During the City Council workshop on Sept. 26, O’Fallon Communications Director Tom Drabelle led a discussion about reconsidering a local use tax. In the August 2018 municipal elections, O’Fallon and most other communities in St. Charles County went to the voters with use tax initiatives. The use tax failed in all of them.
Drabelle’s presentation followed up on a previous workshop discussion during which the council had expressed interest in revisiting the use tax. He outlined how a use tax works and its potential impact on the city, saying that the Missouri Municipal League [MML] estimates such a tax could yield about $3 million per year into the city’s general revenue fund. He explained that the potential $3 million in use tax revenue then could be directed specifically to, and only to, street maintenance, through the city’s budget process.
He pointed out lessons learned from the 2018 ballot initiative, including the lack of backing from the Chamber of Commerce and local businesses [the Chamber had decided not to take a position on the initiative], and the lack of a “vote yes” citizen group leading the education about and need for a use tax in the city. Based on the feedback the city received from voters, Drabelle said many of the comments showed voters simply did not understand the use tax and its impact.
Drabelle explained that the ballot wording, which is mandated by the state of Missouri, also apparently caused some confusion. That language read as:
“Shall the City of O’Fallon impose a local use tax at the same rate as the local sales tax rate, currently 2%, provided that if the local sales tax rate is reduced or raised by voter approval, the local use tax rate shall also be reduced or raised by the same action? A use tax return shall not be required to be filed by persons whose purchases from out-of-state vendors do not in total exceed two thousand dollars in any calendar year.”
The city, like all publicly-funded entities, is also restricted by state statutes regarding the discussion of ballot initiatives. Elected officials, such as council members and the mayor, are free to discuss statutes as long as city resources or funds are not utilized. However, city employees and staff members are prohibited from speaking to advocate for a ballot initiative and are prohibited from using city resources or funding to advocate. City employees and staff are permitted to educate residents and voters but educate only.
After Drabelle’s update, Mayor Bill Hennessy informally polled the council on the matter and agreed to pursue this as a ballot initiative for the April 7, 2020, municipal election.
Council member Rose Mack [Ward 2] clarified that she would gladly support the measure as long as the council mandated that all funding from the use tax would be directed and dedicated to city street maintenance. Drabelle confirmed that could be done by the council through the budget process.
Drabelle closed by outlining that in order to have the use tax on the April 7 ballot, an ordinance to that effect must be passed by Jan. 21, 2020. A simple majority would be required for passage.
A use tax is a tax applied to the purchase of goods by Missouri residents and businesses from out-of-state vendors. It is applied to the same type of products that are subject to sales tax; any items exempt from a sales tax also are exempt from the use tax. The amount of use tax due on a purchase is equal to the sales tax rate in place at the point of delivery.
Use tax rates always equal local sales tax rates. Therefore, if a local sales tax sunsets, is lowered or repealed, the use tax would decrease to the new sales tax. In the same vein, if voters approve a new sales tax, the use tax would go up by the same amount. The use tax mirrors the current sales tax and is not a “double tax.”
Out-of-state business purchases and online consumer purchases exceeding $2,000 would be subject to the tax.
Forty-five states and nearly half of all Missouri cities with populations of 2,000 residents or more [105-plus cities] already have a use tax in place. The State of Missouri and St. Charles County already have use taxes; however, O’Fallon receives no income from those taxes.
The difference for local businesses and shoppers would be relatively minimal. For example, if a business makes a $10,000 purchase from an O’Fallon retailer, the sales tax on the purchase would equal $795 [state, county and O’Fallon sales tax]. However, if a business makes a $10,000 purchase today from an out-of-state vendor, the amount of use tax collected on that purchase would equal just $595 [state and county use tax but no O’Fallon taxes]. With a use tax in place, if an O’Fallon business makes a $10,000 purchase from an out-of-state vendor, the combined use tax es would equal $795, the same as if the purchase were subject to local, county and state sales taxes.
Although the impact on individual purchasers is minimal, the impact for O’Fallon could be significant.
Future federal and/or state legislation might impact the collection of a use tax on behalf of the consumers’ state of residence. If a permanent federal or state solution is determined, it is possible only cities that have passed use tax legislation would benefit from those solutions; blocking out those without a use tax.
Other potential use tax benefits include the removal of the incentive to purchase from out-of-state vendors to avoid local sales tax and the diversification of the city’s tax base.