In October, 2019, the state of Texas implemented its new single local sales tax rate program for online and out-of-state sellers. On this episode of ZacCast, we talk to Doug Martella of GoVirtualCFO about the new program and how it will impact sales tax collections in Texas. This is ZacCast, episode five. Here we go. Happy birthday, Pat.

Hey, thanks, Dan.

Hey, we got Doug Martella-

Hey, guys

... in studio, of GoVirtualCFO.

How's everybody doing?

Hi, Doug. We're good, man, we're good.

So full disclosure, Doug used to work with Patrick and I at Hudson Oaks. Uh, he has spent years as a, uh, local government auditor, uh, worked in local government finance. Now he's the owner of GoVirtualCFO. So Doug's gonna be in studio with us as we talk about the single local tax rate, which is a new, uh, tax rate on remote sales from out-of-state, uh, online vendors. So, um, this is something that went into effect October 1st, so it has not started to show up yet on, on Texas city's sales tax data. Uh, it will in December, but it's kinda complicated, and it's definitely different. Uh, we thought it might be a good opportunity just to, just to do a quick deep dive and discuss how it's gonna affect us. So Patrick, why don't you give us a little background on that Wayfair decision, the Supreme Court ruling that actually allowed this?

Yeah, absolutely. So first, you gotta go back to 1992, where the Supreme Court decided that, uh, you couldn't tax remote sellers. Remote sellers being online, website-based sales, right? That's, that's what we all know as, like, amazon.com. Now, Amazon has started to collect, and some of the largers have started to collect, but this one is the Wayfair ruling, which is also a, a big site, where in 2018, the Supreme Court came in and said, "Okay, the world's changed," and so now states it is easy to collect sales tax as an online seller. We're gonna get into that in a little bit more detail about how actual easy it is, 'cause it, it, it is fairly easy for people to do it. But this is a, a, a ruling from the Supreme Court that says that cities and states can now collect their local taxes on remote sellers. So should be a huge boon for local cities, there's no doubt, but the question is going to be: how does each state implement it? And in Texas, we're gonna talk specifically about how Texas is implementing the Wayfair ruling.

Right. So since June, when that ruling took effect, uh, states have been kind of trying to scramble to figure out how this is gonna work, how are they going to, uh, al- allow cities and local governments to collect this sales tax, and kinda balance the ease of use on the actual taxpayer versus how is it gonna roll down to the cities, and how is the taxp- the... When I say the taxpayer, uh, what I mean is the business that's paying the taxes, but there's also the taxpayer, the actual consumer, who's the one physically paying the taxes. Um, so the solution that the state of Texas came up with is called the single local tax rate, and essentially what this is, is a calculated tax rate that any remote online seller can opt into, and then they will charge that for their local option tax across the entire state. No matter what city or county or wherever the purchase takes place or the delivery takes place, they have the opportunity to just charge a straight flat local tax rate.

And it is important to note that in the ruling from the Supreme Court, they said it is, it is legal to charge a tax rate on remote sellers as long as it do- it's not an impediment to doing business, right? Basically, what they meant is, is that small sellers need an ability or an easy ability to charge the tax without a burden of having to pay multiple different cities, right? Or multiple different local governments.

Okay, so this single local tax rate went into effect October 1st. The way that it's calculated is important to understand, because, um, the choices that were made in the formula, uh, are obvious in terms of, you know... It, it makes sense that it's easy to understand, but it also does have some effects on cities, and it has some, some implications, uh, in terms of how that money will be allocated. So basically, what the state is doing every year is they're taking the total amount of local sales taxes that are collected, and they're comparing that to the total amount of state sales taxes that are collected. And whatever that ratio is, it gets applied to the state sales tax rate, and then that is your single local tax rate. So for example, if there were $100 in local sales taxes last year and $340 in state sales taxes, and I understand these are not round numbers, but they're relatively close to the actual numbers, so -

Yeah

... uh, that ratio is about 30%. So what the state is doing is taking that 30%, multiplying it by the six-and-a-quarter sales tax rate, and then they'll round to the nearest quarter. So, uh, based on the data that we looked at, um, last year or whenever, whenever the ruling came out, uh, and the proposal was, was made, that number was about 1.84%, so it would get rounded down to 1.75%. So if you opt in to the single local tax rate, you can charge 1.75% no matter where the s- the sale occurs, and then remit that to the state.

