And, the office, or location is a "place of business." In subsequent sub- final sentence indicates that business locations such as ware- sections of the rule, the comptroller describes some examples. houses, storage yards, and manufacturing plants may not be "places of business." The comptroller is adding the sales personnel language to pro- vide an objective criterion for buyers, sellers, and auditors to con- sider. Does a facility have sales personnel? If it does, it is likely 49 TexReg 4798 June 28, 2024 Texas Register a "place of business" -- an established outlet, office, or location order. The physical locations of computer servers that receive operated by a seller for the purpose of receiving orders for tax- website orders are often random, variable, and uncertain. The able items. If the facility does not have sales personnel, it is likely best way to treat computer servers consistently and coherently not a "place of business." is to uniformly recognize that they are not "established" places of business of the seller. The reference to sales personnel is also consistent with the gen- eral objectives of the local tax statute. "It is a fundamental prin- The fourth sentence of the definition of "place of business of the ciple of statutory construction and indeed of language itself that seller" in subsection (a)(16) states: "The 'purpose' element of words' meanings cannot be determined in isolation but must be the definition may be established by proof that sales personnel drawn from the context in which they are used." TGS-NOPEC of the seller received three or more orders for taxable items at the Geophysical Co. v. Combs, 340 S.W.3d 432, 441 (Tex. 2011). facility during the calendar year." This language is consistent with The context for the "place of business" definition is not limited to the statutory language that a "'place of business of the retailer' ... the consummation statutes. It also extends to the sales tax per- includes any location at which three or more orders are received mit requirement. The requirement of a sales tax permit for each by the retailer during a calendar year." "place of business" suggests that presence of sales personnel is The remaining sentences of the definition of "place of business a reasonable factor to consider. of the seller" are noncontroversial. The third sentence in the definition of "place of business" in Mr. Gilmore, Mr. Kroll, Mr. Land, and Mr. Mays do not be- subsection (a)(16) states: "The term does not include a com- lieve that this definition simplifies local tax sourcing. However, puter server, Internet protocol address, domain name, website, the comptroller is under no illusions that the definition will elim- or software application." This sentence is consistent with the inate all ambiguities. In some instances, the determination will concept that a "place of business" usually requires the presence depend upon the particular facts. But in many instances, it will of personnel to receive the order. Even a broad, every-day us- be clear. And, the rule also makes clear that mere hardware age of the term "place of business" does not include computer installations are not "places of business of the seller." To that ex- servers, Internet protocol addresses, and websites. Many sell- tent, the rule will help taxpayers understand how the comptroller ers house their computer servers at a co-location facility or rent interprets and intends to apply the statute. computer server space at a managed hosting site. An ordinary person would not consider the physical locations of these com- Summary of the Factual Bases for the Rule - Subsection (b)(5) - puter servers to be places of business of the seller. Similarly, A facility without sales personnel is usually not a "place of busi- an ordinary person would not perceive an Internet protocol ad- ness of the seller." dress, a domain name, or a website as an "established outlet, Subsection (b)(5) provides: office, or location" so as to constitute a place of business in or- dinary usage. And, in this statutory context, which is narrower "(5) A facility without sales personnel is usually not a 'place of than ordinary usage, the comptroller has concluded that the leg- business of the seller.' A vending machine is not an 'established islature could not have intended that the receipt of an order by outlet, office, or location,' and does not constitute a 'place of busi- an automated mechanical device would make the device an "es- ness of the seller.' Instead, a vending machine sale is treated as tablished outlet, office or location operated by the retailer." a sale by an itinerant vendor. See subsections (a)(10) and (c)(6) of this section. However, a walk-in retail outlet with a stock of In addition to being a reasonable interpretation of the statute and goods available for immediate purchase through a cashier-less consistent with precedent, the comptroller's interpretation that point of sale terminal at the outlet would be an 'established out- computer servers and the software applications that run on the let, office, or location' so as to constitute a 'place of business of servers are not places of business, is a practical interpretation the seller' even though sales personnel are not required for ev- that will facilitate uniformity and ease of administration for tax- ery sale. A computer that operates an automated shopping cart payers and auditors. Website orders can be received at multiple software program is not an 'established outlet, office, or location,' physical addresses - any locations that have Internet access. A and does not constitute a 'place of business of the seller.' A com- website order is sent to an Internet protocol (IP) address. An puter that operates an automated telephone ordering system is IP address is not a permanent physical address. It is a series of not an 'established outlet, office, or location,' and does not con- numbers assigned to a device, such as a computer server. Web- stitute a 'place of business of the seller.'" sites may use dynamic IP addresses that are assigned by the network upon connection and that change over time. The public Subsection (b)(5) provides examples of the application of the IP address of a website may simply be routing orders to differ- definition of "place of business of the seller," and the factual ent, private IP addresses. Load balancers may change the IP bases for subsection (b)(5) are the same as the for the definition. addresses that communicate with customers. Conversely, mul- In addition, the treatment of vending machines is consistent with tiple websites may be hosted at a single IP address. the treatment of vending machines in prior versions of the rule. The computer server receiving an order may belong to the seller Reasons Why the Comptroller Disagrees With Commenters' or it may belong to a third party. The computer server may be sit- Submissions and Proposals - Subsections (a)(10) and (b)(5). uated on the seller's premises, it may be situated at a co-location Some commenters asserted that a "place of business" does not facility operated by a third party, or it may be situated at a web have to be operated for the purpose of receiving orders for tax- hosting facility operated by a third party. The computer server able items. According to the comments submitted by CASTLE: may be one of multiple servers that serve the same website from different physical addresses as part of a cloud distribution net- "The statutory definition of 'place of business,' Tax Code, work. The computer server may route the order to multiple other §321.002(3)(A), describes five different place of business cat- servers for load balancing purposes. Conversely, a single com- egories: established outlets; established offices; established puter server may serve multiple websites. Also, the seller may locations operated by the retailer or the retailer's agent or or may not know the physical address of the server receiving the employee for the purpose of receiving orders for taxable items; ADOPTED RULES June 28, 2024 49 TexReg 4799 any location at which three or more orders are received by the retailer's employee in the definition of "place of business of the retailer during a calendar year; and warehouses, storage yards, retailer." or manufacturing plants that receive three or more orders in As previously stated, the comptroller is adding the sales person- a calendar year. Tax Code, §321.002(a)(3)(A). The first two nel language to provide an objective criterion for buyers, sellers, categories need not have as a purpose receipt of orders and do and auditors to consider. Does a facility have sales personnel? not need to receive orders to be a place of business." If it does, it is likely a "place of business" -- an established outlet, CASTLE further commented that the function of an "established office, or location operated by a seller for the