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The House Committee on Ways & Means met on April 21 to hear invited and public testimony for a number of interim charges related to overseeing the implementation of bills, property tax relief, and local sales and use tax sourcing. An archive of the hearing can be found here.

This report is intended to give you an overview and highlight of the discussions on the various topics taken up. It is not a verbatim transcript of the discussions but is based upon what was audible or understandable to the observer and the desire to get details out as quickly as possible with few errors or omissions.

 

Interim Charge: Actively oversee associated rulemaking and agency actions to ensure the intended legislative outcome of: HB 2080 and SB 903, relating to taxpayers’ suits;

James Arbogast, General Counsel Texas Comptroller

  • Both HB 2080 and SB 903 were supported by the agency, the Attorney General, and taxpayer groups
  • Has not been any problem implementing them; not aware of any issues from the taxpayer side or the agency side
  • Have not heard any changes that need to be made
  • Overviews SB 903; previously the only way to bring a suit was to exhaust the administrative process
  • Has only been one request; do not expect this to be used a lot, but could be used more when taxpayers are more familiar with the process
  • Are not proposing any rules to implement this; could use rules in the future to provide clarity
  • Overviews HB 2080; previously could only bring a suit by paying under protest to bring a suit against the Comptroller or AG
  • Since September 1, have been 11 tax lawsuits and 7 are under this new procedure; 2 situations where taxpayers paid the entire liability
  • Are not anticipating writing any rules for this bill; will be up to the courts to decide if there are any issues
    • Do not anticipate any issues
  • Chair Morgan Meyer and Arbogast discuss the alternative process taxpayers can go under these bills
  • Chair Meyer – What is the status of those 7 that have been filed?
    • Are in discovery and initial procedures

 

Interim Charge: Actively oversee associated rulemaking and agency actions to ensure the intended legislative outcome of SB 248, relating to the sale of cigarettes, tobacco products, and e-cigarettes.

Michael Elwell, Texas Comptroller’s Office

  • SB 248 created multiple permits and increased the number of fines to be charged, and took away criminal negligence on a civil penalty
  • Are currently 10,520 taxpayers permitted; 441 standalone e-cigarette retailers
  • Did not issue any violations during the first two months; as of March 15, have been two issued violations
  • Permit period lasts two years; next deadline is May 2024
  • Murphy – Tracking revenue, do you sequester that?
    • Have not collected much, began January 1; should pay for the administration of it
  • Murphy – Do not pay the lump? It is prorated?
    • Will only pay for January-May and then is prorated from when you got your permit
  • Thierry – If a e-cigarette retailer have paid? Whole
    • Pay the lump amount for what they owe; at renewal time they will pay again
  • Thierry – Those that already have a traditional tobacco permit; they have a discount and pay completely separately?
    • Correct
  • Thierry – Have had taxation for e-cigarettes discussions since the 86th session; any thoughts on what would be easiest on the Comptroller’s office in terms of collections?
    • Some states do by concentration of nicotine, some by milliliter, and some by how much it sold for
    • Most of what we do is how much it sold for, but could do by milliliter if it is the will
    • Would be difficult to do by concentration of nicotine
  • Chair Meyer – Issues with issuing the permits?
    • Had an issue tying the program with tobacco through webfile; hopefully that was resolved last night
    • Chair Meyer – Asks they follow up with this issues
  • Chair Meyer – Nature of violations?
    • Did not have e-cigarette permits; enforcement division did it
  • Thierry – Penalty for repeated violations?
    • Starts at up to $1000 penalty, then $2000, then $3000, then 5-day permit suspension

 

