Untitled Texas Attorney General Opinion ( 2004 )

ATTORNEY GENERAL OF TEXAS
GREG ABBOTT
January 15,2004
The Honorable Florence Shapiro Opinion No. GA-01 37
Chair, Education Committee
Texas State Senate Re: Whether House Bill 3534 invalidates or
P.O. Box 12068 prohibits sales tax rebate contracts between a
Austin, Texas 787 1 l-2068 municipality and certain businesses
(RQ-008%GA)
Dear Senator Shapiro:
You ask generally how House Bill 3 534,’ which amended sections 32 1.002(a)(3) and 32 1.203
of the Tax Code, affects a municipality’s contract to rebate sales taxes to a business that utilizes what
you describe as a “sales tax billing office.“* See TEX. TAXCODEANN. $9 321.002(a)(3), 321.203(1)
(Vernon Supp. 2004).
The Tax Code permits a municipality, with voter approval, to adopt a municipal sales and
use tax for retail sales that occur in the municipality. See id. 8 321.101(a)-(b) (Vernon 2002). The
state comptroller administers, collects, and enforces the tax. See id. 8 32 1.301. A sale occurs as a
taxable event “within the municipality in which the sale is consummated.” Id. fj 321.203(a) (Vernon
Supp. 2004). “A sale is consummated as provided by this section regardless of the place where
transfer of title or possession occurs.” Id. Section 321.203 further refines where a sale is
consummated under different circumstances. Id. 6 32 1.203(b)-(I).
As a general rule, a sale is consummated at a retailer’s place of business. See id. Chapter
32 1 of the Tax Code defines a “[pllace of business of the retailer” generally as “an established outlet,
office, or location operated by the retailer or the retailer’s agent or employee for the purpose of
receiving orders for taxable items and includes any location at which three or more orders are
received by the retailer during a calendar year.” Id. 5 321.002(a)(3).
The Local Government Code authorizes municipalities to refund or rebate municipal sales
taxes and otherwise expend public funds for certain economic development purposes. See, e.g., TEX.
LOC. GOV’T CODE ANN. $5 378.004(2) (Vernon Supp. 2004) (refunds for neighborhood
‘See Act of May 30,2003,78th Leg., R.S., ch. 1155, $5 l-3,2003 Tex. Gen. Laws 3255,3255.
‘Letter from Honorable Florence Shapiro, Chair, Education Committee, Texas State Senate, to Office of
Attorney General, at 1 (July 17,2003) (on file with Opinion Committee) [hereinafter Request Letter].
The Honorable Florence Shapiro - Page 2 (GA-0137)
empowerment zones); 380.002(b) ( economic development grants). Some cities have exercised this
authority by contractually granting a tax rebate to businesses they wish to attract or retain.3 Under
the law existing prior to the passage of House Bill 3534, a business could obtain the benefit of the
municipality’s sales tax rebates without necessarily having a major physical presence in the
municipality. The senate bill analysis to House Bill 3534 explained:
Currently, state law permits the point of collection for sales
tax to be at a billing office, which may be different from the point of
sale or of merchandise delivery or shipping. Recently, some cities
have been promoting the establishment of what has been called a
sales tax billing office. Under this arrangement, companies contract
with the billing office to re-invoice sales by electronically sending
billing instructions to an invoicing office staffed with computers and
one or more billing clerks who repackage invoices from the new
billing office which is shown as the new point of sale and in this way
possibly avoid a higher municipal sales tax than that of the physical
point of sale.
SENATE RESEARCH CTR., BILL ANALYSIS,Tex. H.B. 3534,78th Leg., R.S. (2003).
To address this situation, House Bill 3534 created an exclusion in the Tax Code’s defmition
of a “place of business of the retailer” in section 321.002(a)(3) by adding the following language:
An outlet, office, facility, or location that contracts with a retail or
commercial business engaged in activities to which this chapter
applies to process for that business invoices or bills of lading onto
which sales tax is added is not a “place of business of the retailer” if
the comptroller determines that the outlet, office, facility, or location
functions or exists to avoid the tax imposed by this chapter or to
rebate a portion of the tax imposed by this chapter to the contracting
business.
TEX. TAX CODE ANN. 5 321.002(a)(3) (V emon Supp. 2004). House Bill 3534 also added the
following proviso concerning the situs of a consummated sale in section 32 1.203 :
3The fiscal note to House Bill 3534 explained:
Under current law, cities may rebate local sales taxes to businesses under
the provisions of Chapter 378 and 380 of the Local Government Code. Some cities
have used this authority to enter into contracts with businesses for sales tax rebates
in order to attract or retain them to their respective city.
FISCALNOTE,Tex. H.B. 3534,7Sth Leg., R.S. (2003).