purpose of receiv- office" is "business." This interpretation would mean that any fa- ing orders for taxable items. If the facility does not have sales cility operated by a seller for a business purpose would be a personnel, it is likely not a "place of business." This objective cri- "place of business" -- executive offices, administrative offices, terion is supported by the previously explained legislative history research and development laboratories, maintenance facilities, of the statute. vehicle garages, etc. The comptroller rejects this interpretation Mr. Sheets, citing former §3.334(h)(3)(B), commented that "the as unreasonable. The 1979 legislation, which adopted the def- prior version of Rule 3.334 recognized that an Internet order is inition of "place of business," required each "place of business" received at a place of business while the proposed amendments to have a sales tax permit. See 66th Legislature, 1979, Ch. 624, cause Internet orders to be received nowhere." §3. That requirement is now in Tax Code, §321.303. It is unrea- sonable to think that the legislature intended that a maintenance The comptroller responds that the comment overstates the effect facility would be required to have a sales tax permit. A more of the prior rule and misunderstands the effect of the adopted reasonable interpretation is that a "place of business," whether rule. Prior to the 2020 amendments, §3.334(h)(3)(B) provided: it is an outlet, office, or location, "must be operated by a seller "(B) Order received at a place of business in Texas, fulfilled at for the purpose of receiving orders for taxable items," as the rule a location that is not a place of business. When an order that requires. is placed over the telephone, through the Internet, or by any Mr. Mays and other commenters also alleged that there is no means other than in person is received by the seller at a place reason for the comptroller to amend its rule. But, CASTLE's in- of business in Texas, and the seller fulfills the order at a loca- terpretation of the "purpose" requirement illustrates the need for tion that is not a place of business of the seller in Texas, such as clarification. The CASTLE interpretation may work at cross-pur- a warehouse or distribution center, the sale is consummated at poses with other commenters who claim the right to source all the place of business at which the order for the taxable item is their sales to their "single place of business." If every taxpayer received." facility with a business purpose is in fact a "place of business" as (41 TexReg 260, 265) (2016) (former 34 TAC §3.334(h)(3), em- CASTLE suggests, many of these commenters may have mul- phasis added); (39 TexReg 9597, 9606) (2014) (former 34 TAC tiple places of businesses. The adopted rule states the comp- §3.334(h)(3), emphasis added). troller's interpretation, and sets the stage for a definitive court resolution of the conflict between competing commenters. The former language only meant that a place of business may receive an order through the Internet, or any other method of Mr. Christian commented on the portion of the definition of "place communication except in-person communication. For example, of business" that excludes orders from "employees, independent a sales representative at a place of business in Texas could re- contractors, and natural persons affiliated with the seller." He ceive an order through the Internet in the form of a VOIP call or commented that the language was "extra-statutory." The comp- an email. But, the former language did not mean that every In- troller disagrees. The language has been in the rule since 2014, ternet order is automatically received at a place of business, as when it was adopted without adverse comment. It allows a fa- illustrated by the following comptroller rulings before and after cility to make in-house courtesy sales to workers at the facility the comptroller adopted §3.334 in 2014. without the facility becoming a place of business. Courtesy sales to workers are insufficient to conclude that a facility was estab- Comptroller Letter Ruling (STAR Accession No.) 200510723L lished for the purpose of receiving orders. (2005) stated: Mr. Christian and other commenters observed that the statutory "The location of the server does not create a 'place of business' definition of "place of business" does not mention sales person- for purposes of local tax collection." nel. However, an agency rule need not be limited to parroting the And Comptroller Letter Ruling (STAR Accession No.) words of the statute. The courts have said that a rule may not 200605592L (2006) similarly stated: impose additional burdens, conditions, or restrictions in excess of or inconsistent with the relevant statutory provisions. State "The location of the server does not create a 'place of business' Office of Pub. Util. Counsel v. Pub. Util. Comm'n of Tex., 131 for purposes of local tax collection." S.W.3d 314, 321 (Tex. App.--Austin 2004, pet. denied). The And Comptroller Letter Ruling (STAR Accession No.) implication of that statement is that a rule may impose burdens, 201906015L (2019) similarly stated: conditions, or restrictions that are consistent with the relevant statutory provisions. E.g., id. at 342 (court approved "formulaic "COMPANY operates **************'s online marketplace (Web- means" not specified in the statute). Previous tax cases have ap- site) and various apps used by Texas customers to make online proved comptroller rules that articulated requirements that were orders. ... Orders placed on the Website or through COMPANY's not explicitly stated in the statute. Perry Homes v. Strayhorn, apps and processed and routed by servers are not received at a 108 S.W.3d 444, 448 (Tex. App.--Austin 2003, no pet.); DuPont place of business." Photomasks, Inc. v. Strayhorn, 219 S.W.3d 414, 422 (Tex. Furthermore, the adopted rule does not mean that Internet or- App.--Austin 2006, pet. denied). The reference to sales per- ders are received "nowhere." Internet orders, such and VOIP sonnel in the rule is consistent with the statutory reference to a calls and emails may be received at a place of business. And under subsection (b)(5), an Internet order received by an auto- 49 TexReg 4800 June 28, 2024 Texas Register mated shopping cart is received somewhere - at the computer general standard that is applicable to all situations, as well as to server -- but, that somewhere is not a "place of business of the automated website orders and fulfillment warehouses. seller." The adopted standard comports with the ordinary usage of the Summary of the Factual Bases for the Rule - Subsections (b)(1) terms, as evidenced by the fact that the standard has been and (c)(7) - Distributions centers, manufacturing plants, storage approved by twenty-four states under the Streamlined Sales Tax yards, and warehouses, and when and where an order is "re- Agreement. The adopted standard will also promote uniformity ceived." with those states that have elected or will elect origin-based sourcing. Subsection (b)(1) provides: Reasons Why the Comptroller Disagrees With Commenters' "(1) Distribution centers, manufacturing plants, storage yards, Submissions and Proposals - Subsections (b)(1) and (c)(7). warehouses, and similar facilities. Most of the commenters are concerned with the effect of the sub- (A) A distribution center, manufacturing plant, storage yard, sections on fulfillment warehouses and similar facilities. Sub- warehouse, or similar facility operated by a seller for the pur- section (b)(1)(A) provides: "Forwarding previously received or- pose of selling taxable items where sales personnel of the ders to a facility for fulfillment does not make the facility a place seller receive three or more orders for taxable items during the of business." Subsection (c)(7) similarly provides: "The location calendar year from persons other than employees, independent where an order is received ... means the physical location ... contractors, and natural persons affiliated with the seller is a where an order is initially received ... and not where the order place of business of the seller. Forwarding previously received may be subsequently accepted, completed or fulfilled." orders to the facility for fulfilment does not make the facility a place of business. Subsection (c)(7) explicitly limits receipt to the location where the order is initially received, ruling out intermediate and final loca- (B) If a location that is a place of business of the seller, such as tions where an order might be accepted, completed, or fulfilled. a sales office, is in the same building as a distribution center, Subsection (c)(7) also explicitly states the criteria for determining manufacturing plant, storage yard, warehouse, or similar facility when an order is received: "An order is received when all of the operated by a seller, then