Overall Vote Recommendation

Yes

Principle Criteria

Free Enterprise

Property Rights

Personal Responsibility

Limited Government

Individual Liberty

Digest

HB 134 seeks to clarify and modify how the location of a retail sale is determined for local sales and use tax collection in Texas. The bill primarily targets the definitions within Section 321.002 and the sourcing rules in Section 321.203 of the Texas Tax Code. It introduces new definitions such as “active economic development agreement,” “additional municipal sales and use tax,” “affiliated group,” “principal business location,” and “small business,” with the goal of establishing a more precise framework for determining the point of tax obligation, especially for small businesses.

One of the central changes in the bill is the stipulation that for small businesses meeting specific criteria—such as having fewer than 100 employees, less than $2 million in gross receipts, and a principal business location in Texas—sales are considered consummated at the business's principal location. This contrasts with the current standard, where sales are typically sourced to where the order is received. The bill also tightens the definition of “place of business” to exclude intangible or digital spaces like websites or IP addresses and sets a minimum threshold of three orders annually at a location for it to be considered a taxable nexus.

By aligning tax sourcing rules with the operational reality of small Texas-based businesses, the bill aims to ensure a fairer tax system and reduce ambiguity around tax liability, particularly in the age of e-commerce. Additionally, the bill carves out an exception for businesses involved in active local economic development agreements as of January 1, 2025, providing a measure of protection for existing arrangements. Overall, HB 134 is intended to streamline tax collection processes, reduce disputes over jurisdiction, and support in-state small businesses.

The Committee Substitute for HB 134 introduces several significant changes to the originally filed version of the bill, expanding its scope and refining key definitions. One of the most notable revisions is the expansion of the definition of a “small business.” While the original bill limited eligibility to businesses with fewer than 20 employees and less than $500,000 in gross receipts, the substitute raises these thresholds to 100 employees and $2 million in receipts. This broadened definition allows a significantly larger number of Texas-based businesses to benefit from the bill’s simplified local tax sourcing provisions.

Another major enhancement in the substitute is the introduction of specific language concerning retailers with active economic development agreements. The substitute allows such retailers to elect to continue sourcing their local sales taxes to a single business location within a municipality, even when shipping items to other locations. These provisions, which sunset in 2030, were not present in the originally filed bill and represent a compromise designed to protect existing local revenue arrangements tied to such agreements.

Additionally, the substitute version includes more precise language around how and where an order is considered “received,” emphasizing that the location must be where all necessary order information is gathered—not merely where the transaction is completed or fulfilled. This clarification improves administrative certainty for tax purposes. Finally, while both versions include repealers of specific Tax Code provisions, the substitute integrates those changes more cohesively into the broader legislative structure, offering a more polished and comprehensive approach to reforming local sales tax sourcing rules in Texas.

Author

Morgan Meyer

Giovanni Capriglione

Candy Noble

Contact the Author

Rep. Morgan Meyer

Capitol Phone:

(512) 463-0367

Capitol Office:

CAP GN.8

E-Mail:

[email protected]

Visit Official Website

Fiscal Notes

According to the Legislative Budget Board (LBB) and the Comptroller's Office, the bill is expected to result in a reduction in state service fee revenue collected for administering local sales and use taxes. This is due to changes in where sales are sourced—shifting from locations where retailers receive orders to where purchasers receive or take possession of taxable items.

While the bill includes provisions to exempt small businesses (under 100 employees and $2 million in gross receipts) and offers a temporary sourcing option for businesses with economic development agreements (until 2030), the overall effect would likely reduce sales tax revenue in jurisdictions that currently benefit from centralized sourcing strategies. Notably, sales delivered into unincorporated areas or low-tax jurisdictions could lead to decreased tax collections because these areas often have lower or no local tax rates compared to urban centers.

The impact will not be evenly distributed. Some local jurisdictions may gain revenue as transactions are redirected to them, but others—particularly those that currently benefit from large retailers locating “sales offices” within their boundaries—may lose significant revenue. After 2030, when the protections for economic development agreements expire, municipalities relying on these arrangements are expected to experience sharp fiscal declines.

Importantly, due to limitations in available data—particularly the lack of reported shipping/delivery address information for each taxable transaction—the Comptroller is unable to provide a precise estimate of the net fiscal impact. Therefore, while a general decline in local tax collections and related state administrative fees is expected, the magnitude of this decline remains unknown.

Vote Recommendation Notes

HB 134 aims to streamline and modernize Texas’s local sales and use tax structure by adopting destination-based sourcing as the default method for determining where sales taxes are owed. This approach aligns with the broader consensus in public finance that taxes should be levied where goods and services are consumed. The bill introduces clarity by defining when and where orders are “received” and by specifying that digital infrastructure, such as websites or servers, cannot be used to determine a retailer’s tax nexus.

The bill also creates a favorable framework for small businesses by allowing those with fewer than 100 employees and less than $2 million in annual revenue to source sales to their principal business location. This provides administrative simplicity and predictability for local entrepreneurs. Additionally, transitional provisions for businesses with active economic development agreements help to ease the shift to the new model, preserving local fiscal commitments through the end of 2030.

While the Legislative Budget Board notes potential revenue shifts among jurisdictions—and some overall decline in local tax revenue—the bill mitigates these impacts by excluding small businesses and temporarily preserving sourcing rules for development-incentivized retailers. Although exact fiscal outcomes are hard to project due to limited data, the bill’s policy rationale, clarity, and incremental implementation justify why Texas Policy Research recommends that lawmakers vote YES on HB 134.

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