Charlie Gagen, American Lung Association and Texas Public Health Coalition

  • E-cigarettes and vapes are being used 3 times than traditional tobacco
  • Vape shop openings are “exploding”
  • Dallas and Houston have 3x more tobacco retailers than McDonalds
  • This bill closed important loopholes, but more work to be done
  • Recommends making it an annual renewal rather than a two year renewal
  • Require every retailer face at least one compliance check annually and six-month compliance checks for violators
  • Recommends taxing e-cigarettes at 30% at the same rate as traditional tobacco products
  • Recommends an increase the tax on all tobacco products; raising all tobacco tax to $1.50 would be $625 million annually for the state
  • Recommends the use of a percentage tax
  • Guerra – How much does a typical pack of cigarettes cost? How does that compare to e-cigarettes?
    • Around $6 for a pack; one cartridge for disposable e-cigarette contains the same amount of tobacco as a pack of cigarettes
    • E-cigarettes are typically sold in one or two packs at around $6 to $12
  • Guerra and Gagen discuss the history of taxation of e-cigarettes in Texas
  • Guerra – Recommendation on the price?
    • Recommend taxing both at an equivalent rate; around 30%
  • Guerra – What different groups support vs. do not support?
    • Every public health group is opposed to e-cigarettes; have led to an explosion on youth tobacco use
  • Thierry – Theory is that if you make this identical there is no deterrent from using traditional feedback; why would we tax them the same since we do not have the evidence they are the same?
    • E-cigarettes are not a cessation device; Texas is the lowest in investing in cessation programs
    • Would like to treat all these products equally; additionally would like to raise the tax on all tobacco products
  • Thierry – 10% previously proposed tax equal the same amount taxed on traditional cigarettes?
    • No, it was lower; equal tax would be around 30%
  • Thierry – Any data on effectiveness of other states using the per milliliter taxation system?
    • Will look into that and send data your way; public health groups strongly support a percentage tax system based on price
  • Cole – Federal funding depends on retail violations being low?
    • $196 million for the grant that goes to HHSC; substance abuse and treatment block grant
    • If violations breach a certain threshold, 10% will be held back
    • Concerned since Texas has not done
  • Shine – Have been discussions about synthetic tobacco and creating a hard reduction category?
    • Do not support creation on a hard reduction category; current definition in code covers tobacco and traditional nicotine
    • All tobacco products are dangerous, and should be taxed equally
  • Chair Meyer – Supported Vice-Chair Thierry’s bill last session?
    • No, because it was a per milliliter tax, not a percentage tax
    • Would have only added 7 cents on tobacco products used by kids
    • Chair Meyer – Change isn’t always perfect; recommend you work with Thierry this upcoming session

 

Interim Charge: Study and consider methods of providing additional property tax relief, including the use of $3 billion in available American Rescue Plan Act funds that were held for future tax relief by the 87th Legislature, and other sources of revenue. Explore options to reduce business property tax burdens and options for limiting the growth of property tax bills.

Allision Mansfield, Texas Comptroller’s Office – Resource

  • Chair Meyer – Thoughts on how to address this issue with raising appraisals and values?
    • Not the Comptroller’s Office’s
    • Can discuss what is currently done in state to address property tax relief such as HB 3 and other
  • Chair Meyer – What effect would decreasing appraisal cap?
    • Would slow the growth; would have a significant cost
  • Chair Meyer – Would like you to look at a cap for commercial property
    • Can look into that
  • Shine – Looked at other states that have put caps on commercial properties, non-homesteads, and homesteads
    • Have not looked at that recently, can look into that and get back to you
  • Button – Aware of any studies for the percentage of the increase of residential property values or commercial values by region?
    • Can look at, have data we can provide at a later date
  • Chair Meyer – Expect a surplus due to strong collections?
    • Not advised
    • Chair Meyer – Think we are, will ask another resource

 

Tom Currah, Texas Comptroller’s Office – Resource

  • Certification Revenue Estimate projected in November; surplus was around $12b
  • Revenue has been running ahead of that estimate
  • Will do some renewed forecasting this summer, would not be surprised if that estimate was revised
  • Cole – Could use those funds to refund Comptroller for property tax relief purposes?
    • Would be a question for the chair
    • Cole – Will let that question go for now
  • Shine – 8.5% inflation and a federal reserve being more reactive; how would a potential recession affect those collections?
    • When we look at those numbers in the summer
    • Would depend on what type of recession that is
  • Chair Meyer – How much has revenue exceeded expectations?
    • Hard to put a number on that; sales and severance are running better than expected
  • Button – You spoke yesterday about the increases due to energy; are past last-year
  • Button notes the Prop 1 homestead exemption is on the ballot on May 7
  • Martinez-Fischer – Will get feedback from the Comptroller on international trade and recent issues on the border with commercial vehicles?
    • Forecasts consider anything that would affect the economy
    • Will be forecasting cash flow in summer; June-July
  • Martinez-Fischer – Asks the Comptroller looks into the effects on the economy due recent executive action at the border
  • Button – Speaker Phelan had a vision to work with International Relations work with Transportation to look into the border transportation impact with supply chain issues; working to schedule the next hearing
  • Noble – Mic cut out during Noble’s question
    • Would be happy to work with the committee when working through potential issues