the entire facility is a place of business information from the purchaser necessary to the determination of the seller." whether the order can be accepted has been received by or on And subsection (c)(7) provides: behalf of the seller." "(7) The location where the order is received by or on behalf of CASTLE commented that the modifier "initially" is not present in the seller means the physical location of a seller or third party the portion of definition of "place of business" that refers to the lo- such as an established outlet, office location, or automated order cation at which orders are "received." CASTLE, and Kyle Kasner receipt system operated by or on behalf of the seller where an in a previous rulemaking proceeding, also commented that the order is initially received by or on behalf of the seller and not consummation statute in Tax Code, §321.203 sometimes refers where the order may be subsequently accepted, completed or to where the retailer "first receives" the order, implying that an fulfilled. An order is received when all of the information from order can be "received" at more than one place. the purchaser necessary to the determination whether the order CASTLE also argued that the dictionary defines "receive" as "to can be accepted has been received by or on behalf of the seller. take into one's possession, to take delivery of a thing, to get, or The location from which a product is shipped shall not be used to come by," and a fulfillment warehouse cannot fulfill an order in determining the location where the order is received by the unless it gets or comes by the order. This argument may seem seller." reasonable in the abstract, but not in context. When the statute The text of subsection (c)(7) is taken from Section and its legislative history are considered as a whole, the proper 3.10.1C5 of the Streamlined Sales and Use Tax Agreement construction is the opposite - a fulfillment warehouse does not re- (SSUTA). See https://www.streamlinedsalestax.org/docs/de- ceive an order for purposes of the local sales tax statutes merely fault-source/agreement/ssuta/ssuta-as-amended-through-05- because fulfillment information has been sent to the warehouse. 24-23-with-hyperlinks-and-compiler-notes-at-end.pdf. With regard to statutory construction, the Texas Supreme Court In its 2014 rulemaking, the comptroller proposed a definition has stated: "We must analyze statutory language in its context, of "receive," but deleted the proposed definition in response to considering the specific sections at issue as well as the statute concerns stated in oral and written comments. See (39 TexReg as a whole. {Citation omitted}. While 'it is not for courts to un- 4179) (May 30, 2014) (proposed rule amendment) and (39 dertake to make laws "better" by reading language into them,' TexReg 9598) (December 5, 2014) (adopted rule amendment). we must make logical inferences when necessary 'to effect clear legislative intent or avoid an absurd or nonsensical result that In its January 2023 rulemaking, the comptroller again declined the Legislature could not have intended.'" Castleman v. Internet to adopt a definition of "receive" and instead, addressed the two Money Ltd., 546 S.W.3d 684, 688 (Tex. 2018), quoting Cadena circumstances that were most prominently debated - automated Comercial USA Corp. v. Tex. Alcoholic Beverage Comm'n, 518 website orders and fulfillment warehouses. Subsection (b) of S.W.3d 318, 338 (Tex. 2017). the adopted rule articulated the comptroller's interpretation that an automated website "receives" the order and that a fulfillment Considering the local sales tax statute sections as a whole, the warehouse does not "receive" the order when it is forwarded from term "received" must be limited to the location where an order the website to the warehouse. See (48 TexReg 400) (January is initially received. This construction effects the clear legislative 27, 2023). intent and avoids an absurd or nonsensical result that the legis- lature could not have intended. Since then, it has become apparent that other circumstances also require a clear articulation of the comptroller's interpreta- The legislature did not define "receiving," "received," or "order." tion of the term "received." Thus, the comptroller is adopting a So, the terms must be construed in the context in which they ADOPTED RULES June 28, 2024 49 TexReg 4801 are used. One context is the definition of "place of business of location where an order is received - the initial location where the retailer" in Tax Code, §321.002(3)(A). A "place of business all the information necessary for acceptance has been received. of a retailer" is a location operated "for the purpose of receiving With this clarification, the consummation statute can be applied orders." One might say, as CASTLE does, that a purpose of a with greater certainty. fulfillment warehouse is to receive the order because receipt is a CASTLE commented: "For all practical purposes an order necessary step in fulfillment. However, one might also reason- placed on a website is typically received at the same time at ably say that while a sales office is operated for the "purpose various locations, including fulfillment centers." However, for of receiving orders," a fulfillment warehouse without sales per- the practical purpose of sourcing local tax, there is a single sonnel is not operated for such a purpose - the purpose is only location where a website order is initially received - the Web fulfillment, which does not require the receipt of the entire order server. According to a report from the group's own expert, Amit containing price and payment terms. The only necessary infor- Basu: "...the Buyer places the online order by communicating mation is delivery information - the product description, quantity, with a Web server that manages the Seller's Web site. ... The and delivery location. Because there are at least two reasonable Web server transmits the order electronically to the Seller's interpretations, the terms in this context are ambiguous. e-Commerce software program." In another context the meaning becomes clearer. That context Mr. Kroll commented that it may be impossible to determine the is the consummation statute in Tax Code, §321.203. Consider location of initial receipt: "Some companies will have multiple Tax Code, §321.203(d): redundant server/data center operations spread across multiple "(d) If the retailer has more than one place of business in this geographic locations." The comptroller agrees. As pointed out state and Subsections (c) and (c-1) do not apply, the sale is con- in the 2020 rulemaking, a computer server may be situated on summated at: 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 (1) the place of business of the retailer in this state where the facility operated by a third party. The computer server may be order is received; or one of multiple servers that serve the same website from different (2) if the order is not received at a place of business of the retailer, physical addresses as part of a cloud distribution network. The the place of business from which the retailer's agent or employee computer server may route the order to multiple other servers for who took the order operates." load balancing purposes. Conversely, a single computer server may serve multiple websites. The seller may or may not know Assume a situation in which the retailer has multiple retail stores the physical address of the server receiving the order. If the in Texas (more than one place of business in the state), but a seller does not even know the physical location of the server, customer calls in an order to a Texas sales office and the order an ordinary person would not consider the physical location of is fulfilled from a location outside of Texas, so that Tax Code, the computer server to be a place of business of the seller. So, §321.203(c) and (c-1) indisputably do not apply. Also assume the best way to treat these orders consistently and coherently that information from the order is forwarded to the retailer's ex- is to treat them uniformly as being received at locations that are ecutive office in Texas for approval, to the retailer's Texas credit not places of business of the seller. If a server is not a "place office for a credit check, to the retailer's Texas manufacturing fa- of business" of the seller, then the exact location of the server cility for assembly, to the retailer's Texas storage lot for bundled does not have to be determined because the location will not shipping to a fulfillment center, to the retailer's fulfillment center determine the sourcing of local sales tax. for fulfillment to the customer, to the retailer's Texas accounting office for billing, and to the retailer's Texas controller for collec- The comptroller's application of the statute to fulfillment centers tion on the account. is also