Voters in Columbia, Ashland, Harrisburg and Boone County will see nearly identical use-tax measures at the polls on Tuesday.
The Boone County use tax measure will appear on the ballot as Proposition U, while Columbia and Harrisburg’s proposals each are called Proposition 1. The Ashland measure appears on the ballot as Question.
When shoppers in Missouri buy from out-of-state companies, they often pay no sales tax. The state collects a use tax equal to the state sales tax rate of 4.225 percent on those purchases, including many online sales.
If voters approve all the measures Tuesday, Columbia and Ashland shoppers would pay total city and county use taxes of 3.75 percent, while those in Harrisburg would pay 2.75 percent. Those in unincorporated areas would pay the county use tax of 1.75 percent.
With existing state use taxes included, the total rates would be 7.975 percent in Columbia and Ashland, 6.975 percent in Harrisburg and 5.975 percent in unincorporated Boone County.
Boone County Auditor June Pitchford said the taxes would mostly affect companies making large out-of-state purchases.
“They are already paying the state use tax,” Pitchford said. “Now they would simply add in the county and city taxes.”
Businesses making major out-of-state purchases are subject to audit by the Missouri Department of Revenue. For individual shoppers who are less likely to be audited, paying use tax is more of an honor system.
“You know, people who buy just a camera from the internet, the Missouri Department of Revenue does not have an apparatus for auditing all those small-dollar purchases,” Pitchford said. “So that’s why there’s an exemption for that.”
Shoppers are only required to file use tax with the state when they buy more than $2,000 worth of goods subject to the tax in a year. Shoppers who meet that exemption would need to keep track of when they were paying use tax at the point of sale.
How use tax works
Pitchford used construction of student housing to illustrate how use taxes work. If a contractor buys construction materials in Columbia, it’s charged the city sales tax. The vendor collects the tax and pays it to the Missouri Department of Revenue.
If the contractor buys the materials from a company outside Missouri, it pays the state’s 4.225 percent use tax.
“Because the city and county don’t have use taxes in place, that vendor does not pay local city and county taxes,” Pitchford said. “We would get that if that vendor purchased from a local lumber company, but because they bought it out of state, and are bringing it into the state, they’re only paying the state use tax right now.”
Out-of-state companies that have a physical presence in Missouri are required to collect and remit use tax at the point of sale when they sell to shoppers in the state.
“They might have a distribution center, an office, warehouse; they might maintain a stock of goods. There’s a variety of physical presences that would trigger that,” Pitchford said.
Kohl’s is one example. The national department store chain with headquarters in Wisconsin has a physical presence in Missouri, with over 20 stores in the state. When a shopper in Columbia buys something on Kohl’s website, he or she pays the state use tax along with the purchase. If Tuesday’s use tax measures are approved, shoppers would also pay municipal and county use taxes. Shoppers would then pay the same total tax rate online as they would pay at the store in Columbia.
Out-of-state companies without a physical presence in Missouri are not required to collect use tax for the state. Missouri shoppers who buy from those companies are responsible for paying the state.
Slow revenue growth
Columbia and Boone County officials say the use tax could help make up for slowly growing sales tax revenue. The city and county are both largely and increasingly funded by sales tax.
In 2006, 60 percent of the county’s revenue came from sales tax. In 2016, it was 71 percent.
Less than 33 percent of Columbia’s revenue came from sales tax in 2006. In 2016, it was over 43 percent.
Pitchford said the growth of untaxed internet sales poses financial problems for local governments.
“In the past, economists have projected that long-term sales tax growth would mirror population growth,” Pitchford said. “That was true until the explosive growth of e-commerce, but that is no longer true.”
Sales tax growth in recent years has paled in comparison to what it was just 10 or 12 years ago. From 2005 to 2006, for example, Boone County sales tax revenue grew 9 percent, while the population grew less than 3 percent. From 2014 to 2015 and 2015 to 2016, however, the county sales tax revenue grew about 2 percent each year, while the population increased about 1 percent each year.
Columbia Community Relations Director Steven Sapp said the city has the same concerns. From 2005 to 2006, city sales tax revenue grew 7.6 percent, while population grew 3 percent. From 2014 to 2015, city sales tax revenue grew over 3 percent, and it fell flat from 2015 to 2016. The city population grew about 1.5 percent each year.
“The internet has become a disruptor to the funding mechanisms that many states, cities and counties have used to fund services to the public that the public expects: law enforcement, fire protection, streets, to some extent parks, and things like that,” Sapp said. “They expect those to be funded as part of the community, and we’ve typically always relied on the sales tax to do that.”
As more people shop on the internet, purchases subject to use tax have grown as a share of all taxable sales.
In 2006, sales subject to use tax made up 2.9 percent of all taxable sales in Boone County, according to data provided by the Missouri Department of Revenue. In 2016, they made up 3.2 percent.
In Columbia, sales subject to use tax made up 2.4 percent of all taxable sales in 2006. In 2015, they made up 2.9 percent.
Purchases subject to use tax made up over 6 percent of taxable sales in Columbia in 2016, but this was an outlier likely driven by major construction projects that year.
If the city had had a use tax in place in 2015 and 2016, it would have seen an additional $2.8 million in revenue.
Pitchford said she expects the growth of internet sales to continue and the growth of sales tax revenue in Boone County to slow, or to even go flat or negative.
That could be a problem for the city and county as their populations and expenses continue to grow.
“When people ask me what the county is going to spend this on, we need this to continue to provide existing services,” Pitchford said.
She highlighted the growing cost of law enforcement, as technology such as body cameras for sheriff’s deputies and police officers means more evidence to review.
“It takes additional resources to go through that evidence, to respond to requests for that,” Pitchford said. “The county has already funded one additional assistant prosecuting attorney because of all the additional digital evidence that has to be reviewed.”
In Boone County, spending on public safety grew over 43 percent from 2006 to 2016. In Columbia, it grew 31 percent.
City and county officials say that the use tax isn’t a perfect solution to the effects of untaxed internet purchases and that the problem really needs to be fixed at a national level.
Sapp said Columbia’s mayor and city manager traveled to Washington in April to lobby for the Marketplace Fairness Act. Several versions of the bill have been introduced in Congress over the years. It would grant states the power to tax internet sales over state lines just as they tax in-person sales within the state.
If the bill is passed, it would replace the patchwork of use and sales tax laws with a single system of sales tax collected at the point of sale, both in-store and online.
Sapp isn’t holding his breath.
“What’s happening here is we’re Band-Aiding a solution — city by city, county by county, state by state — because they won’t act at a federal level,” Sapp said.