 

Dale Craymer, Texas Taxpayer and Research Association

  • Will confine comments to General Revenue; remains unresolved in litigation whether ARPA funds can be used for property tax relief
  • Property tax in 2021 totaled $73b
  • Effective tax rates compared to other states in industrial was 7th highest and homestead 12th highest
  • Overviews SB 2 and HB 3 from 2019 and their aims to reduce tax rates
  • Have done an assessment on how those bills are performing
  • That legislation is working, should use part of the $12b surplus to add to that and continue to buy down tax rates
  • Overviews property taxation in Texas starting from 1990
  • In HB 3, the impact of rising values is driving down tax rates
  • School tax rates are continuing to decline; this would be the fourth year of that decline
  • Due to SB 2, levies are continuing to rise, but are not rising at the same level as before
  • Total property tax levy compared to the market value; effective tax rate has drifted downward since HB 3 and SB 2 have taken effect
  • In 2021, taxpayers saved approximately $6b dollars due to those pieces of legislation
    • 2021 taxpayers saved north of $4b on school taxes alone
  • While appraisals are rising, does not result in raising tax values due to SB 2
  • All homeowners are protected by a 10% appraisal cap
  • Are two propositions on the ballot next month; Prop 1 and Prop 2 that will result in property tax savings
  • What is driving up property tax bills is not the appraisal; it is the desire for more revenue at the local level
  • City of Austin traditionally offers a 10% homestead exemption and raised it to 20% last year
    • Took $8b of homeowner value off the tax roles; had to adopt a higher tax rate
    • Businesses did not benefit from the homestead exemption, but felt the higher tax rate
  • Appraisal caps do not necessarily provide meaningful relief; will continuously oppose them
  • Next biennium is likely to exceed the $12b in excess revenue; should invest in HB 3 and continue to buy down tax rates
  • Exempting inventories shifts the cost to homeowners; if you chose that avenue should do with Louisiana does and claim a credit towards business liability
  • Martinez-Fischer – Texas case on ARPA not being utilized for tax cuts?
    • Not aware of one; discussing the new West Virginia case
  • Martinez-Fischer – Every business would pay a personal property tax on items associated with the business?
    • Yes, would account for it in your rendition statement
  • Martinez-Fischer – You recommend we look at that as a more equitable way to distribute tax relief?
    • If you want to be more competitive with other states, exempting business inventories or personal properties would be a good choice
    • But would maybe be made up one way or another
  • Martinez-Fischer – Louisiana has a credit offset on their margins taxes?
    • Correct
  • Martinez-Fischer – Valero one of your members? All businesses from Valero to a
    • Yes
  • Martinez-Fischer – Seems to make more sense to levy it on a tax that everyone is paying?
    • Inventory tax is a “sore thumb” but suggest rate compression overall
    • Is hard to spend enough to make that property tax relief visible
    • Inventory exemption is another recommendation
  • Shine – Looked at any method used at the state level for compression for cities and counties?
    • SB 2 effectively creates an compression effect; is the rollback rate
  • Shine – Have you looked at the effects of exemptions?
    • Have data on school property taxes, are different databases/exemptions for certain cities
  • Shine – Those that have adopted those exemptions, spread on the cost?
    • Yes
  • Thierry – Opinion on creating an exemption on business inventory whether they provide service versus sale of goods?
    • Inventory is tangible personal property while service businesses also have personal property
  • Shine and Craymer discuss unfunded mandates on cities and counties; could be a form of compression for cities and municipalities
  • Chair Meyer – Thoughts on how much more we would need to compress?
    • Though question; future revenue estimates seem to be favorable even if there is a recession
    • In January, will have a firmer estimate; $6b would be a good target for now
  • Chair Meyer – Would a 10-cent reduction be acceptable?
    • Would be very generous
  • Chair Meyer – In a case in Northern District of Texas does allow use of ARPA funds as we see fit
    • Federal government is likely to appeal that case
  • Chair Meyer – Eliminate the inventory tax without a credit?
    • Not a desirable policy move, tax would be moved on to something else
  • Chair Meyer – Estimate of the cost of that?
    • Probably $3b on the school tax, and would be double that for businesses
  • Murphy – Talking about a one-year compression? Would be no guaranteed rates would stay the same
    • Would encourage a permanent rate reduction; Rainy Day Fund would have enough to cover
    • Chair Meyer – Agree with you it would have to be permanent
  • Murphy – Made a conscious decision to make that compression permanent in HB 3; right now things look good for us, but there are always economic fluctuations
    • Agree, the Rainy Day Fund was created to smooth over those fluctuations

