September 14, 2020

The Honorable Chairman, House Ways and Means Committee Capital Extension, Room E2.722 P.O. Box 2910 Austin, Texas 78768-2910

Re: Comments Regarding House Ways and Means Interim Charge #3

Chairman Burrows, Members of the Committee:

There continues to be policy discussions about how the growth of e-commerce may require a reconsideration of whether local sales tax should be paid to the community that is responsible for supplying the goods, or to the local community where the purchaser resides. Whether the sales tax should be paid to the community that provides the business community the necessary services to operate, such as police, fire, streets and other infrastructure, or to the community which consumes the product. As discussed below, the same considerations that led the Legislature to choose origin-based allocation of local sales tax before e-commerce, and again as its utilization grew through the 2000’s, also support keeping the current approach. Not only is no change needed, enacting such a significant change will ultimately hurt consumers in the state. Specific areas of concern are:

1. The confusion and cost caused by changing the rules on the business community. 2. The basic transaction between seller and buyer has not changed. 3. Fulfillment centers require more expensive infrastructure and municipal services compared to retail centers and residential areas. 4. Without a convenient supply, there is no sales tax generation. 5. Changing sourcing from origin-based to destination-based is a Robin Hood for sales tax plan. 6. The Texas Miracle was built on the foundation of origin-based sales tax. We all recognize the advancements in technology and its impact on our lives, but the basic principles of the role of producers and consumers, goods and services, sellers and buyers, have not changed since the first bartering systems were created thousands of years ago. How we communicate and connect with each other has advanced, yet, the basic transaction between the seller and the buyer has not. The producer has a product that the consumer wants, and the consumer is provided multiple opportunities in which to acquire and eventually take possession of the product. E-commerce does not fundamentally change the transaction; it only makes it faster and more convenient. What some seem to think is a new economy, e-commerce, is not new at all. Extensive articles dating back 10 years or more have been describing the shifting landscape created by e-commerce, its challenges and City of Coppell Page 2

opportunities. These articles elaborate on the constant changes influencing retail and business-to-business markets, the growth of sales-related omni-channels, and the evolution of transaction techniques which today include a variety of offerings, such as social media sales, mobile applications, video concierge chat sales and artificial intelligence sales, as examples. Texas’ previous experience in attempting to make a shift from origination to destination sourcing should be a warning to those considering the change now. In 2003, the Texas Legislature enacted HB 2425 which was intended to make the destination sourcing shift. Even before final implementation of the change in HB 2425, the Legislature and the Comptroller decided not to implement the rule due to the chaos it was creating for the business community. The very businesses that the State of Texas promotes, and supports were so confused and confounded by the rules that the same Legislators who passed the statute put a stop to its implementation. The impact on the businesses community, the changing of the rules, the cost to implement, the lack of clarity in the methods of implementation, all created an unhealthy economic environment and took the business’s focus off of their primary purpose, getting a product to the consumer in the most efficient and least costly way. What is happening now due to the State Comptroller’s adopting of Rule 3.334, mirrors this experience; this time though without the guidance and input of the State Legislature, or any change to the statute specifying how sales tax is sourced. To illustrate the impact of changing sales tax sourcing from origin-based to destination-based consider what would happen if infrastructure needed to support successful super-regional malls, regional destination retail centers and downtowns did not exist, were not maintained, or worse were removed. These consumer supply facilities, many of which attract millions of visitors a year, are regional destinations requiring significant infrastructure investment and municipal services in order to serve and continually attract consumers. The location of these centers, critical to their success, is based on multiple criteria including trade area, access and municipally provided infrastructure and services. Likewise, the driver of e-commerce for the consumer and business-to-business trade, fulfillment centers, require similar, but greater support. Good transportation, good services, reasonably priced housing for employees of these centers, good schools for their children, and adequate infrastructure are all critical to the decision of where to locate. These centers cannot meet the expectations of consumers, whether individuals or businesses, without the local municipal government providing these essential elements. The fact that fulfillment centers are not traditionally viewed by consumers in the marketplace as being important to the supply chain, does not minimize their importance to providing supply; and without convenient supply, there is no sales tax. The market efficiencies of these facilities are the cornerstone of their success and have created for all consumers and businesses more choice, lower prices, and more convenient availability. They expand the reach of traditional retail outlets. These facilities, and their locations, are the bricks and mortar stores of the e-commerce revolution. Their vital role in getting products to consumers demonstrate that there is no longer a requirement that the consumer, or business, must be present in a traditional “store” or retail outlet in order to purchase and receive a product. Many communities in Texas positioned themselves to be retail hubs, or regional destinations, and others pursued and implemented plans that supported regional warehousing, distribution and fulfillment centers for various reasons, including their strategic location or influences of an international airport or seaport. Those that focused on traditional retail did not invest their sales tax dollars in the infrastructure necessary to support the heavy load associated with the intense commercial development required for fulfillment centers. In a sense, communities that focused on traditional retail outsourced their “supply” needs to others to provide the support to these producers. Penalizing communities now for choosing to support fulfillment centers that have become the retail operations of the 21st century, and rewarding those who did not, is not City of Coppell Page 3

