AGENDA CAPTION:
Title
Consider approval of Resolution 2021-48R, approving amendment number one to the chapter 380 Economic Development Incentive agreement with Best Buy Texas.com, LLC that provided certain incentives for said company to locate and operate an internet sales operations center in the city for the purpose of conforming the agreement to changes in law regarding the sourcing of sales taxes on internet sales; authorizing the City Manager, or his designee, to execute said amendment; and declaring an effective date.
Body
Meeting date: March 2, 2021
Department: City Manager’s Office
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Fiscal Note:
Prior Council Action: Resolution approving a Chapter 380 economic development incentive agreement - August 16, 2016.
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Background Information:
In August 2016, the City of San Marcos approved a Chapter 380 Economic Development Incentive Agreement with Best Buy Texas.com, LLC to locate and operate an internet sales operations center in the City. The agreement included incentives for the company in the form of annual refunds of 50 percent of ad valorem taxes from personal property and 75 percent of sales tax revenues generated over the life of the agreement. At the time of entering into the agreement, sales tax collection in Texas occurred at the point of sale instead of the destination of the product purchased.
On May 31, 2020, the Texas Comptroller adopted an interpretation change to Rule 3.334 that modifies the sourcing of tax collection for internet sales in the state. Vendors will no longer collect sales tax based on the point of sale (seller’s place of business) but rather the destination of the taxable good purchased (buyer’s location). The effective date for the rule change for entities with existing Chapter 380 agreements is October 1, 2021 in order to allow jurisdictions with Chapter 380 agreements to absorb revenue impact. The City factored these changes into the FY21 and FY22 budget assumptions.
Since adoption of the rule change, Best Buy Texas.com, LLC was notified by the Comptroller of Public Accounts of an audit of all sales since the beginning of the Chapter 380 Economic Development Incentive agreement with the City. Best Buy Texas.com, LLC, the City and the Comptroller negotiated a settlement that the sourcing change would instead take effect on January 1, 2021, earlier than the October 1, 2021 anticipated date when the FY21 budget was adopted.
The City projected to receive at least $3.4 Million in revenue in FY21 as a result of the Chapter 380 agreement. Best Buy Texas.com, LLC has agreed to ensure the City receives the full $3.4 Million in anticipated revenue so to avoid adverse impacts to the City’s adopted FY21 budget as a direct result of the earlier sourcing change included in the settlement agreement.
This proposed amendment allows the City to pay the remaining funds owed to Best Buy Texas.com, LLC minus the amount they are covering to meet our estimated revenue projections from this revenue source and also allows the Chapter 380 agreement to be reinstated, upon mutual agreement of the parties, if the law or legal interpretations change to allow for sourcing of sales tax to occur at the point of sale again sometime in the future.
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Recommendation:
Staff recommends approval.