 

Commissioner J.J Koch, Dallas County

  • Recommends the 88th legislature authorize counties to offer a $100,000 flat dollar homestead exemption
  • Median homeowner would see a 30% property tax relief
  • Dallas has the 6th lowest tax rate amongst counties; bond agencies consider them to be debt free
  • Renting has played a major role in overall demand increase and the number of houses available
  • Asks the legislature to review currently authorized property tax exemptions that are no longer needed
  • Warn against eliminated business personal property tax exemptions entirely; would increase the burden on residential and commercial property
  • Asks cities and counties be provided with a similar provision that state agencies are in terms of budgetary decreases
  • Button – Raising homestead exemption, have an estimate of how much savings this would result in?
    • For median households would be a 30% reduction
  • Button – What would be the total estimated cost to the county?
    • Will shift the burden to those residential households with larger households and commercial properties
    • New construction in Dallas will allow us to reach the no new revenue rate
  • Button – How did you come up with this 30%?
    • The 20% flat exemption does not appropriately address median or lower value homes
  • Button – If we do something like this for all counties, a lot of work needs to be done; any success stories from other states on this? This is a very creative idea, but need more information
    • Shine – Important for the committee to get a copy of what you are laying out; we need to look into this
    • Do not have any information on other states
    • Is not super creative, is the same exemption schools have, but it’s a bigger number
    • Should be an option for counties
  • Chair Meyer – Know how much money we have saved by adopting the no new revenue rate?
    • Saved taxpayers $54m over the past three budget cycles

 

Shandra Villanueva, Every Texan

  • Asks the committee to not use ARPA funds to buy down property tax rates
  • A number of ARPA funds have been used already, but they have not been used for strictly COVID-19 related expenses or to help families
  • Legislature has no plan to replace lost revenues and set the basic allotment in 2019
    • If this was adjusted for inflation it would be $6,713
  • How we fund Special Education and Pre-k still needs to be overhauled
  • If there is $12b in excess funds, should look into how to put that into our schools/teachers
  • Are $3b in ARPA funds; have seen enrollment declines and learning loss
  • Those ARPA funds could go towards CPS including salaries for case workers

 

Leo Lopez, Associate Commissioner for School Finance, Texas Education Agency

  • HB 3 included tax compression, school finance formula reforms, among others
  • HB 3 infused over $4.4 billion and slowed down
  • Provides an overview of tax rates each year after HB 3 implementation
  • Was a 7% reduction in Tier One tax rate in FY2020 and expanded golden pennies from 6 to 8 and created 9 copper pennies as well
  • Whichever growth results in the lowest tax rates is what the school district gets
  • Each summer, districts submit to TEA estimates of local property value growth; Plug these estimates into formulas and TEA publishes maximum compressed tax rate (MCR)
  • FY2021 had Tier One Compression from 0.93 to $0.9164
  • FY2022 Tier One State Compression moved from $0.9164 to $0.9134
  • Districts have 0.17 of discretion to levy above that; School boards can levy five pennies above their individual tier 1 rate; Anything above 5 pennies requires voter approval
  • In Tier One have gone from $1 to a projected $.084 cents in tax year 2022
  • Since 2019, total tax rate $1.10 and around $.95
  • Provides overview of tax rates since prior to HB1
  • Since HB 3, calculated around $9b in savings
  • Chair Meyer – If we want to further slow the growth, what is the annual cost per penny of compression?
    • Right now, roughly $300 million per penny
    • If bought down from $25m per year
  • Chair Meyer – How would affect recapture payment? Would reduce the amount paying recapture
    • Would reduce both