supported by statutory history. Prior to 1979, the consum- mation statute had no provision for sourcing to where an "order" In the sense proposed by CASTLE, all these locations "received" was "received," and the statute provided: the "order" to complete their assigned tasks. But this interpre- tation leads to absurd results. If the "order" was "received" at "If the retailer has more than one place of business in the State, multiple locations, so that each location became a "place of busi- the place or places at which retail sales, leases, and rentals are ness," it would be impossible to identify the particular location consummated shall be the retailer's place or places where the where the local tax should be sourced. purchaser or lessee takes possession and removes from the retailer's premises the articles of tangible personal property, or Furthermore, Tax Code, §321.203(d) refers to "the place of busi- if the retailer delivers the tangible personal property to a point ness ... where the order is received," indicating that there is a designated by the purchaser or lessee, then the sales, leases, singular location where the order is received. The most reason- or rentals are consummated at the retailer's place or places of able singular location, and perhaps the only reasonable singular business from which tangible personal property is delivered to location, is where the information necessary to accept the order the purchaser or lessee." Acts 1969, 61st Leg., 2nd C.S., Ch. 1. is initially received as provided in subsection (c)(7). In the ex- Art. 1 §42. ample above, the location where the order is received would be the Texas sales office. In 1979, the Texas Legislature added a definition of "place of business of the retailer," which was previously undefined. The This example regarding Tax Code, §321.203(d) also illustrates definition required that the location be operated "for the purpose the need for additional clarity. Subsection (b)(1)(A) explicitly pro- of receiving orders." Acts 1979, 66th Legislature, Ch. 624, Art. vides that a fulfillment center is not a "place of business" simply 1, §3 (amended Article 1066c(B)(1)). The legislature also added because orders may be forwarded to the facility for fulfillment. a sourcing provision based on where the order is received, com- But subsection (b)(1)(A) does not explicitly eliminate the possibil- parable to current Tax Code, §321.203(d): ity that other locations are "places of business," such as locations where orders are accepted or otherwise completed. Subsection "If neither possession of tangible personal property is taken at (c)(7) explicitly eliminates those possibilities. There is a single nor shipment or delivery of the tangible personal property is 49 TexReg 4802 June 28, 2024 Texas Register made from the retailer's place of business within this State, the facturing plant may not be considered a 'place of business of the sale, lease, or rental is consummated at the retailer's place of retailer' unless three or more orders are received by the retailer business within the State where the order is received or if the in a calendar year at such warehouse, storage yard, or manufac- order is not received at a place of business of the retailer, at the turing plant." Acts 1979, 66th Legislature, Ch. 624, Art. 1, §3. A place of business from which the retailer's salesman who took typical warehouse, storage yard, or manufacturing plant would the order operates." almost certainly process more than three orders in a calendar year. So, this explicit threshold requirement is an additional in- Acts 1979, 66th Legislature, Ch. 624, Art. 1, §3 (amended Ar- dication that the legislature did not intend for these facilities to ticle 1066c(B)(1)(c)). Like current Tax Code, §321.203(d), the automatically be "places of business" simply because they pro- legislature referred to "the place of business ... where the order cessed order information that was previously received at other is received," contemplating a single location, and not multiple lo- locations. Instead, the legislature set a low threshold yet still ex- cations. And like the current statute, the 1979 sourcing statute pected these facilities to engage in at least some sales activities. would be unworkable if an "order" could be "received" at multiple locations where order information might be sent for processing. Mr. Gilmore commented: "This is a major revision to a state practice that has been in place for more than 50 years." CAS- The 1979 amendments were originally set to expire on August TLE commented that the amendment is "inconsistent with his 31, 1981. But, following an October 2, 1980, Interim Report of {the comptroller's} pre-2019 application of the statutory defini- the House Ways and Means Committee, the legislature made tion of 'place of business.'" The comptroller disagrees with these the 1979 amendments permanent. Acts 1981, 67th Legislature, comments. Ch. 838, §1. First, the comptroller's treatment of fulfillment warehouses goes Mr. Kroll commented that the comptroller "misremembers as far back as Comptroller's Decision No. 15,654 (1985), which the legislative history." The comptroller disagrees. During the stated (emphasis added): 1979 session of the legislature, a House Study Group analysis stated that the "bill is necessary to protect the state from pos- "But it seems to the administrative law judge that the legislature sible consequences of the pending court suits." The analysis was amending the law if not entirely in reaction to the then-pend- specifically referenced "Dunigan Tool and Supply v. Bullock" as ing case of Bullock v. Dunigan Tool & Supply Co., 588 S.W.2d one of those suits. The analysis is available at the Legislative 633 (Tex. Civ. App.-Texarkana, writ ref'd n.r.e.), at least partly in Reference Library website at https://lrl.texas.gov/scanned/hro- reaction to that case. And if that be so, then the legislature did BillAnalyses/66-0/SB582.pdf. not want warehousing and storage facilities (many of which are outside city limits) to be the places where sales were consum- In the Dunigan litigation, sales personnel took orders that were mated for local sales tax purposes unless orders were actually forwarded to pipe storage facilities where the orders were ful- received there by personnel working there, but wanted the of- filled. At the time of the 1979 legislation, the district court had fice location out of which the salesman operated to be the place ruled that the transactions should be sourced to the pipe stor- where the sales were consummated." age facilities. Bullock v. Dunigan Tool & Supply Co., 588 S.W.2d 633, 635 (Tex. Civ. App. - Austin, Sept. 6, 1979, writ ref'd CASTLE commented: "The Comptroller misreads the decision." n.r.e.). Therefore, when the 1979 House Study Group bill anal- But, the text of the decision speaks for itself: "the legislature ... ysis stated that the bill was intended to protect the state from wanted the office location out of which the salesman operated to the consequences of the Dunnigan litigation, the analysis meant be the place where the sales were consummated." that the legislation was intended to reduce the circumstances in Second, the text of former §3.334(h)(3) indicated that a fulfill- which transactions would be sourced to fulfillment warehouses, ment center is not automatically a "place of business" for local which at the time were often located in rural areas not subject to sourcing (emphasis added): local sales tax. The legislature accomplished this objective by adding a definition of "place of business" that was limited to a "(3) Consummation of sale. The following rules, taken from Tax location operated "for the purpose of receiving orders," and by Code, §321.203 and §323.203, apply to all sellers engaged in adding a provision for sourcing transactions to where the order business in this state, regardless of whether they have a place was received. Acts 1979, 66th Legislature, Ch. 624, Art. 1, §3. of business in Texas or multiple places of business in the state. Mr. Kasner in a previous rulemaking proceeding commented ... that the proposed rule reverses the effect of the Dunigan de- (B) Order received at a place of business in Texas, fulfilled at cision. He is correct, because the rule attempts to follow the a location that is not a place of business. When an order that subsequent legislation, which was intended to reverse the effect is placed over the telephone, through the Internet, or by any of the Dunigan decision. means other than in person is received by the seller at a place In the subsequent October 2, 1980, Interim Report of the House of business in Texas, and the seller fulfills the order at a loca- Ways and Means Committee, the committee considered whether tion that is not a place of business of the seller in Texas, such as to allow the recently adopted statutory definition of "place of busi- a warehouse or distribution center, the sale is consummated at ness" to expire. The committee described the consequence: the place of business at which the order for the taxable item is "The location of sale would no longer be tied to permitted outlets, received. 