The Honorable Florence Shapiro - Page 3 (GA-0137)
If there is no place of business of the retailer because the comptroller
determines that an outlet, office, facility, or location contracts with a
retail or commercial business to process for that business invoices
or bills of lading and that the outlet, office, facility, or location
functions or exists to avoid the tax imposed by this chapter or to
rebate a portion of the tax imposed by this chapter to the contracting
business, a sale is consummated at the place ofbusiness of the retailer
from whom the outlet, office, facility, or location purchased the
taxable item for resale to the contracting business.
Id. 6 321.203(&
You refer us to a newspaper account of a city council that took “[qluick action” to enter into
a rebate contract with a business “to take advantage of a tax windfall before legislation prohibiting
the law is signed by the governor.” Robert Cadwallader, Tax loophole will benefit Mansfield, FORT
WORTH STAR-TELEGRAM, June 21, 2003.4 The article reported that House Bill 3534 “would
invalidate any arrangement that was not in effect by May 27. And any such tax deals that are in
effect by the time the law is signed by the governor can continue for two years.” Id.
You ask how House Bill 3534 applies to rebate contracts between municipalities and
businesses that utilize sales tax billing offices in light of the bill’s effective dates:
First, may . . . any cilfv that has a company with a current
presence in said city enact a contract over the next two years?
Can new contracts be established between cities and
corporations after May 27,2003, or before being signed into law by
the Governor and if so, what are the parameters for such an
agreement?
Lastly, if a longer than two-year contract between a city and
corporation was established before May 27th, will the contract
become void on September 1,2005, or be allowed to continue until
the expiration date?
Request Letter, supra note 2, at 2.
Section 3 of House Bill 3534 provides its effective dates:
(a) This Act takes effect September 1, 2003, and applies only to a
sale of a taxable item that occurs on or after that date. A sale of a
taxable item that occurs before that date is governed by the law in
4Attachment
to RequestLetter,supra note 2.
The Honorable Florence Shapiro - Page 4 (GA-0137)
effect on the date the item is sold, and that law is continued in effect
for that purpose.
(b) Notwithstanding Subsection (a) of this section, the change in law
made to Section 321.002(a)(3), Tax Code, by this Act, may not,
before September 1,2005, be applied to an outlet, office, facility, or
location that was in existence on May 27,2003.
Act of May 30,2003,78th Leg., R.S., ch. 1155, 0 3(a)-(b), 2003 Tex. Gen. Laws 3255,3255.
House Bill 3534 operates only to establish the tax situs of certain consummated sales and
prescribe a schedule for its implementation. Under House Bill 3534, the comptroller may determine
that an “outlet, office, facility, or location,” does not qualify as a “place of business of the retailer.”
TEX. TAX CODE ANN. 0 321.002(a)(3) (Vernon Supp. 2004). For an outlet, office, facility, or
location in existence on May 27,2003, House Bill 3534 does not apply until September 1,2005, and
until that date they are governed by the statutes as they read prior to amendment. For an outlet,
office, facility, or location established after May 27,2003, House Bill 3534 applies to all sales that
occur on or after September 1,2003. Consequently, after the applicable effective date, an “outlet,
office, facility, or location” may no longer qualify as a “place of business” for tax purposes if the
comptroller so determines, in which case there may not be significant sales taxes for the municipality
to rebate.
House Bill 3534 does not make particular contracts void. Compare with TEX. NAT. RES.
CODE ANN. 8 161.227 (Vernon Supp. 2004) (p roviding that certain agreements are “expressly
declared to be void”). Of course, it may make some contracts less attractive and may impact their
enforceability. Compare Centex Corp. v. Dalton, 840 S.W.2d 952,954 (Tex. 1992) (a change in the
law may be the basis for discharging a contractual duty due to impossibility of performance), with
Hufjnes v. Swor Sand & Gravel Co., Inc., 750 S.W.2d 38,40 (Tex. App.-Fort Worth 1988, no writ)
(a change in the law that merely makes performance more burdensome or less profitable may not
excuse performance). However, House Bill 3534 does not invalidate existing tax rebate contracts,
nor does it prohibit municipalities from executing new ones.
The Honorable Florence Shapiro - Page 5 (GA-0137)
SUMMARY
House Bill 3534, which amended sections 321.002(a)(3)
and 321.203 of the Tax Code, prevents certain outlets, offices,
facilities, or locations from qualifying as a “place of business of the
retailer” for municipal sales tax purposes. House Bill 3534 does not
invalidate existing municipal sales tax rebate contracts nor prohibit
municipalities and businesses from executing new contracts.
BARRY R. MCBEE
First Assistant Attorney General
DON R. ?VILLETT
Deputy Attorney General for Legal Counsel
NANCY S. FULLER
Chair, Opinion Committee
William A. Hill
Assistant Attorney General, Opinion Committee