 

Mike Meyer, Texas Education Agency

  • Will provide an update on ARPA funds TEA has been tasked with administering
  • CARES, CRRSA, and ARPA appropriated ESSER funds; 90% directly to school systems
  • Overviews allowable uses of ESSER funds
  • As of April 6, all funds have been fully allocated and state discretionary funds are allocated to projects
  • $17.3 billion from these federal bills; $2.2 billion from these bills offsets the cost of the attendance hold harmless implemented during the pandemic; $15.1 billion freely available for use by LEAs
  • Currently, about $4 billion has been used and 13.3 billion remains; School systems have until September 2024, other staggered expiration dates
  • Explains programs TEA administers with these funds
  • School districts have until September of 2024 to spend some of those funds
  • Received $1.8b in total discretionary funds
  • Chair Meyer – With direct payments, what kind of guardrails do the school systems have on usage of the funds?
    • Were guardrails on the federal legislation; could be used for the purposes of other federal legislation
    • Formula funds were distributed based on poverty levels
    • ARPA had other reporting requirements
  • Chair Meyer – Did they have to report back what they used funds for?
    • Submitted drawdowns; Bills did not give latitude or guidance for information necessary to process
    • Incumbent on districts to document how they use them
    • Chair Meyer – Do they have to submit that documentation to you
    • No, we do backend monitoring, but is not for all districts
  • Chair Meyer – Have funds been used for their intended purposes, from what you’ve seen?
    • Yes

 

Elizabeth C, LBB – Resource

  • Chair Meyer – Question regarding the constitutional spending limit?
    • Would be better for my colleague

 

Vance Guinn, Texas Public Policy Foundation

  • Property taxes are a large issue in Texas; property values have been skyrocketing and there is an “affordability crisis”
  • Some are spending more on their property taxes than they are on their mortgage
  • Mortgage rates are up to 5%; will possibly lead to a boom-and-bust cycle
  • Need to find ways to make Texas more competitive
  • Have reached employment highs for the 6th straight month
  • Texas has the 6th most burdensome tax system in the state
    • Other states without an income tax rank much lower
    • Is about the excessive spending at the local level
  • SB 1336 was a good combination of HB 3 and SB 2
  • Have not seen the full effect of SB 2; need to now lower the property tax bills
    • Additionally, rent prices are going up so fast
  • Georgia, Montana, and Kentucky are looking at revenue triggers
  • Need to take the surplus revenue and give it back to the taxpayers
  • Texas needs to withstand whatever is happening in D.C.
  • Expect the surplus to be around $15b when the Comptroller revises the revenue estimate
  • Medicaid costs will probably be high; expect that cost to be $5b
    • Will leave $10b left
  • State should pay 100% of the M&O property tax and eliminate the school-paid M&O
    • Should buy down that school district M&O property tax using those surplus dollars
    • That process alone would take 20 years
    • If local cities and counties should have the same spending limit as the state
    • Plan looks at eliminating M&O property tax by 2033
  • If you remove a lot of exemptions in place, you could bring in 700,000 people into the state and the tax burden would go down
  • Martinez-Fischer – You said the state is tasked with funding schools, challenge you on that; you think the state does not excessively spend?
    • Looking at it from the taxpayer’s perspective
  • Martinez-Fischer – TPPF’s position to give ARPA funds back to the federal government? There is a reason we are flush in our state coffers
    • Have in suggested it in the past, but seems like the state will keep it
  • Martinez-Fischer – The administration you worked for gave federal funding to states as well, is that a bad idea?
    • Were under different circumstances; initial federal relief was a good idea, there was no reason to give additional funds after that
  • Martinez-Fischer and Guinn discussed federal Medicaid, required Medicaid enrollment, and the Medicaid 1115 waiver extension

 