the Texas way. Yet, changing sales tax sourcing from origin-based to destination-based will do exactly that. Changing the sourcing rules will redistribute sales tax dollars to cities that have not invested in supporting the new system for retail sales that is part of the Texas Miracle. Said another way and with no fondness, changing Texas from origin-based sourcing to destination-based sourcing is the Robin Hood plan for sales tax. Regarding infrastructure and municipal services, some argue that a UPS truck delivering an ordered product to a resident in town A has an impact on local streets and that is why destination sourcing is the correct way to allocate sales tax, as opposed to supporting the community from where the product was shipped. That is a false comparison. One UPS truck equates to the same wear and tear on a typical residential street as 600 cars. This is not the number of trips; it is the physical impact on the street itself. On the other hand, an 18- wheeler supplying product to a distribution center is the equivalent of 6,400 cars traveling on a street, over 10 times the impact of a single UPS truck. Additionally, residential streets are designed to accommodate trash trucks, delivery trucks like those used by UPS and FedEx, and even an occasional 18-wheeler. In a sense, the UPS truck has no marginal impact and may actually have a marginal benefit as it reduces trips by consumers and businesses. The street infrastructure utilized by 18-wheelers in areas that have attracted fulfillment centers, however, must be designed and constructed to handle the more intense use. Their life span, even with more robust specifications, is shorter than a residential street, meaning that they be rebuilt more frequently. As a result, municipalities that have chosen to encourage fulfillment centers spend more tax dollars on street construction and maintenance. Often overlooked is the fact that cities where fulfilment centers are located must provide more police, fire, and other municipal services, at a higher cost, for both capital investment and maintenance, than for traditional retail operations. This increased cost is due in large part to the training and equipment needing to be more specialized to serve what is a more intensive use. Others argue that e-commerce is reducing the allocation of local sales tax received by smaller communities and that changing sourcing from origin to destination-based will reverse this trend. That is simply not the case. The demise of the local hardware store to large retail centers and regional locations occurred long before e-commerce. Historical data provided by the Comptroller’s office does not support the view that e-commerce is the cause of reduced sales tax collection in smaller communities. The Comptroller’s data reflects that, as e-commerce has grown, the percentage sales tax growth in most smaller communities (represented by members of the House Ways and Means Committee) is higher than the percentage growth in population. Additionally, the per capita growth in local sales tax in smaller communities, while sales through e-commerce have increased, has also outpaced general population growth in these same communities. This is yet another example where the perception does not match the facts. The Texas Miracle was built on the premise of supporting producers in their efforts to expand their businesses in Texas in order to have access to and serve the growing Texas population. Investment in infrastructure by local municipalities provided the backbone for the Texas Miracle. Land use, building codes, investments in water, sewer and road systems were built on origin-based sourcing in the allocation of local sales tax. Changing the rules now on how sales tax is sourced destroys the foundation on which those decisions rest. To illustrate the magnitude and negative impact of changing the historical sourcing model from origination to destination, you need look no farther than the City of Coppell. The change in sales tax allocations for City of Coppell Page 4 the City, caused by the stroke of his pen through the adoption of Rule 3.334, not authorized by the Legislature, (see Charge #1 for the Committee) is expected to reduce sales tax collections in Coppell by approximately $24-26 million dollars even though only impacting approximately 10% of the nearly 29 million square feet of warehouse, distribution and fulfillment center space in the City. This fact is further confirmed by the Comptroller’s own words when he states that he knows the new rule will create “winners and losers” in sales tax sourcing. To illustrate how he knows this is that in Coppell, for example, through the years many of the businesses that will be required to change their sourcing have been audited by the State Comptroller verifying under existing statute that they were in fact collecting and allocating sales tax correctly, based on origin sourcing. The Comptroller’s preferred tax policy evidenced by the adopted rule change means that these Coppell businesses will no longer be allowed origin sourcing for many transactions. It is also important to recognize in spite of this rule change, the responsibility to provide the public services, roadway infrastructure, public safety, water, and wastewater and drainage infrastructure does not change to the business sector specifically, or the community in general. In Coppell, we can estimate the negative impact. Many cities and businesses have not even begun to measure what could be lost, much less what gain they may have. If Coppell’s expected experience is similarly anticipated in other cities that are comparably situated, whether strategically located in their respective regions or located near major aviation or seaport hubs, the results will be devastating to these cities as well. An examination of Texas cities with major airports and with similar land uses as Coppell, which is adjacent to the -Fort Worth International Airport, demonstrates potential average losses of sales tax of 21% for those cities. Nevertheless, the responsibility of Coppell and other similarly situated cities to provide the public services, roadway infrastructure, public safety, water, wastewater, and drainage infrastructure for fulfillment centers does not change. The above loss to these cities including Brownsville, San Angelo, Midland, McAllen, Lubbock, Harlingen and others, does not include the additional 20% loss in sales tax collection that all cities may experience due to the fact that over 20% of Texas’ population lives in unincorporated areas, where no municipal sales tax would be collected on destination-based sourcing. This again is another fact that the Comptroller does not acknowledge when his office states that changing sourcing will have no net effect on local sales tax collections in the State. In summary, if it ain’t broke, don’t fix it. It ain’t broke! Sincerely,

Karen Selbo Hunt, Mayor

City of Coppell 255 E. Parkway Blvd. Coppell, TX 75019 [email protected] 972-304-3618