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 ac- (D) Order fulfilled within the state at a location that is not a place tivities necessary to subsequently effectuate the sale. of business. When an order is received by a seller at any location other than a place of business of the seller in this state, and the To be clear, under the 1979 legislation and today, a fulfillment seller fulfills the order at a location in Texas that is not a place warehouse could be and can be a "place of business." The legis- of business of the seller, then the sale is consummated at the lature set a low threshold: "A warehouse, storage yard, or manu- ADOPTED RULES June 28, 2024 49 TexReg 4803 location in Texas to which the order is shipped or delivered, or sale is consummated at the location in Texas to which the order the location where it is transferred to the purchaser." is shipped. See §3.334(h)(3)(D). For Scenario One, local sales and use tax is due based on the location where the order is (41 TexReg 260, 265) (2016) (former 34 TAC §3.334(h)(3), em- delivered." STAR Accession No. 201906015L (June 13, 2019) phasis added); (39 TexReg 9597, 9606) (2014) (former 34 TAC (emphasis added). §3.334(h)(3), emphasis added). Each of these documents, which predate the rulemaking, and Third, the consummation rules in former §3.334(h)(3) were aug- which the comptroller indexed and made available for public in- mented with an explicit provision for fulfillment centers, which spection on the State Tax Automated Research (STAR) System, the former rule referred to as "distribution centers" (emphasis is consistent with the statement in the rule that the location from added): which a product is shipped shall not be used in determining the "(2) Distribution centers, manufacturing plants, storage yards, location where the order is received by the seller. warehouses, and similar facilities. Reasons Why the Comptroller Disagrees With Commenters' (A) A distribution center, manufacturing plant, storage yard, Submissions and Proposals - The use of language from the warehouse, or similar facility operated by a seller at which the SSUTA in subsection (c)(7). seller receives three or more orders for taxable items during the In the rulemaking that adopted subsection (c))(7), the comptroller calendar year is a place of business. received comments that are discussed below. (B) If a salesperson who receives three or more orders for tax- Mr. Kroll commented: "The Texas Legislature, (the entity with able items within a calendar year is assigned to work from, or to constitutional responsibility for the state's Tax Policy), has had work at, a distribution center, manufacturing plant, storage yard, nine regular sessions to adopt the SSUTA's preferred origin warehouse, or similar facility operated by a seller, then the facil- sourcing model found in SSUTA 3.10.1. The Legislature has ity is a place of business. not acted, even in 2013 when then Senator Hegar was chairing (C) If a location that is a place of business of the seller, such the Senate Finance, Subcommittee on Fiscal Matters with Tax as a sales office, is in the same building as a distribution center, policy responsibility." manufacturing plant, storage yard, warehouse, or similar facility CASTLE similarly commented: "the Legislature, in general, re- operated by a seller, then the entire facility is a place of business jected the Comptroller's efforts to become a member and be sub- of the seller." ject to the Agreement, and, more specifically, declined to adopt (41 TexReg 260, 263) (2016) (former 34 TAC §3.334(e)(2), em- the language of 3.10.1 and change the definition of what is a phasis added); (39 TexReg 9597, 9605) (2014) (former 34 TAC 'place of business.'" §3.334(e)(2), emphasis added). Mr. Land commented: "By not adopting the agreement, the If a distribution center were automatically a "place of business" legislature was rejecting the very language the Comptroller pro- for local tax sourcing as the Plaintiff cities contend, subpara- poses to adopt..." graphs (B) and (C) would not be required - there would be no Clyde Hairston, Mayor of the City of Lancaster, commented: need for a salesperson or a sales office to "then" make the dis- "Rule changes refer to the Streamline Sales and Use Tax Agree- tribution center a "place of business" for local tax sourcing pur- ment. States participating in this agreement do not seem to have poses. similar economic issues as the State of Texas. If the intent of the Fourth, in addition to its rule, the comptroller distributed Publi- rule change is to position the state to participate in the Sales and cation 94-105, sometimes called the "Local Sales and Use Tax Use Tax Agreement, further research is needed to better support Bulletin - Guidelines for Collecting Local Sales and Use Tax," the rationale for this action." or "Tax Topics - Guidelines of Collecting Local Sales and Use And, Rolin McPhee, City Manager of the City of Longview, com- Tax" (Guidelines). These Guidelines were posted on the comp- mented: "This sentiment runs counter to the story of Texas. Yes, troller's website and indexed in the comptroller's State Tax Au- we should look to and learn from other states, but Texas should tomated Research System. Since at least 2007, the Guidelines lead and not follow. We should not implement statewide policies referred to a "location within the state that is not a place of busi- because 'everyone else is doing it.'" ness (such as a warehouse or distribution center)." E.g., STAR Accession No. 200902596L (February 2009). The Guidelines David Bristol, Mayor of the City of Prosper, had similar com- were intended as a general guide and not as a comprehensive ments. resource. But, an ordinary reader would not walk away with the Although the legislature declined to adopt the SSUTA, it would impression that a taxpayer's fulfillment center was automatically be an overstatement to suggest that the legislature specifically a "place of business" for purposes of local tax sourcing. rejected the language of a single subsection of the SSUTA. As Fifth, in 2016, the comptroller rewrote the Guidelines to be even CASTLE pointed out: "Therefore, prior to December 31, 2007, more specific regarding fulfillment centers: "The warehouse from the Legislature had to agree to the quoted 3.10.1 language, as a which the person ships those items is not a place of business, step in allowing Texas to be subject to the Agreement. But doing unless the warehouse separately qualifies as a place of busi- so would have required not only that the Legislature radically re- ness." STAR Accession No. 201606995L (June 1, 2016). vise the statutory definition of 'place of business' but make many other changes to the sections of the Tax Code addressing sales And, sixth, in 2019, a comptroller letter ruling discussed ful- and use tax." fillment centers, referring to the former rule, then in effect: "Scenario One: Taxpayer Retailer operates fulfillment centers Texas has a unique, composite consummation statute, in which in Texas that are not open to the public. ... When an order sales are sometimes sourced to where the order is received, is received at a location that is not a place of business and is sometimes sourced to where the order is fulfilled, and sometimes fulfilled in Texas at a location that is not a place of business, the sourced to where the order is delivered. Adoption of the SSUTA 49 TexReg 4804 June 28, 2024 Texas Register would require fundamental changes to this composite consum- Tax Code, §321.203 establishes a hierarchy among places mation statute, which the comptroller is not advocating or pro- of business involved in a transaction, subject to certain ex- moting. However, there is one area of overlap. Both systems ceptions. The hierarchy is described in a summary chart in use the receipt of an order as a factor in sourcing. In this area the Comptroller's Guide for Sellers. See https://comptrol- of overlap, it is entirely appropriate to consider how the SSUTA ler.texas.gov/taxes/publications/94-105.php (Local Sales and does it. Use Tax Collection - A Guide for Sellers). If an order is fulfilled from a place of business of the seller in Texas, the sale is The comptroller has considered the language in the SSUTA and consummated at that location even if the order is received at concluded that it is a reasonable and practical method of deter- another place of business in Texas (except for orders received mining where and when an order is received. And, the SSUTA in person). Conversely, an order is consummated at the place language has the added benefit of