The state will then distribute that, that money directly to the local governments based on their pro rata amount of sales tax.

Right.

Yeah.

So if, uh, if your city generates, you know, half a percent of the entire local sales tax across the state, then you will get half a percent of the single local tax rate that is paid by those remote sellers.

Yes, which is a huge advantage to the cities that are, you know, their per capita sales tax is really high, right? Or that their actual sales tax generation in the state of Texas is really high.

Right, and so this is one of the implications of this formula, is that it does benefit certain cities at the expense of others. Um, you t- you take a look at, I mean, Hudson Oaks is a high per capita sales tax city.

Mm-hmm.

Um, you take the extreme example, which we blogged about when, when this proposal-... uh, was May, which is Sunset Valley down in the Austin area. I think they have 800 people and 28 times the state average in per capita sales tax.

Yep.

It's, it's a relatively affluent, but it's also surrounded by Austin. It's surrounded by affluent areas of Austin, and they have a lot of retail shopping. So, uh, they are basically importing a ton of sales tax revenue, and as a result, they have a higher proportion per capita of the s- the state's local revenue totals. So when this local tax rate is actually divvied up, they're gonna get a higher percentage than certainly what their residents are actually purchasing. Other cities will... You know, obviously, if there's a heavy on one side, there's gonna be a light on the other. So some cities will get hurt. They will receive less than their residents are actually paying. Um, but in order to make the whole system as easy as possible to understand, that's how it works.

So just to clarify, this is an opt-in for businesses, right?

Yes. If a business does not opt in... That's a great question, Doug. Look at you.

Yeah, he's here!

If the business does not, does not opt in, they are obligated to collect and remit the actual amount that's due.

Well, let's talk about how easy that actually is, right?

Yes.

Yeah. I think it's important to talk about things like TaxJar and the APIs that are out there. I, I don't even- how much is TaxJar?

When we looked, it was 17 bucks a month-

Okay

... for access to the API. And basically, what you can do is you can give it an address, and it will tell you what the local tax rates are.

Correct. And then there are services on top of that that will actually remit your sales tax for you.

Right. They, they can, like, tie into your accounting software, and Doug-

Correct

... is an accountant, and I'm sure you've had, had to deal with some of that stuff.

Yeah, especially TaxJar can just go right into accounting software and, and distribute all that for you.

Yeah.

Yeah.

So now, I mean, yes, it does mean that you're filing several, potentially several different sales tax filings, depending on how many cities you happen to sell in in a specific month. Um-

So the threshold that was set by the state of Texas is you have to collect sales tax if you have more than $500,000 in sales in the state.

In the state.

That's correct.

Which... Yeah, so, so basically, so this is, this is where some of the arguments kind of fall flat, I think-

Mm-hmm

... about trying to not be onerous on, on these small businesses. If you don't have a physical presence in Texas and you're selling half a million dollars' worth of taxable sales remotely to Texas residents and businesses, you can probably afford 17 bucks a month for TaxJar or some other online sales platform that allows you... That, that will calculate that for you. I mean, Shopify is gonna handle that kind of stuff for you.

Mm-hmm.

Uh, if you're selling through Amazon, they... Well, they have a special arrangement, but still, if you're using any kind of platform for sales, they're gonna handle that for you.

Yeah, let's talk about that. Amazon still has a special arrangement with the state of Texas.

Despite this, yes.

Yes.

So, so the one thing that is going to affect Amazon is that, uh, about half of their sales come from Amazon proper-

Mm-hmm

... and the other half from third parties. Those third parties were not a part of the original agreement. They will be a part of this new arrangement.

Okay.

So-

So half of the Amazon sales that we don't receive today, we will actually receive in December?

Theoretically, yes.

Yes. Correct. And it's gonna take some time for everybody to collect. So what is that gonna look like in the actual sales tax file that's received by the comptroller to these local governments?

So the confidential file will not include any local tax rate, a single local tax rate in the information.

Mm-hmm.

