Last week Partnership Lake Houston led efforts with chambers of commerce from across the state in opposition to HB 4072.
HB 4072 requires businesses to calculate and collect sales tax based upon the rate and location where the purchaser takes possession of the item. This overturns 50+ years of Texas tax policy and changes our state from Origin to Destination sourcing.
A small business with one location currently collects and remits the State and Local sales tax to that location. Under the proposed Legislation, that business must now calculate the correct state and local tax for each individual order at the location to which it is shipped or delivered.
While not available yet, the Texas Comptroller has stated that they will make available to businesses a rate and boundary database of all 1600+ local taxing jurisdictions in the State of Texas. Businesses will be able to access this database in order to calculate the appropriate sales tax and remittance codes for each transaction. It will be up to the business to pay for the integration and software tool of their choice that makes the database usable… if they don’t want to look up an address, one at a time.
Difficult to calculate and administer for businesses.
Current origin sourcing is inherently easier, quicker and less burdensome than Destination sourcing. Texas businesses know where they are and can easily fill out sales tax returns directing sales tax to their local taxing jurisdictions. Destination sourcing will require those companies to verify the taxing jurisdictions at the delivery location and remit separate taxes for all of those disparate locations. This imposes a new administrative burden on all Texas businesses… at a time when they are still dealing with the depressed business activity as a result of the COVID shutdown.
More than 80% of Texas businesses with a sales tax permit have a single location. The vast majority of these businesses submit an “outlet” return to the Comptroller, directing all their local sales tax to that single location. That will be a thing of the past for anyone that delivers or ships an order to a customer.
Expensive: Small businesses will have to purchase software or spend additional money to comply with the new Destination Administrative Tax imposed by this bill. National software companies offer a variety of tax compliance “solutions”, but none of them are free. Additionally, companies have to train employees and integrate these new “tax compliance” solutions into their sales regime.
Avalara, TaxCloud, Vertex, Sovos, TaxJar… these are all for-profit companies that sell business sales tax compliance services. Small businesses can expect annual costs, depending on how many transactions, of between $1,000 and $9,000 for these companies. This does not include the integration with the small businesses’ point of sale systems.
Barrier to Entry: Texas is considered one of the best places to start a small business because the overall tax and governmental administrative burden on business is relatively small. HB 4072 creates a new barrier to entry for small businesses that will now have to factor in costly tax compliance efforts for this Destination Administration Tax, while under current law… they can simply calculate and collect the rate at their single location and easily complete and remit a simple tax return for that location.
Liability: Texas businesses that collect and remit the wrong tax rate face two forms of jeopardy. If they did not collect a high enough tax rate at the delivery location, the business could face penalties and interest from the Comptroller on audit for an under the collection. However, should the business collect too much tax, based on the wrong rate at the delivery location, they could face refund requests from customers, or even legal action from the plaintiff’s bar for overcollection. This bill and its Destination Administrative Tax on businesses does not have any grace period or liability protection for Texas businesses.
Out of State: Last Session, the Legislature and the entire state, including the business community and local governments, supported HB 2153 the Remote Seller bill. This bill requires an out-of-state business that sells OVER $500k annually into Texas to collect and remit sales tax to the Comptroller. HOWEVER, the Comptroller determined it was so difficult and perhaps unconstitutional to subject those out-of-state companies to the difficult burden of knowing the sales tax rates and boundaries for all taxing jurisdictions in Texas. Therefore, Legislature allows them to only collect a single rate and submit that to the Comptroller. If destination sourcing is too difficult for larger out-of-state businesses that are selling into Texas to comply with… why are we going to impose this difficult and expensive burden on small Texas sellers.
HB 4072 is bad public policy.
It is bad for the business community and bad for Texas.
Call your STATE REPRESENTATIVE and tell them to Vote “NO” on HB 4072.
You can find your state Rep here: