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GG 31
Improve State and Local Sales Tax Collections


The U.S. Constitution prevents state governments from taxing goods exported to foreign countries. Texas is the only state bordering Mexico that allows foreign buyers to seek a sales tax rebate while taking possession of the property in this country, by having a customs broker certify that the goods are leaving the country. Comptroller investigations have found that customs brokers often provide such certification without any verification and that merchants receive many fraudulent sales receipts presented for rebates. In addition, individuals often attempt to receive rebates for items actually delivered to homes in Texas. Other states require proof that the retailer or a certified common carrier has actually shipped items out of the country. Texas should adopt this practice. Every one percent fee that goes to a customs broker in a fraudulent transaction is a one percent sales tax loss to a city. Border taxpayers are having to make up the difference for fraud committed in their own communities. Local sales tax collections would increase by almost $35 million over the next five years in Border counties.


The U.S. Constitution prevents state governments from taxing goods exported to foreign countries.[1] As a result, Texas and other states must grant sales tax exemptions or rebates on goods sold in the U.S. and shipped or taken to foreign countries. The Comptroller’s office estimates these exemptions totaled $69 million in Texas in 2001, including $52.5 million in state sales tax and $16.5 million in local sales taxes.[2]

Under Texas law, foreign buyers in Texas can receive a sales tax refund (or be exempted from taxation, in the case of maquiladoras) by providing:

  • proof that the item was shipped out by the retailer through a federally licensed freight company;
  • documentation by a customs broker;
  • import documents from a foreign country;
  • export documents from a federally licensed freight company showing that, although the property was received in Texas, it was shipped out of state; or
  • a maquiladora exemption certificate.[3]

Texas’ sales tax was enacted in 1961. Since then, the history of sales tax rebates for foreign retail trade has had three themes and an obvious pattern: allegations of fraud and loss of sales tax revenue; efforts to tighten enforcement and reduce fraud; and calls from border retailers and Mexican nationals to reduce bureaucratic restrictions and paperwork to increase international trade.

The original Texas sales tax law exempted exports of tangible personal property when the retailer delivered the goods to a forwarding agent for delivery outside the state. Goods had to be shipped out of state, otherwise tax was due; buyers could not take delivery. In 1969, the Comptroller’s rules established that a forwarding agent, common carrier or retailer had to ship the goods out of state.

The 1970s saw numerous complaints that this rule was too strict. U.S. customs officials had discontinued the practice of verifying exports and purchasers found it difficult to obtain import documentation from Mexican authorities. The Comptroller’s office created a “proof of export” form that could be certified by forwarding agents. The comptroller was given no statutory authority over forwarding agents, however, and no federal agency oversaw their work.

By 1985, city officials began complaining that freight forwarders were fraudulently certifying exports, costing cities sales tax revenue. In response, the Legislature amended the sales tax law to replace verification by freight forwarders with certification by private firms called customs brokers.[4] The belief at the time was that customs brokers, who are licensed by the federal government, would provide verification that goods were actually leaving the country.

By the early 1990s, local officials told the Comptroller’s office that customs brokers were not verifying that goods sold as exports to Mexico were indeed leaving Texas. The 1993 Legislature passed House Bill 2413, which attempted to combat fraud by requiring customs brokers to be licensed by the Comptroller’s office. Customs brokers receive Comptroller stamps that they attach to documentation of export forms provided by the Comptroller’s office (manifiestos). In addition, the agency began allowing customs brokers to refund taxes directly to buyers and, in turn, submit requests for rebates to retailers. Further complaints led to passage of a 1999 law requiring a waiting period for sales tax rebates of 24 hours in the Border area and seven days away from the Border. This was intended to allow enough time for the goods to be exported before the buyer applied for a rebate.

The system, up close

Comptroller Enforcement and e-Texas staff members visited four customs brokers in El Paso near the international bridges across the Rio Grande. Typically, these businesses include or are adjacent to currency exchanges (casas de cambio), money transfer services, income tax filing and refund operations and small loan and pawn companies.

In each instance, Comptroller personnel asked employees to explain how their operation works. Custom’s broker employees indicated that they first ask to see some form of identification, such as a Mexican passport, border crossing card (mica), Mexican voter card (carta de elector) or a new “laser” visa. If the person produces this identification and a sales receipt, the employee prepares a document saying that the goods have been exported over a particular bridge, attaches the Comptroller’s stamp and charges a fee for the service.

These fees are based on the dollar volume of the receipt and typically equal 1 percent of value, with a $2 minimum fee. (The 1 percent fee, incidentally, equals the 1 percent sales tax levied by the city of El Paso.) Employees in most offices said they round up to the next dollar. Therefore, the broker would charge $4 to make the buyer of a $350 purchase eligible for a refund of 8.25 percent or $28.88. In most cases, the buyer goes to the retailer for a sales tax refund after waiting 24 hours. In some locations in other cities, however, the customs broker “fronts” the money to the buyer and then collects the refund from the store owner.

In each instance, e-Texas asked broker employees if they check to see whether the goods are actually exported, as required. None did. In three cases, employees said flatly they do not verify whether the goods have indeed left the country; one person said that, if he had extra employees available, they would accompany the person to the bridge, but that no one was available that day to do so.

U.S. Customs will not allow brokers to work on the bridges. As a result, some customs brokers argue that the rule requiring them to actually see the merchandise leave is unworkable.[5]

Similar results were found in site visits in Laredo. In Laredo, the cost of a stamped manifiesto varies widely, with prices ranging from a $5 minimum at the mall on the north side of town down to 50 cents at small shops near the bridges. Again, customs brokers do not verify that goods actually leave the state. In fact, one employee of a customs broker provided a copy of a blank export certificate with the name of a particular bridge preprinted on the form.

A visit to an outlet mall in San Marcos provided another example. There, the customs broker provides refunds to foreign buyers so that they do not have to wait seven days to claim their refunds. Buyers assign their receipts to brokers who in turn collect the sales tax refund. Buyers receive their refunds on the same day, with the customs broker collecting from the retailer later.

A broken system

Comptroller Enforcement and e-Texas staff conducted site visits in El Paso, Laredo, Hidalgo, McAllen, Brownsville and San Marcos during 2002. They interviewed customs brokers, small retailers and large national retailers. They found a system riddled with fraud.

In theory, customs brokers verify that merchandise has left the country. In fact, they do not verify that goods are exported or even that they exist. Only licensed customs brokers or their employees are supposed to sell stamped manifiestos. But unlicensed “brokers” operate by buying the stamps from licensed brokers.

The rebate is intended to encourage legitimate Mexican shoppers to patronize Texas businesses. Both U.S. and Mexican citizens, however, are involved in schemes to turn in other people’s receipts. Rebates on goods are supposed to go to the person that bought them; many, however, obtain rebates on items they did not even purchase. Rebates supposedly are available only for goods exported out of the U.S. but buyers often pursue rebates for items delivered inside the country.

Enforcement staff and El Paso retailers described incidents in which brokers have colluded with store employees to create fraudulent refunds.[6] Retailers also said that customs brokers sometimes discourage shoppers from going to stores that have rejected manifiestos based on suspect receipts. Retail employees that e-Texas spoke with estimated that fully half of the manifiestos they receive are suspect.

Problems were uncovered in site visits to McAllen and Brownsville as well. During site visits by e-Texas staff, Internal Revenue System (IRS) agents contacted the Comptroller’s field offices with information about a series of large furniture purchases totaling $145,000 made over a few weeks by a person the IRS suspected of money laundering. The furniture was delivered to a Mission, Texas address and an individual attempted to obtain more than $11,000 in tax rebates from the store, claiming Mexican citizenship, despite the fact the furniture was delivered in Texas. Some brokers in McAllen said that manifiestos with attached Comptroller stamps are available over the border in Reynosa; others said that a business in Monterey purchases sales receipts from people who travel in Texas.

In Hidalgo, one custom broker whose license had been suspended by the Comptroller’s office still displayed a sign offering manifiestos. When approached, employees said they sold manifiestos and had blank forms on hand. After Enforcement personnel identified themselves, they back peddled, saying that the individual who actually sold the manifiestos was not there. Some “brokers” in Hidalgo said they buy the stamps for 25 cents apiece from a broker who gets them from the Comptroller’s office, suggesting that they were neither licensed brokers nor employees of one.

In Brownsville, employees of a major retailer said they rebate more than $1,000 per day in sales taxes; at peak times, the amount can escalate to $5,000 per day. They described incidents in which individuals bring in manifiestos and receipts worth large amounts. The receipts, however, obviously were collected from nearby dumpsters or off the ground in the parking lot; some had store employees’ names on them, as required when employees purchase items where they work. As in El Paso, retailer’s employees interviewed in Brownsville said they suspect that many of the receipts they see are not legitimate.

At one point, a small boy approached an e-Texas staff member on an international bridge between Matamoros and Brownsville. He asked the employee if he would sell any sales tax receipts he had, presumably to use in obtaining fraudulent sales tax rebates.

Widespread fraud

The Comptroller’s office currently licenses about 230 active customs brokers, up from 169 in 1996. The number of stamps distributed to customs brokers has risen from 2 million per year in 1996 to 2.8 million in 2001. Since Comptroller investigations began in 1996, the agency has suspended the licenses of 55 brokers, mostly for failing to verify that merchandise has left the country.[7]

The existence of widespread fraud has been confirmed by sting operations. A 1996 Comptroller investigation found that customs brokers did not verify that merchandise had left the country, or even that the merchandise existed, in 95 percent of cases examined.

A 1996 Comptroller “sting” operation involved 169 licensed customs brokers. Comptroller staff entered their offices with Sears receipts and asked for export certificates. The majority of brokers asked for a mica card or Mexican passport; 18, however, did not even ask for identification. Their licenses were suspended.[8]

Investigations in March 2000 focused on 23 brokers. Most asked for some form of identification, but none inquired about the actual location of the merchandise. Ten brokers received suspensions after they provided certificates to investigators who presented receipts for nonexistent goods and fake mica cards purchased at flea markets that bore pictures of people not even vaguely resembling the Enforcement agents. Thirteen asked for passports and refused to provide the certification when none was produced, although none even asked about the location of the merchandise.[9]

Comptroller investigations in 2001 found a similar pattern. Comptroller staff investigated brokers in Brownsville, McAllen, San Antonio, San Marcos and El Paso. Comptroller staff presented sales receipts and mica cards and asked for an export certificate. Of 31 brokers investigated, 16 were found in violation for not verifying that the goods were exported.[10] In McAllen, five of seven customs brokers provided Comptroller stamps without verifying that the goods were exported. In Brownsville, all five of a group of brokers were found in violation. Similar results were seen in the other cities.[11]

The Legislature has attempted to solve some of these problems in recent years. As noted above, the 1999 Legislature required that sales tax refunds cannot be issued until 24 hours had passed in Border counties and seven days in other counties, to allow time for goods to be exported before the buyer receives a refund.[12] The Legislature also has considered several bills in recent years to increase the amount of documentation required by Mexican nationals.[13]

Opinions about the effect of the sales tax rebate system are divided. Some retailers say that rebates are vital to retail trade. Others question the fairness of the system to U.S. citizens and local communities that need tax revenue to fund basic services. According to a Comptroller survey of 40 retailers from El Paso to Brownsville, 60 percent think the system is unfair to locals who pay the sales tax.[14] Elected officials also complain that Border cities are losing sales tax revenue.[15]

Other states fight fraud

Comptroller staff raised the issue of sales tax rebates for foreign buyers at a recent meeting of the Border Caucus of the National Tax Administrators organization. The discussion revealed that Texas is the only state bordering Mexico using a system of rebates involving customs brokers.[16] Other states require proof that the items were shipped out of the state and do not allow for an exemption or rebate if the buyer takes possession of the property in the U.S.

For example, California allows an exemption only if the items are shipped out of state by the seller or a certified common carrier. According to the California State Board of Equalization, if a foreign buyer takes physical possession of the goods in California, he or she is taxed.[17] Likewise, Arizona and New Mexico do not allow a refund if the buyer accepts the goods personally.[18]

States along the Canadian border have similar issues with tax rebates.[19] In Washington, buyers from surrounding states or provinces may qualify for a sales tax exemption if their states have signed a reciprocal agreement. Retailers have forms and buyers do not have to pay the tax if they can provide an out-of-state driver’s license. According to Washington state officials, some fraud problems arise with persons such as students and retirees who use their out-of-state licenses to qualify for exemptions yet live in the state for a large part of the year.[20]

Washington state and Alberta have a reciprocal agreement in place so that a seller can use an Alberta driver’s license to establish the person’s residency; he or she then does not have to pay the tax. Buyers from British Columbia, however, are required to have the goods shipped to an out-of-state address to qualify for a tax exemption because the province has not made an agreement with Washington.

Michigan and New York both require that a foreign buyer taking possession of the goods in this country must be taxed. Instead, the seller or a certified customs broker must ship the merchandise out of the country to earn a rebate.[21]

Provinces on the Canadian side of the border have similar systems to those of U.S. states. According to the British Columbia Ministry of Finance, buyers are eligible to avoid paying provincial sales tax only if the seller ships the goods to another Canadian province or U.S. state or Indian reserve. The purpose of the exemption is to avoid negative effects on retailers, given that the neighboring province of Alberta has no sales tax.[22]

The Canadian federal government also has a system to allow tourists to receive rebates of the nation’s value-added tax. The system has been adjusted recently to combat fraud. Canada customs officials inspect goods at the country’s nine major airports and require receipts and proof that the person is leaving the country, such as a plane ticket. People traveling by land must stop at an inspection station and provide information such as a charter bus ticket.[23]

Retail trade effects

Some retailers argue that elimination of the sales tax rebate would drastically reduce retail sales to Mexican shoppers. Any proposal for reform, however, should not eliminate the rebate. Instead, the method of obtaining the refund should be changed to reduce fraud.

If the customs broker system were eliminated, Mexican shoppers could not travel to other U.S. border states to seek a tax advantage; all other border states require that buyers must not take possession of the merchandise in the U.S. By moving to a similar system, Texas would be on equal footing with other states regarding taxes. In addition, Texas has more than half of the entire U.S.-Mexico border. Mexican shoppers who chose to go elsewhere would face high travel costs.

Texas retailers say that the price and quality of their goods are the reasons Mexican shoppers come to Texas. Reform of the rebate system would not affect those advantages.


State law should be amended to eliminate the provision for customs broker certifications of exports.

The current system does not work and Texas taxpayers, particularly those in the Border area, are paying for it. Customs brokers do little in return for charging buyers for 1 percent of their purchases. In particular, they do not verify that any merchandise has left the country. In their defense, even if they wanted to incur the expense of putting employees on the bridges to verify that merchandise leaves the state, the federal government would not allow them to do so.

Fiscal Impact

These recommendations would increase sales tax collections to the benefit of cities, counties, transportation authorities and the state’s general revenue. The sales tax exemption is valued at $69 million per year, including $52.5 million in sales tax reductions to the state and $16.5 million in lost revenue to the cities.[24] By moving to eliminate fraud in the current system, collections on currently exempt transactions would increase. Sales taxes due local governments would increase annually, starting at $6.4 million in 2004. Sales taxes due the state would increase annually, beginning at a gain of $23.7 million in 2004.

The estimate employed Comptroller data on the level of taxable sales compared to total sales reported by retailers in border areas and compared the resulting ratio with the same ratio for the state.

Total retail sales in the Border region were adjusted by this ratio to estimate the level of taxable sales that would occur if the use of custom brokers is eliminated. The current level of taxable sales was subtracted from this amount and multiplied by the state tax rate to determine the fiscal impact. Finally, the estimate adjusts this amount to reflect some decreased sales to Mexican citizens due to elimination of the program. The fiscal impact on units of local government was estimated proportionally.

Fiscal Year Gain to General Revenue Gain to Local Units of Government
2004 $23,748,000 $6,412,000
2005 $24,765,000 $6,687,000
2006 $25,780,000 $6,961,000
2007 $26,811,000 $7,239,000
2008 $27,855,000 $7,521,000


[1]U.S. Const. Art. I, §10, cls. 2. Tangible property is exempt from taxation so long as the property retains its character as an import or export.

[2]Estimate compiled by the Texas Comptroller of Public Accounts.

[3]Tex. Tax Code §151.307 (Vernon 1992).

[4]Tex. Tax Code §151.307 (Vernon 1992).

[5]Interview with Luis Martinez, Enforcement field manager, El Paso Enforcement Office, Texas Comptroller of Public Accounts, June 12, 2002.

[6]Interview with Luis Martinez.

[7]Interview with Mike Reck, Enforcement Division, Texas Comptroller of Public Accounts, May 31, 2001.

[8]Memorandum from Dona Medlock to Andy Welch, Texas Comptroller of Public Accounts, September 30, 1996; and memorandum from Harold Lee to Billy Hamilton, Texas Comptroller of Public Accounts, September 30, 1999.

[9]Interview with Mike Reck.

[10]E-mail communication from Mike Reck, Enforcement Division, Texas Comptroller of Public Accounts, June 20, 2002.

[11]E-mail communication from Mike Reck, Enforcement Division, Texas Comptroller of Public Accounts, September 7, 2001.

[12]Tex. H.B. 2406, 76th Leg., R.S. (1999).

[13]Tex. H.B. 1281, 75th Leg., R.S. (1997).

[14]E-mail communication from Mike Reck, Enforcement Division, Texas Comptroller of Public Accounts, August 10, 2001.

[15]Letter from State Representative Miguel Wise to Comptroller Carole Keeton Rylander, November 28, 1999.

[16]E-mail communication from Adina Christian, Tax Policy Division, Texas Comptroller of Public Accounts, April 17, 2002.

[17]Interview with Steve Smith, California Board of Equalization, Sacramento, California, June 3, 2002.

[18]E-mail communication from Adina Christian, Tax Policy Division, Texas Comptroller of Public Accounts, April 17, 2002.

[19]Memorandum from Chris Kuykendall, House Study Group, to Representative Henry Cuellar, April 1, 1997

[20]Interview with Claire Hasselhoft, Washington State Auditor’s Office, Olympia, Washington, June 3, 2002.

[21]Memorandum from Chris Kuykendall, House Study Group, to Representative Henry Cuellar, April 1, 1997

[22]Telephone interview with Andy Robinson, director, Tax Policy Branch, Ministry of Finance, Victoria, British Columbia, Canada, June 4, 2002.

[23]Canada Customs and Revenue Agency, “Proof of Export,” (Last visited June 3, 2002.)

[24]Estimate compiled by Texas Comptroller of Public Accounts.