If a, a remote seller does not opt in and they pay as normal, that will show up in your confidential report, but the single local-

As long as they meet the threshold.

Yes, as long as they meet your th- whatever, your $500 or $5,000 threshold-

Mm-hmm

... for inclusion in the report. But if you're, if you're paying the- if you're making $500,000 a year in remote sales-

Yes

... you're gonna meet that threshold.

So we have a threshold of $5,000 for cities that have a property tax, right? So if you sell $5,000 worth of goods... No, I'm sorry, let's, let's go back.

If you, if you pay 5,000 in s-

Yeah

... in sales taxes, state, local, whatever, if you-

All throughout the state, anywhere.

Right.

Yeah, you're included in a report.

Yes.

Okay. But-

If you don't have a property tax, it's $500.

Okay.

So you're talking $60,000 basically in taxable sales throughout the year. That threshold is, is actually pretty low.

So the math on that, though, so the threshold for the new remote seller is, is $500,000-

Mm-hmm

... in sales, right?

Sales.

The math on 5,000, if it's 8.25, is significantly less than 500,000-

Right

... in sales.

Yeah, so if... Yeah, so a remote seller who is obligated to pay, or to collect and remit taxes because they meet that $500,000 threshold, will show up in your confidential reports.

Do you think anybody told our legislators that's a bit of a double standard?

Well, I guess the question is, uh, if you're a local taxpayer, then you are paying to one jurisdiction or, or one set of overlapping jurisdictions-

Mm-hmm

... and people are coming to you to buy, versus if you have a small online shop in New Hampshire, and you happen to have, you know, 10 or 15 people from Texas who just go to your website and buy something, and they all happen to be in different cities-

Yeah

... then y- you'd have to be filing 10 different reports to the, to the state.

Correct.

That's the argument-

Okay

... versus just one.

Eh, it's a valid argument.

One interesting side effect of this is, if we can kind of move on to, uh, to, you know, the impl- implications, the taxpayer themself, the actual consumer buying a good that's taxable, paying a single local tax rate. In, in many cases, this rate might be lower than what you would otherwise pay, 'cause if you're in a, a, a location where that full 2% local option is capped and you're paying 1.75%, okay-

Mm

... you're making off okay. In a lot of places, especially unincorporated areas or ETJs, um, I, in particular, have saved a lot of money on sales tax goods by arguing with contractors and things like that, that at my house, I don't have any local option sales taxes. So 6.25% is all that I owe if something is taxable at my location. Um, I'm now gonna be subject to pay 1.75% on all of these items. So the state, understanding that this could be a problem, has provided a refund mechanism-... but what that means is that I now have to keep track of every single online receipt that I get and check to see if- check to see what the local tax rate was, if it's 1.75, uh, or if it's something different.

Mm-hmm.

'Cause I, I have to know if they're a local taxpayer, right? Local- a single local tax rate payer.

Correct, yes.

They could just be charging the wrong amount, which happens frequently.

Mm-hmm.

Um, I bought something this morning for some Christmas decorations, and they charged me 6.75% sales tax. It's like, that's not 1.75, that's not... It's nothing. It's just a number .

Correct. Yes, yes.

So I have to keep track of all that, and then vet it, verify it, and then submit that to the comptroller and hope to get a refund for my overpayments.

So what's interesting, though, is that a ... It is not necessarily illegal in the state of Texas for somebody to charge a tax and then not remit it to the comptroller.

In fact, businesses are permitted to collect the full local option tax, even if they don't owe it.

But they're not required to remit what they collect.

Well, the- if you... So if, say, I had a business at my house, uh, which was a seller of taxable goods-

Yes

... and my location was where those payments were processed, yes, I could charge the full 2% local option. This is my understanding.

Mm-hmm.

Because I am allowed to collect it, but I don't have a jurisdiction to, to report to.

Correct.

So if I did send it, most likely it would show up, it would get trickled down through that unidentified, uh, un- unidentified taxes-

Uh-huh

... uh, or collections line item on your, on the, like the public side of the sales tax data.

But what if you didn't send it? Aren't you just making 2% more?

Theoretically, the, you-

Yes.

Mm-hmm.