being a concept that other of business of the seller in Texas where the order is received states have acknowledged, and a concept with which many tax- only if the order was not fulfilled from a place of business in payers will already be familiar. Texas (except for orders received in person). Subsection (c) of Summary of the Factual Bases for the Rule - Subsection (c) - the comptroller rule reflects this hierarchy. Application of the consummation rules. The statutory provision in Tax Code, §321.203(b), for a seller Subsection (c) states in relevant part: with a single place of business in Texas, is simply a recogni- tion that the hierarchy is not required in those circumstances. "The following rules, taken from Tax Code, §321.203 and The outcome will be the same regardless of whether the order §323.203, apply to all sellers engaged in business in Texas, is received, fulfilled, or received and fulfilled from that place of regardless of whether they have no place of business in Texas, a business, and regardless of whether the order is placed at that single place of business in Texas, or multiple places of business location in person - the sale will be consummated at that place in Texas." of business. The language of subsection (c) tracks the language in the prior But the place of business must have a discrete connection 2014 and 2016 versions of the rule: to the sale for the sale to be consummated there. Tax Code, "The following rules, taken from Tax Code, §321.203 and §321.203(b) cannot reasonably be interpreted to mean that a §323.203, apply to all sellers engaged in business in this state, sale is consummated at the seller's single place of business in regardless of whether they have a place of business in Texas or Texas, even if that place of business did not receive the order multiple places of business in the state." from the customer, did not fulfill the order to the customer, and was not the location where the order was delivered. (41 TexReg 260, 265) (2016) (former 34 TAC §3.334(h)(3); (39 TexReg 9597, 9606) (2014) (former 34 TAC §3.334(h)(3)). Suppose a reseller has a single place of business, located in City A, that consists only of a sales office. The reseller also has Reasons Why the Comptroller Disagrees With Commenters' a fully-automated shopping website hosted by a server in City Submissions and Proposals - Subsection (c). B that receives and processes an order from a customer in City Mr. Sheets commented that the rule changes how Internet or- C. The order is then fulfilled from a third-party manufacturer's ders are sourced for retailers with a single place of business in warehouse in City D and shipped to the customer in City C. To Texas. However, the language of subsection (c) has the same make the customer in City C pay local sales tax to City A, a ju- effect as the language in the prior 2014 and 2016 versions of risdiction that had no relation to the customer or the transaction, the rule - no special treatment for vendors with a single "place of would be an unreasonable reading of the statute that the Leg- business." islature could not have intended. See, Castleman v. Internet Money Ltd., 546 S.W.3d 684, 688 (Tex. 2018) (making "logical Mr. Sheets commented that the rule conflicts with Tax Code, inferences" necessary "to avoid an absurd or nonsensical result §321.203(b), which provides: that the Legislature could not have intended."). "(b) If a retailer has only one place of business in this state, all Another rule of statutory construction is that compliance with of the retailer's retail sales of taxable items are consummated at the constitutions of this State and the United States is intended. that place of business except as provided by Subsection (e)." Government Code, §311.021(a). In the tax arena, as elsewhere, Tax Code, §321.203(b) describes the consummation principles the United States Constitution requires due process. In tax for a seller that has only one place of business in the state. In cases, the United States Supreme Court has stated that due the comptroller's view, those principles are consistent with the process "centrally concerns the fundamental fairness of govern- treatment of other sellers and do not require special treatment in mental activity." N. Carolina Dep't of Revenue v. The Kimberley the rule. Rice Kaestner 1992 Family Tr., 139 S. Ct. 2213, 2219, (2019), quoting Quill v. North Dakota, 504 U.S. 298, 312 (1992). As a matter of statutory construction, Tax Code, §321.203(b) should be viewed in the context of the statute as a whole. Castle- The "due course of law" provision of the Texas constitution man v. Internet Money Ltd., 546 S.W.3d 684, 688 (Tex. 2018). provides protections similar to, and in some instances, greater When the statute is considered as a whole, the only reasonable than the protections in the federal due process clause. Patel interpretation is that all retail sales associated with a single place v. Tex. Dep't of Licensing & Regulation, 469 S.W.3d 69, 86-87 of business are consummated at that single place of business, (Tex. 2015) ("the Texas due course of law protections in Article regardless of whether the order was placed in person there, the I, §19, for the most part, align with the protections found in the order was received there from a purchaser at another location, or Fourteenth Amendment to the United States Constitution. But, the order was fulfilled there. But, the statute cannot reasonably ... Section 19's substantive due course provisions undoubtedly mean that an order with no connection to that place of business were intended to bear at least some burden for protecting indi- would be consummated there. vidual rights that the United States Supreme Court determined were not protected by the federal Constitution."). ADOPTED RULES June 28, 2024 49 TexReg 4805 A statute violates the Texas due course of law protection if the business of the seller. But if a person performs contract tele- "statute's actual, real-world effect as applied to the challenging marketing from the person's residence, the person will not be party could not arguably be rationally related to, or is so burden- operating out of a place of business of the seller because the some as to be oppressive in light of, the governmental interest." residence is not "operated by the seller," as required by subsec- Id. at 87. tion (a)(16). The actual, real-world effect of Mr. Sheet's interpretation could Reasons Why the Comptroller Disagrees With Commenters' not arguably be rationally related to, or is so burdensome as to Submissions and Proposals - Subsection (b)(4). be oppressive to taxpayers in light of, the governmental inter- In the rulemaking that adopted subsection (b)(4), Mr. Kroll com- est in local taxation. Specifically, there is no rational connection mented that subsection (b)(4) "no longer imputes the order to or sufficient government interest to make a purchaser in City C the place of business where the employee is assigned, and that pay sales tax to City A simply because the vendor arranged its the new policy does not accurately or easily reflect the mobile business such that it had a single sales office in City A that had workforce of today." And Brian Pannell, North America Tax Di- nothing to do with the transaction. rector for Dell Inc., commented that subsection (b)(4) deviates Mr. Sheets commented that procedural due process require- from Tax Code, §321.203(d)(2) and "effectively changes sourc- ments do not apply because Tax Code, §321.203(b) is the result ing rules for salespersons who are assigned to regional places of legislative action. However, the comptroller's statutory inter- of business but do their principal work-related activities at other pretation is based on substantive due process. See, Patel, 469 locations." S.W.3d at 75. The comptroller disagrees with these comments. Tax Code, Mr. Sheets also proposes to add a "special" exception for sell- §321.203(d) does not impute an order to the location where a ers with a single place of business in Texas. The comptroller salesperson is "assigned." Instead, the statute provides that in declines to make the proposed revisions for the reasons stated certain circumstances, an order may be imputed to the "place of in the preceding paragraphs. The City of Round Rock is chal- business from which the retailer's agent or employee who took lenging the comptroller's interpretation in the pending litigation. the order operates." And, although an order may be imputed to Again, it is appropriate to state the comptroller's interpretation in a place of business of the retailer if the agent or employee oper- the rule so that those who disagree may challenge the interpre- ates out of that place of business, the statute does not mandate tation in court. that an agent or employee be assigned to, or operate out of, a place of business. If an agent or employee does not operate