McAllen, other Texas cities hoping to benefit from new sales tax policy interpretation

It’s not in-person shopping that leaders in McAllen have been unsure about. They know consumers spend money at La Plaza Mall and other brick-and-mortar stores across the city.

But online sales have been tricky to quantify, they said, and following a U.S. Supreme Court ruling, Texas regulators are now working to tweak the interpretation of the sales tax revenue law that could allow hundreds of cities across the state like McAllen to receive some new revenues and be able to quantify online sales.

“Once these rules are implemented, you’ll have an idea,” McAllen Chamber of Commerce President Steve Ahlenius said of measuring online sales in municipalities.

“It evens the playing field,” McAllen Mayor Jim Darling said.

McAllen’s economy relies heavily on sales tax revenues, with a significant portion stemming from sales at La Plaza Mall. City officials reported a record year of sales tax revenues in 2019, and if online sales are to soon contribute another stream of sales tax revenues, Darling said it could be helpful for the city.

Texas Comptroller Glenn Hegar this week wrote in a column that he is working to change the interpretation of state sales tax policy that allows cities to receive sales tax revenues from online purchases made in their city, instead of not receiving anything at all for those purchases within the city.

“That’s why my office has proposed a change to Rule 3.334 to clarify that local sales tax is tied to the place of business from which internet orders are fulfilled or the location to which items are shipped or delivered,” Hegar wrote in a column in the Dallas Morning News.

“The tax code’s current definition makes it clear that a “place of business” is an actual location operated by the retailer for the purpose of receiving orders,” Hegar wrote. “It’s a place a customer can visit or call to place an order. This definition, or a version of it, has been in state law since before 1980. We don’t need to change the law, we just need some clarity in its interpretation.”

Online orders are typically placed through a website or software application, Hegar wrote, “neither of which meet the definition of a place of business in the way a traditional business does: You can’t call the internet. You can’t walk into the internet.”

A Supreme Court ruling in the South Dakota v. Wayfair case in 2018 gave way to this. In a 5 to 4 decision, the high court stated that states may charge tax on purchases made from out-of-state sellers, even if the seller does not have a physical presence in the state levying the tax.

Ahlenius said the “Wayfair ruling has some real implications for cities.” He said it could be an advantage for McAllen once the new rules go into effect.

But while online sales have boomed, Ahlenius cautioned: “Experts predict that by 2025, 30% of retail business will be online. Just 30%. That means 70% still being done brick and mortar stores locally.”