So my, my question is, the, the big issue is, if you then go and try to get a refund for the remote sales tax, and it was never remitted to the comptroller, how in the world is the comptroller going to watch and track all those sales?

It will be difficult. I guess they assume that someone from out of state probably doesn't have the time or resources to read through the entire sales tax code and figure out that that could be a potential way to make a couple extra bucks.

No, but somebody who knows how to program software could figure that out and create a quick API and know what tax didn't have to be remitted. Even if you're charging a 1.75, right, in this remote sales tax, if you charge that, you still have the opportunity to collect that on everybody and not remit it for people you wouldn't have to remit it for. So, Doug, uh-

Surely, there's got to be some sort of penalty for that.

There's not. That's, that's the interesting thing.

So let's talk about this, though, from, um, from a logistical standpoint. If you're a business and you're, uh, when you're ringing up on the point of sale, you have a line item for taxes, right? That's gonna get booked into a specific account in your GL, right?

Correct.

So I- unless you just misname it, in your accounts, it's gonna say, sa- local sales taxes.

Correct.

So you're gonna have to distinguish between legitimate local sales taxes and ones that you're keeping, right? That seems like it might be kind of difficult.

If you collect sales tax, it should go to a liability, and that liability should be paid to the, to the state. Whether you reclass that liability to revenue, that's, that's the argument there, and that's what you're getting at.

That's correct. That's what- that's exactly what I'm getting at. 'Cause when you're talking about... You know, look, when you're talking about $500,000 in sales, it's probably not that much money, right? When you're talking specifically about millions of dollars in sales or a billion, you know, for some of these remote sellers, it could be a lot of money in that 1.75% difference there, or 2%.

Giving me flashbacks of Justin Timberlake there.

So, but I, I mean, look, there's so many different ways to game this system. I'm, I'm unsure why the state decided to have a refund process to begin with. How are they ever going to show that they received that money from the per- from, from the, the person that you bought it from?

So you're concerned... This is funny. You're concerned that the state's gonna be reimbursing money that they never collected?

That is correct.

I'm concerned that there's gonna be no easy way to say, "I for sure paid the single local tax rate, and you owe me money." I think that there's gonna be a roadblock before you get to the reimbursement part.

You're gonna see it, though, on your, on your receipt, right? You're gonna see that 1.75% sales tax.

Typically, typically, they don't show you the percentage. You'll have to calculate it. And they almo- almost never break it down by, uh, s- state versus local, especially for an online seller who is not concerned with state versus local. They're just concerned about what the total tax rate I'm supposed to charge. So if you get, uh, a receipt and it shows 8% sales tax, you might be able to assume that they are a single local taxpayer, but they may just have put the wrong number in there, right? So-

No, I... Yeah, I don't disagree, but I'm trying to put myself in the comptroller's position, right? That is gonna be incredibly difficult.

It should go all the way back to the way you, you set it up with the comptroller, right? When you actually set up your, your business and your tax rate, and you'd select what you're actually paying.

Correct, yes.

That would, that would kind of mitigate that problem.

'Cause you have to opt in with the comptroller to-

You do

... to the rate.

But so when I send the comptroller a printout, and I buy a lot of stuff online, which, I mean, I just, I do. A lot of them are small purchases, but we don't buy a ton at local stores just because it's easier. Now, a lot of the stuff we buy is from Amazon, but still, I'm gonna have to save hundreds, potentially, of receipts, print them out, email them, I don't know, send them to the comptroller. They're gonna have to look at each one and say, "Oh, wait, uh, yadayada.com, let me check the files to see if they're a single local tax rate payer," and then just check off the ones that are, and give me, give me a refund. First of all, I would bet less than 100 people in the entire state are gonna file for refunds. 'Cause most people don't even know about a single local tax rate. There's been no p- there's not been no, uh, you know, broadcasting or-

I'm gonna take the over on that one, by the way, but it's not gonna be much more.

Yeah, I mean-

Yeah

... exaggerating-

Just a little bit.

Ex- I was exaggerating for-

Yes

... emphasis. But still, the average consumer, I would bet, if you walked around and asked people at Walmart or whatever, they have no idea. They don't even know what their local tax rate is. They just assume it's one and a, eight and a quarter. If you tell them, "Oh, hey, by the way-"... Are you familiar with this new single local tax rate? Their eyes are gonna glaze over, and then you tell them that there's now a refund policy. They would, they would have no idea.