out Summary of the Factual Bases for the Rule - Subsection (b)(4) of a place of business, Tax Code, §321.203(d) has no applica- - Order received by a salesperson who is not at a place of busi- tion. And, it would be unreasonable to allow a vendor to source ness when the salesperson receives the order. sales to a place of business by merely "assigning" a salesperson Subsection (b)(4) provides: to that location in the absence of any physical connection. "(4) An order that is received by a salesperson who is not at a Summary of the Factual Bases for the Rule - Subsection (b)(6) place of business of the seller when the salesperson receives -small and micro-businesses. the order is treated as being received at the location from which The comptroller adds subsection (b)(6) to the former rule: the salesperson operates. Examples include orders that a sales- person receives by mail, telephone, including Voice over Internet "If a small business or a micro-business operates a single lo- Protocol and cellular phone calls, facsimile, and email while trav- cation out of which it conducts all of its business activities, the eling. The location from which the salesperson operates is the comptroller will presume that the location is a place of business principal fixed location where the salesperson conducts work-re- of the seller." lated activities. The location from which a salesperson operates The comptroller also adds following supporting definitions to sub- will be a place of business of the seller only if the location meets section (a): the definition of a 'place of business of a seller' in subsection (a)(16) of this section on its own, without regard to the orders "Independently owned and operated business--a self-controlling imputed to that location by this paragraph." entity that is not a subsidiary of another entity or otherwise sub- ject to control by another entity, and that is not publicly traded." Tax Code, §321.203(d) provides for consummation of a local sale at the place of business "from which the retailer's agent "Micro-business--a legal entity, including a corporation, partner- or employee who took the order operates." Prior to the 2020 ship, or sole proprietorship, that: amendment, the rule did not define the location from which a (A) is formed for the purpose of making a profit; salesperson operates. The third sentence of subsection (b)(4) now provides in part: "The location from which the salesperson (B) is independently owned and operated; and operates is the principal fixed location from which the salesper- (C) has not more than 20 employees." son conducts work-related activities..." A physical connection be- tween the salesperson and the place of business is a reasonable "Small business--a legal entity, including a corporation, partner- interpretation of the location from which a salesperson operates. ship, or sole proprietorship, that: The final sentence of subsection (b)(4) clarifies that the princi- (A) is formed for the purpose of making a profit; pal fixed location from which the salesperson conducts work-re- (B) is independently owned and operated; and lated activities may or may not be a place of business of the seller, depending upon whether the location meets the defini- (C) has fewer than 100 employees or less than $6 million in an- tional requirements of subsection (a)(16). For example, if an nual gross receipts." entrepreneur conducts sales operations from the entrepreneur's The definition of "independently owned and operated business" residence, the entrepreneur will be operating out of a place of is taken from Government Code, Chapter 2006, Small Busi- 49 TexReg 4806 June 28, 2024 Texas Register nesses and Rural Communities Impact Guidelines, updated in Subsection (i)(3) implements House Bill 2153, 86th Legislature, December 2017. 2019, which sets a single local use tax rate that remote sellers may elect to use. The definitions of "micro-business" and "small business" are taken from Government Code, Chapter 2006. The comptroller received no negative submissions or proposals regarding this subsection. The comptroller cannot make a location a "place of business" by rule if the statute does not allow it. But, the agency can presume Summary of the Factual Bases for the Rule - Subsection (k)(5) - that a location is a "place of business" based on indicative facts, Marketplace sales. such as a small, independent business that conducts all of its Subsection (k)(5) implemented House Bill 1525, 86th Legisla- business operations out of a single location. ture, 2019, which places local sales and use tax collection re- Reasons Why the Comptroller Disagrees With Commenters' sponsibilities on marketplace providers. Submissions and Proposals - Subsection (b)6). The comptroller received no negative submissions or proposals Mr. Sheets commented that the subsection does nothing to regarding this subsection. reduce the adverse economic effects on small and microbusi- Reasons Why the Comptroller Disagrees With Commenters' nesses. Mr. Land commented that there is no rational policy Submissions and Proposals - Public benefits and costs. reason for treating businesses differently based upon size or revenue, and Mr. Gilmore questioned the reasoning behind the Mr. Christian commented that there will be a significant fiscal im- differentiation. CASTLE commented that the presumption is plication for businesses that must invest in reprogramming soft- contrary to the law and factually unsupported. And, Mr. Chris- ware for enhanced local tax compliance, and the economic cost tian commented that the presumption should be expanded. to the public must be estimated. Mr. Gilmore, Mr. Land, Mr. Sheets, and Mr. Mays also commented that the rule will increase The comptroller responds that the agency routinely uses pre- business compliance costs. sumptions in applying statutes, and the courts have honored them. A word search of the Texas Administrative Code produces The comptroller acknowledges that there may be additional com- over 60 instances in which the comptroller rules use presump- pliance costs, since it is conceivable that the rule may cause tions. For example, the Austin Court of Appeals recognized that some vendors to realize that they are noncompliant. If the ven- "repainting is presumed to be a taxable activity unless the tax- dors come into compliance by changing from single-location re- payer affirmatively shows that the repainting meets the specific porting to multiple-location reporting, their compliance burden requisites of maintenance as set out in the rule." GATX Termi- may increase. And if vendors change from multiple-location re- nals Corp. v. Rylander, 78 S.W.3d 630, 635 (Tex. App. - Austin porting to single-location reporting, their compliance burden may 2002, no pet.); 34 TAC §3.357(b)(8). diminish. The rational policy reason for special treatment, and the size and The total net economic cost cannot be reliably estimated for revenue requirements have been mandated by the Texas Legis- reasons explained in the preamble to the proposed rule. The lature in Government Code, Chapter 2006. And, the parameters comptroller cannot determine the number of vendors that would are appropriate for the presumption. It is reasonable to assume change from single-location report to multiple-location reporting. that a small business or a micro-business that operates a single Furthermore, the cost of compliance with the statute cannot be location out of which it conducts all of its business activities will a factor in the rulemaking because compliance with the statute receive three or more orders per calendar year at that location, is required with or without the rule. making that location a place of business of the seller. It is less Reasons Why the Comptroller Disagrees With Commenters' reasonable to make that assumption if the business operates Submissions and Proposals - Revenue Effect out of more than one location, or if the business is an affiliate of another, creating the possibility that the order receipt and order The preamble to the proposed rule explained the methodology fulfillment may occur in different locations. that the comptroller used to estimate the revenue effect. Mr. Mays, Mr. Sheets, Mr. Gilmore, Mr. Land, and CASTLE all Summary of the Factual Bases for the Rule - Subsections commented that the analysis of the revenue impact on cities was (c)(2)(B)(ii), (d)(2), and (i) - Seller's obligation to collect local insufficient, but did not identify any errors in the assumptions that use tax. the agency used in the estimate. Subsection (c)(2)(B)(ii) provides that a remote seller that is re- CASTLE contends that "there must be a dollar amount specific quired to collect state use tax must also collect local use tax. to each local government or a dollar amount that can be easily Subsection (d)(2) and subsection (i) provide that a non-remote calculated