Kevin Cavanaugh, Legislative Budget Board

  • Chair asked about new spending limit
    • New limit does not go into effect into next biennium, and any thing regarding tax relief don’t impact
    • The tax cut does not count against the spending limit but what is appropriated as a result could impact (such as funding for school districts)
  • If reimburse school districts it will potentially count against the spending limit
  • SB 2 is a good example of a tax cut not impacting the spending limit, because there was no reimbursement on revenue loss

 

Staff, Legislative Budget Board

  • Chair wants to know how specific of language is recovery language for using funds in tax relief
  • TMF – what is penalty for non-compliance?
    • Equal or lessor value paid to tax reduction
    • Does not know how it impacts other federal funds
  • TMF asked about earlier case discussion on West Virginia – has filed an appeal, would like a legal briefing at some point

 

Cyrus Reed, Lone Star Sierra Club

  • Does not think the federal funding (ARPA) should be used for tax relief, there are more investments the state could make that would benefit Texans
  • Such as matching state funds so more federal dollars could be drawn down, like the infrastructure bill that requires matching funds for water infrastructure
  • Did away with the system benefit fund, could do more to help low-income people with bills and weatherization
  • Provided handout to committee with other examples

 

Ray Head, TAPTP

  • Generally, support proposals that provide ongoing property tax relief to property owners
  • Small businesses won’t feel impacts of homestead exemption on ballot in November; however they would benefit from Abbott’s recent property tax plan which would increase small business personal property exemption to $100k
  • Another proposal from Abbott that TAPTP supports is the mandatory discounts for homeowners who pay taxes early (up to 3%)
  • Notes many taxpayers they are working with are unaware of existing resources to help educate themselves
  • Would like to see more links to help inform on taxpayers such as a link to the “Property Taxpayers’ Bill of Rights” and “Texas Property Tax Basics”

 

Cheryl Johnson, Galveston County

  • Ran for school board after seeing property taxes, appraisal creep still occurs
  • Believe Galveston school district compression is working well for tax payers
  • Provided a packet of details to committee
  • Believes there are 4 options, could reform the whole system or apply more bandages or appraisal cap to all real properties
  • Price paid system recommendation and move it to office of Comptroller
    • Could eliminate CADs if this is done
    • Could eliminate property value study
  • Could move to a sales tax, not sure how that works with local government indebtedness on bonds
  • With $3 billion in ARPA recommends paying it to back for tax relief ($272 avg per person)
  • Supports concepts of reduce and extend appraisal cap and believes it may be the easier thing to do
  • Points to her appraisal value, appraisal creed forces taxes up
  • Believes legislature can determine the “market value” as being price paid or fair cash value
  • TMF – asked her more about Comptroller office assessing values for property
    • Valuation of commercial and industrial properties is highly complex, believes it would be more efficient if they do it
    • A band aid is increasing margin of error for property taxes, within 5% of what Comptroller says those values need to be
    • Her example: Marathon valued around $1.4 billion and Valero says half their size so need to pay half the taxes
    • TMF agrees Comptroller has capability to do this, Comptroller plays larger role in setting property values
    • TMF notes he would like review her property value study; witness refers back to Middleton authoring legislation on this issue

 

David Wheaton, Texas Housers

  • Advocacy and research organization
  • Low-income renters need emergency rental assistance funds (185k households in fear of being evicted in the next month)
  • ARPA funds should in part go to help these low-income renters
  • If ARPA goes to tax relief it would disproportionally impact Texans, helping white residents and using federal funds to do it which would cause Constitutional violation to occur
  • Noble – argues property owners are charging higher rents because of rising taxes
    • Agrees with her conclusion which is why he argues only a portion of funds going to rent relief
  • Funding for rental relief is all federal funds, no Texas funds have gone into it

 

Daniel Goshen, National Wildlife Federation

  • Eligible use of ARPA funds would be for water infrastructure
  • Funds need to go to economic disadvantage communities and ARPA can be used to help draw down SRF funds
  • Match funds would allow Texas to leverage almost $2.9 billion over the next few years
  • Recommends using a small portion of the funds for water infrastructure

 

David Billings, Mayor of Fate Texas

  • School districts are the highest taxes
  • MUDs and PIDs are also taxing entities and would like to see greater transparency
  • MUD hearings should be in the taxing district itself and should know about MUD election, possibly MUD should advertise on their website
  • Need more transparency in the CAD process
  • Need to find a better way to do appraisals
  • Notes investment firms are coming in buying proprieties which increases appraised value
  • Would like to be able to invest in roads and increase community and business involvement
  • Any help they can get for infrastructure would be helpful for water, roads, etc.

