Local governments starting to see new revenue from use tax

Local governments starting to see new revenue from use tax
A Supreme Court decision regarding the online store Wayfair led to use taxes approved by voters last year that will pay off Mexico's Aquatic Center loan and provide other budget options around the county. [Dave Faries]
Dave Faries

In its first month, the local option use tax netted Audrain Count a total of 84 cents. In January it brought in $89,147.

The city of Mexico received nothing in October, nothing in November. Now a total of $48,290 has come into city coffers.

“We’re on track to receive what we expected,” observed Mexico City Manager Bruce Slagle.

That amount — $155,000 per year — was based on an estimate derived from a study by the state Department of Revenue. The city directs funds from its use tax to capital projects, such as paying off the loan for the new Aquatic Center.

“That’s why we were able to do the pool,” Slagle added.

For the county, which is revenue neutral, the additional source of income may allow for a reduction of property or other taxes. Vandalia City Administrator Darren Berry reports that the use taxes voted in by that community has brought in a little more revenue than anticipated — a plus, since court fines and fees have dropped due to the pandemic.

Approved by voters in the spring of 2020, use taxes went into effect in October. The tax is intended to allow city and county governments to collect on purchases made out of state, often over the internet. How they are applied and reported, however, is sometimes difficult even for elected officials.

“The local option use tax is hard to get your arms around,” said Steve Hobbs, Audrain County’s presiding commissioner. “It’s so hard to understand.”

The reason is largely due to the way in which the state applies the tax. Every state but Florida and Missouri treat out of state purchases as a traditional sales tax. Missouri opted to base the tax on point of use — something purchased elsewhere, but used in the state, county and community.

So every county and city were required to put the tax up for vote. Funds come into the state, where it is portioned to the smaller government entities.

“It’s probably the oddest thing I’ve seen,” Hobbs pointed out.

To make matters more interesting, some businesses report taxes monthly, others quarterly or even annually. And if a person purchases an item out of state, but the company that sold the item has a presence in Missouri – a store, a distribution center, a call center – the sales tax, rather than the use tax, is applied.

It’s an either, or situation. Sales tax is not paid on top of a use tax. And Slagle points out that both are at the same rate.

“This is really kind of confusing,” Slagle said. “Forty-eight other states just treat it as a sales tax. For some reason here it’s a use tax.”

Use taxes have been in place for decades as a way to compensate governments for sales taxes lost due to out of state purchases.

The background of the new local use taxes is also complicated, involving several court cases — including the Wayfair Decision. The Supreme Court ruled against the collection of use taxes for retail purchases in National Bellas Hess v Illinois, in which the state tried to assert its right to tax a Missouri mail order catalog operation.

That was in 1967. In 1992 the court overruled part of that decision in Quill Corp. V North Dakota, but the language prevented states from collecting sales taxes on what would become the large online retail sector.

In 2018’s South Dakota v Wayfair, the court changed direction. Wayfair had no presence in the state, but the court found that South Dakota’s application of sales tax to online retailers was not a burden to interstate commerce in that it gave protections to small businesses and those who have limited transactions in the state.

In the opinion, Justice Anthony Kennedy wrote “The Quill Court did not have before it the present realities of the interstate marketplace, where the Internet’s prevalence and power have changed the dynamics of the national economy. The expansion of e-commerce has also increased the revenue shortfall faced by States seeking to collect their sales and use taxes.”

“The idea is to level the playing field,” Hobbs said.

The electronic tools available by the time of the Wayfair Decision also made keeping, tracking and reporting sales more accurate for state and local tax purposes.

“They probably weren’t able to do this 15 years ago,” the commissioner added.


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