Tax & Accounting Blog

Texas Special District Tax Falls Victim to Its Own Complexity

Blog, Indirect Tax, ONESOURCE, Sales and Use Tax May 23, 2016

As comedian John Oliver recently observed (note: clip contains explicit language), America has an astounding number of special taxing jurisdictions (also known as special districts). There are about 40,000 such districts, which are used to fund things like fire departments, libraries, and mass-transit systems. Special districts have boundaries that don’t conform to existing geopolitical borders, and so they may include portions of multiple cities or counties.

Texas, in particular, is enamored of special districts. The Lone Star State has 277 special districts, which often combine to form overlapping layers of taxation. As if that weren’t complicated enough, these cartographic Venn diagrams are also subject to a state law  that says the maximum combined county, city, and district sales tax rate may not exceed 2% in any location.

It’s against this backdrop that Texas Attorney General Opinion No. KP-0084 was recently issued. The Montgomery County Emergency Services District #7 (“ESD”) requested the opinion in order to resolve the following problem.

In May 2015, the ESD held an election to levy a new sales tax in parts of its territory. Per Texas law, the election order excluded two areas where, if enacted, the combined local rate would exceed 2%. However, the order also inadvertently included a third area where the 2% cap would be exceeded. So when the tax did indeed pass, the Texas Comptroller refused to levy it. The ESD thought it should still be able to levy it in areas where it wouldn’t exceed the max, but Attorney General Ken Paxton definitively laid that idea to rest, opining that the entire tax was invalid.

This episode illustrates the risk of local governments relying so heavily on special districts that they essentially lose track of what taxes are being levied where. As the Board of the Montgomery County ESD learned, such “ghost districts” can come back to haunt you.