 

Christy Rome, Texas School Coalition

  • Recapture climbing about $3 billion per year, would like property tax relief to be permanent and lasting
  • Sustainable relief is very important
  • Consider ever increasing costs schools are feeling in inflation and labor market
  • Agrees balance is needed as they address the number of concerns

 

Interim Charge: Evaluate the impact of shifting to destination sourcing for local sales and use tax purposes, including the benefits of reduced taxpayer confusion. Monitor the implementation of the Comptroller’s amendments to 34 Tx. Admin. Code §3.334, relating to local sales and use taxes, and the Comptroller’s Sales Tax Rate Locator. Make recommendations for legislation to improve Texas’ local sales and use tax sourcing.

Ray Langenberg, Comptroller Attorney

  • Provided a power point presentation to committee, saying if you put all the words of the tax code on a page; it cannot be read
  • Destination sourcing is already used and complexity leads to confusion
  • Local sales tax rule is also long, points out it was 8.5 pages when published in the Texas Register
  • Currently have complex system with some things based on origin, destination, and where things are fulfilled
  • Notes they have remote seller legislation, even a person with no location in Texas must still pay sales tax and the Comptroller has incorporated a simple rate into the proposed rule
  • Comptroller incorporated several legislative changes into the proposed new rule
  • Definition is narrower than “ordinary place of business”, incorporates concept of receiving orders
  • Location is not a place of business simply because it received orders
  • Agency has attempted to provide one bright line
  • Rule has been subject to local tax litigation in Round Rock and Coppell, Humble, DeSoto and Carrollton
  • Agency has agreed to postpone implementation while lawsuits is pending
  • Chair Meyer wants to know what the irreparable harm was
  • Believes cities may say it would impact revenue
  • Trying to enact statute fair and consistent as much as they can
  • Noble – Says business owners reaching out to her have perception it would change the way they do business?
    • Have a group of individuals who work through a variety of examples at the Comptroller office
  • Rodriguez – Asked for other examples of states that have switched from origin to destination?
    • Most recent have been Colorado and Washington state; Colorado phased in and Washington State did a mitigation procedure
    • There are lessons to be learned and they have been in contact with Washington
    • Points out size difference between other states and Texas which impacts some of the comparison capabilities
  • Rodriguez – Previous legislation asked the Comptroller to study this switch?
    • Does not know; want to be clear we are not overall switching from origin to destination
    • Have a mixed system; Washington and Colorado are primarily destination
  • Rodriguez notes last session a bill passed out of committee that would follow Washington and Colorado’s suit
  • Murphy – Politics are local; could give analysis on how it will affect localities?
    • Agency has not done that and would be a significant undertaking
    • If it is the will of the legislature, the agency will do that
  • Chair Meyer – Shifting to destination would help simplify in relation to sourcing
    • Yes, if done right
  • Chair Meyer – Noted the 5 cities that filed lawsuits; heard from other cities that the switch would hurt their bottom line?
    • Received a number of comments who were against the rule and more who were for the rule
  • Are 1,698 city, counties, and special districts in Texas

 

Dale Craymer, TTARA

  • Thinks from policy perspective destination sourcing is appropriate way to go but how they go about it is critical
  • Need complicated and slower way to get there, perhaps a phase in and something to address transition
  • There will be exceptions in examples, would prefer some things to be defined in statute over Comptroller rule making
  • Agrees destination sourcing is the most common and will provide references later
  • Noble – read in notes 35 states use destination sourcing

 

David Billings, Mayor of Fate Texas

  • They support the rule as proposed
  • Supports equitable distribution of sales tax

 

Claire Powell, City Manager of Lewisville

  • Commends committee for looking at impacts of change to destination sources
  • Could burden certain businesses and cause cities to no longer welcome industry
  • Added complexities and time to file with proposed language
  • Economic loss to cities risk, estimate they would lose significant tax revenue approx. $10 million annually
  • If destination is done then they recommend a phased approach
  • Ch 380 agreements could also be impacted
  • Ask for policy changes to be done in a fair and prudent manner , existing agreements drawn up under state law should continue
  • Thierry – asked about phased in approach
    • Study of phase in approach, maybe not 20 year time period but thinks a study needs to be done on best practices

