• Texas: State Comptroller Cracks Down on Retailers that Take Advantage of Municipalities with Lower Tax Rates
  • July 29, 2013
  • Law Firm: McDonald Hopkins LLC - Cleveland Office
  • The Texas Legislature passed legislation that gives the Texas Comptroller of Public Accounts (the Comptroller) the ability to scrutinize retailers’ proclaimed places of business in an effort to weed out potential schemes aiming to take advantage of lower tax rates in certain municipalities. The law was enacted on June 14, 2013 and will go into effect on September 1, 2013. The law narrows the definition of a “place of business of a retailer” to exclude any locations where the retailer does not conduct significant business. The law gives the Comptroller the ability to exclude a place of business if it determines that the place of business is being used solely to take advantage of a lower municipal tax rate. The Texas Legislature created this law in response to schemes by retailers who contracted with offices in jurisdictions with low sales tax rates to reprocess invoices, purchase orders and other similar records.

    To combat these schemes, the law provides criteria that the Comptroller will use in making its determinations of whether particular locations qualify as legitimate “places of business.” The criteria include:

    1. Whether the location is operated for the purpose of receiving orders for taxable items
    2. Whether the location receives three or more orders each calendar year
    3. Whether the location is operated solely for the purpose of avoiding sales tax legally due, or to rebate a portion of sales tax due

    The law additionally provides that the location will not be considered to being used solely for tax avoidance purposes if it “provides significant business services, beyond processing invoices, to the contracting business, including logistics management, purchasing, inventory control or other vital business services.” Furthermore, the law excludes kiosks as places of business.

    Kiosks are defined as small stand-alone structures that:

    1. Are used solely to display merchandise or submit orders from a data entry device
    2. Are located entirely within a location that is the business of another retailer (i.e., a shopping mall)
    3. Do not have taxable items immediately available for delivery to the customer

    This law reflects the over-arching goal to keep businesses honest in claiming their tax liabilities. While this law does not make it illegal for companies to honestly set up shop in municipalities with lower tax rates in order to take advantage of lower tax rates, it does address certain questionable practices associated with classifying the location of sales.