from the methodology used by the Comptroller to gen- seller is responsible for collecting local use tax regardless of the erate an estimate." The comptroller responds that Government location of the seller in Texas. Physical presence in the local ju- Code, §2001.024 has never been interpreted by any agency or risdiction is no longer required. These expansions of the local any court to require individual estimates. There are over 1,700 sales tax collection responsibilities of sellers are based on the local governments in Texas with a local sales tax. In all prior United States Supreme Court decision in South Dakota v. Way- rulemakings, the comptroller has never estimated the loss of or fair, Inc., 138 S. Ct. 2080 (June 21, 2018). increase in local sales tax revenue for each local government in The comptroller received no negative submissions or proposals Texas with a local sales tax. And, the comptroller is unaware of regarding these subsections. any other agency that has made individual estimates for each local government. Summary of the Factual Bases for the Rule - Subsection (i)(3) - Single local tax option for remote sellers. Furthermore, the statute does not require the comptroller to ar- ticulate a methodology for individual estimates that the agency is not required to make. If an individual jurisdiction wants to con- ADOPTED RULES June 28, 2024 49 TexReg 4807 duct its own investigation, the preamble to the proposed rule ex- applicable where the transactions were formerly sourced, there plained the data that the jurisdiction would have to obtain, and would be a reduction in aggregate local sales tax levies and con- the preamble explained how a consultant used the data in his sequent reduction in state service charge revenues under Tax study. See, (49 TexReg 2440, 2443) (April 19, 2024). Code, §§321.503, 322.303, and 323.503. CASTLE suggests that the comptroller could develop a sample Statement of the statutory or other authority under which the rule of local governments. The comptroller responds that Govern- is adopted. ment Code, §2001.024 does not require sampling. Furthermore, Tax Code, §§111.002 (Comptroller's Rule; Compliance; Forfei- an aggregate estimate based on sample of individual jurisdic- ture), 321.306 (Comptroller's Rules), 322.203 (Comptroller's tions would do little to tell individual jurisdictions how they would Rules), and 323.306 (Comptroller's Rules) authorize the comp- be affected. troller to adopt rules to implement the tax statutes. Mr. Sheets suggested that the comptroller could have under- Sections or articles of the code affected. taken alternatives, such as making estimates for the top twenty most populated jurisdictions or making estimates for the cities Tax Code, §151.0595 (Single Local Tax Rate for Remote Sell- involved in the lawsuit. The comptroller responds that Govern- ers); Tax Code, Chapter 321, Subchapters A, B, C, D, and F; Tax ment Code, §2001.024 does not require selective, individual es- Code, Chapter 322; and Tax Code, Chapter 323 are affected. timates. The agency certifies that legal counsel has reviewed the adop- The Administrative Procedure Act only requires a fiscal note tion and found it to be a valid exercise of the agency's legal au- showing "the estimated loss or increase in revenue to the state thority. or to local governments as a result of enforcing or administering the rule." Government Code, §2001.024(a)(4)(C). The comp- Filed with the Office of the Secretary of State on June 14, 2024. troller has done that. In addition, the rulemaking process has TRD-202402641 disclosed the types of cities and taxpayers that may be most Jenny Burleson affected - cities receiving substantial tax revenues from fulfill- ment centers, such as the CASTLE group, and cities receiving Director, Tax Policy Division substantial tax revenues from taxpayers sourcing all their sales Comptroller of Public Accounts to a single location, such as the City of Round Rock. Effective date: July 4, 2024 Proposal publication date: April 19, 2024 Reasons Why the Comptroller Disagrees With Commenters' For further information, please call: (512) 475-2220 Submissions and Proposals - Local employment impact state- ment. ♦ ♦ ♦ CASTLE commented that the comptroller "fails to provide a non-conclusory explanation of why the impact cannot be deter- CHAPTER 5. FUNDS MANAGEMENT mined." The comptroller disagrees. The explanation is stated in (FISCAL AFFAIRS) the preamble of the proposed rule. SUBCHAPTER D. CLAIMS PROCESSING-- Reasons Why the Comptroller Disagrees With Commenters' Submissions and Proposals - Government growth impact state- PAYROLL ment. 34 TAC §5.46 CASTLE comments that the preamble to the proposed rule "fails The Comptroller of Public Accounts adopts amendments to to discuss in any meaningful way" the government growth state- §5.46 concerning deductions for paying membership fees to ment required by Government Code, §2001.0221. Comptroller certain state employee organizations, without changes to the Rule 11.1(d) states that an agency shall "reasonably describe" proposed text as published in the May 3, 2024, issue of the the effect on government growth. 34 TAC §11.1(d). Historically, Texas Register (49 TexReg 2985). The rule will not be repub- the reasonable descriptions published by the comptroller, as well lished. as other agencies, consist of statements of no effect without ex- planation, and statements of effect with brief explanations. The The amendments add a definition of CAPPS in new subsection comptroller followed the historical approach in this rulemaking. (a)(1) and renumber the subsequent provisions accordingly. CASTLE comments that the rule will create or eliminate a gov- The amendments to subsections (b)(1)(C) and (b)(2)(B) add a ernment program if a local government loses significant local second method of establishing, changing or cancelling a pay- sales tax revenue. The comptroller responds that the rule it- roll deduction for state employee organization membership fees. self does not create or eliminate a government program. The These provisions currently allow a state employee to establish, creation or elimination of local government programs is at the change or cancel a payroll deduction by submitting a written au- discretion of local governments. thorization form to the employer's human resource officer or pay- roll officer. The amendments to these provisions also allow a CASTLE also comments that "the Comptroller has already ad- state employee to establish, change or cancel a payroll deduc- mitted that there will be a decrease in the fees he receives." The tion by submitting an electronic authorization through CAPPS. comptroller acknowledges that to the extent that transactions previously sourced within an incorporated municipality would be The amendments to subsection (b)(2)(D) make a conforming sourced to an unincorporated area without a cumulative local tax change to require state agencies to notify the affected eligible rate levied by municipal (pursuant to a limited purpose annexa- organization if a state employee submits an electronic authoriza- tion agreement), county, and/or special purpose taxing authori- tion form through CAPPS cancelling a payroll deduction for state ties commensurate with the cumulative local tax rate levied by employee organization membership fees. the municipal, county, and/or special purpose taxing authorities 49 TexReg 4808 June 28, 2024 Texas Register Automated Certificate of eService This automated certificate of service was created by the efiling system. The filer served this document via email generated by the efiling system on the date and to the persons listed below. The rules governing certificates of service have not changed. Filers must still provide a certificate of service that complies with all applicable rules. Kyle Counce on behalf of Kyle Counce Bar No. 24082862 [email protected] Envelope ID: 106158073 Filing Code Description: Brief Requesting Oral Argument Filing Description: Hancock Cross Appellant Amended Brief Status as of 9/29/2025 7:22 AM CST Associated Case Party: City of Coppell, Texas Name BarNumber Email TimestampSubmitted Status Richard Phillips 24032833 [email protected] 9/26/2025 7:45:27 PM SENT Reed Randel 24075780 [email protected] 9/26/2025 7:45:27 PM SENT Stephen Fink 7013500 [email protected] 9/26/2025 7:45:27 PM SENT James Harris 9065400 [email protected] 9/26/2025 7:45:27 PM SENT Case Contacts Name BarNumber Email TimestampSubmitted Status Bryan Dotson 24072769 [email protected] 9/26/2025 7:45:27 PM SENT Cynthia Bourland 790343 [email protected] 9/26/2025 7:45:27 PM SENT Brandon L.King [email protected] 9/26/2025 7:45:27 PM SENT Associated Case Party: Glenn Hegar, in his official capacity as Texas Comptroller of Public Accounts Name BarNumber Email TimestampSubmitted Status Kyle Counce 24082862 [email protected] 9/26/2025 7:45:27 PM SENT