 

Shannon Haas, Business Owner

  • Could negatively impact small businesses
  • Would need to learn another system and spend a lot of time to learn it and comply
  • Thierry – want % of your sales are online, 1% of sales
    • Already down 11% and wants to grow online sales
  • Thierry – Would it be helpful if the Comptroller asked about software with rate already in it, is that concern?
    • No, concern is filing the business tax

 

Annie Spillman, National Federation of Independent Business

  • Many are concerned about compliance
  • May not know they are out of compliance until they are told
  • Refers back to the one rate option for internet, if the legislature wants to move to destination sourcing then need to create a PSA and education process to explain it

 

Tony Moline, Cedar Park Chamber of Commerce

  • Express concerns of changing from origin to destination based tax
  • Tracking sales is a huge burden to small businesses
  • Over regulation and burdensome for small businesses, please keep in its current form

 

Annie Spilman, National Federation of Independent Business

  • Have about 20,000 members; majority of members do not want to change to destination sourcing
  • Small business owners are concerned about any change; are often not sure if they are in compliance
  • Reads an email from an NFIB member who is against destination sourcing
  • For remote sellers, the legislature set one rate based on where their business is located
  • If it is the will of the House to move to this, need to create educational materials and need to reach out to small businesses to ensure they are educated and in compliance

 

Tony Moline, President and CEO Cedar Park Chamber of Commerce

  • Concerned about the potential shift to destination taxation; especially for small businesses and local governments
  • Would be taking away taxes for local communities; change would be an over-regulation

 

Ellie Braxton, Coppell Chamber of Commerce

  • Chambers of commerce exist to represent the businesses in their communities
  • Oppose any changes to sales tax sourcing; would have a negative impact especially on small businesses
  • Will collaborate with the committee to better craft policy to better serve the businesses in the state
  • Would result in increased administrative burdens and would benefit companies outside of the state
  • Small business owners have not been made aware of this impending change
  • The pandemic and other international conflict has created an economic crisis for small and larger businesses
  • Will impact larger cities more than anyone
  • Reads a number of letters from small businesses who are against the sales tax sourcing change

 

Kyle Kasner, Self

  • Have been working with sales tax for forty years; currently a CPA
  • Some clients would be helped by changing to destination, but some would be hurt
  • In 2021 $11.1b collected in local taxes; 80% of taxpayers in Texas pay one rate
  • State’s tax base is 15% greater than the local tax base; 15% of the time it is outside of the city limits
    • If we go to destination sourcing, some piece of that will go outside of the city limits
  • Outside city limit Texans and businesses will get a tax break
  • Looking at a potential $1b loss if there is a switch to destination
  • Majority of states use destination, but 12 larger states use origin; including California
  •  Is a difference between an excise tax and a sales tax; we have an excise tax where the business is the one who pays it
  • Overviews online sales tax software; cost of compliance for small businesses is $500-$5000

 

A’Londa Barber, Self

  • Is a small business owner in DeSoto; works as a graphic designer for campaigns
  • Notes destination sourcing would make taxing more difficult
  • Currently sales tax calculations are simple; urges the committee to not switch to destination taxing

 

John Kroll, HMWK

  • Overviews the legislative history of destination sourcing; each time it has come up, the legislature has deemed destination sourcing too burdensome
  • At the end of the day, complexity leads to confusion

 

Ray Langenburg, Comptroller’s Office

  • Chair Meyer – Before the Comptroller adopted this rule, you had public testimony correct?
    • Correct, held those hearings about three years ago
  • Chair Meyer – Can you address the concerns we have had today?
    • Is a difference between what the rule does and what the legislature will do
    • Rule does not attempt to impose destination sourcing to anyone who it did not apply to previously, attempts to align with statue
  • Chair Meyer – Are looking
    • Do not have experience with sales tax returns
    • Destination sourcing has been done elsewhere; cannot answer the question of how
  • Chair Meyer – Will be working with the Comptroller’s office and small businesses on how to move forward with this