Well-

And there's, there's really no incentive to, to publicize it. It's in there to say, if in case someone asks, they can say, "Oh, well, we put this in there to save, you know, to protect you as the rural or, you know, non-urban online shopper." It's, it's, it's just cover.

Uh, I agree. There's a lot of room here for somebody to make some money, from a software standpoint, right?

So when the, the single local tax rate was first publicized-

Yes

... and first actually released, that's the first thing we talked about, is, "Hmm-"

Hmm.

"I wonder if there was a service where you could forward your emails, and it would parse the email receipts, and then give you, give you a refund filing." Um, I think it's still a great idea, so if anyone listening has interest in, uh, in working on that with me, I'm happy to help, but I just don't have the time right now to, to devote to it.

Right. Yes.

Uh, but yeah, definitely some opportunity there.

I, I see it more as not like an app. I see it as like a browser extension, as like a Honey, if you ever used that in your browser.

It's a good idea. It's a good idea.

It, like, shows you what the coupons are for that.

Mm-hmm.

I think it's more of a browser extension that just identifies, is there a receipt on the screen, screenshots it, puts it away for you. But now we're getting into nuts and bolts of what this product would look like, if anybody wants to build this product.

I'd be interested to know if the state will have a list of, a list of those who have opted in, because-

I mean, I think that would-

... they could potentially go by domain-

Yeah

... and say, "Oh, well, you're on a single local tax payer, so make sure you pay attention."

Wow!

That's interesting, too.

And that's gonna be open record.

That's not something you could pay for, though.

No, but it's gonna be open record.

Yeah, it should be.

Yeah, you should be able to get that information.

So speaking of open records, let's kind of wrap up here with a couple of, uh, a couple final things. Um, the... We talked a little bit about it, this will- these single local tax rate payers will not be included in your confidential report. They will show up on the public reports, where you see current collections, future collections-

Mm-hmm

... uh, audit collections. You'll see a single local tax rate collections. So they'll be at the top level, but they won't filter down into your, um, your actual confidential data.

Okay. And we're going to then bring that in as a taxpayer in the ZacTax somehow? No?

No, it'll just show up at the top level on your collections page.

Okay.

Final thing, and this is kind of just a mechanical thing, you know, in terms of how the formula works. Um, but those of you, as local officials, who are hoping that since this formula gets rounded to the nearest quarter, hoping that maybe one day it'll go up to 2%, don't hold your breath. Uh, the way that it sta- the way that it works, it's basically guaranteed to, to fall and fall and fall each year. The actual raw collection percentage-

Mm

... most likely will just stop at 1.75, but because the state gets the full credit for these online sales, and local governments are only getting about 95% credit, as it stands right now, if we're at 1.84% collections, and we're getting less than that percent, you know, uh, less than full credit for this new tax, that just means that the state's share is gonna get bigger and bigger, which means that that percentage will drop lower and lower, and it's gonna probably stabilize at 1.75. So don't get your hopes up that we might get lucky and get 2% on this local tax rate, and you'll, you'll get a, a temporary boost.

The other comment I would make as we wrap this up is, I wouldn't... I would not think we're gonna see a significant boost in dollars to local governments with this new rule.

Uh, yeah, I wouldn't count on it being-

Yeah

... being huge.

I think most major sellers online, remote sellers, have already implemented some form of, of local sales tax at this point, and so you've already really seen the boost, uh, from this. You're not gonna see it, uh, in your December check.

I would agree with that. We've already seen a lot of Amazon going on-

Correct

... in the, in the Zac world, so I think it's already been implemented by some of those big, big companies.

Yeah, the major players have already implemented it.

Cool. Well, that is the single local tax rate. It's a lot of fun. Look out for it in your sales tax data starting next month, December 2019. Doug, thanks for joining us.

Thanks, Doug.

Thanks for having me, guys.

Yeah, awesome.

We'll see you all next time. Hey, everyone. Thanks for listening. Show notes for this episode will be available at zactcast.com/5. We'll see you next time.