Court rules against Texas Comptroller in Round Rock sales tax case

The City of Round Rock has achieved a significant legal victory in the effort to protect local sales tax revenue derived from internet sales.

On Tuesday, Dec. 3, the 250th Civil District Court of Travis County issued a final judgment in a consolidated lawsuit brought by Round Rock and five other Texas cities-Coppell, Humble, DeSoto, Carrollton and Farmers Branch-challenging Texas Comptroller Glenn Hegar's administrative rule changes that sought to alter the local sourcing of sales tax revenue from online purchases. The court largely ruled in favor of the cities, permanently blocking the enforcement of key portions of the rule.

The rule changes, originally proposed and adopted by the Comptroller in 2020, would have altered the definition of where sales tax revenue is sourced for certain internet orders. The change to decades-old sourcing rules would have cost Round Rock millions of dollars per year in lost local sales tax revenue, most notably from online sales made by Round Rock-based Dell Technologies.

In 2021, Round Rock filed a lawsuit seeking to block the proposed rule changes, stating that the changes conflicted with state laws governing local sales taxes and were not adopted in compliance with the Texas Administrative Procedures Act. A temporary injunction, agreed upon shortly after the lawsuit was filed, delayed the implementation of the Comptroller's rule changes until the Court issued its decision.

Additionally, the Court ruled that the Comptroller failed to comply with procedural requirements of the Texas Administrative Procedures Act and that the rule would impair the legal rights of the plaintiff cities.

This judgment reinforces the City of Round Rock's commitment to safeguarding local revenue sources that support critical services for our residents. We are proud to have stood with our fellow cities to challenge these rule changes and ensure that local sales tax revenues are sourced fairly and in accordance with state law.

"The City of Round Rock is pleased with the court's decision, which upholds the importance of established sales tax allocation laws," said Round Rock Mayor Craig Morgan. "This ruling protects critical funding that helps us provide public safety, infrastructure and other essential services for our residents. We appreciate the Court's thorough consideration of this matter."