In its simplest form, a use tax is sales tax collected by an e-commerce vendor and distributed to the municipality in which the purchased item will be used. Use tax revenue functions exactly the same way sales tax revenue does – it helps municipalities provide services to residents.
On April 22, the Missouri Municipal League [MML] predicted that “failure to pass an e-commerce use tax could bankrupt local governments in wake of the COVID-19 pandemic.”
“It’s not a new tax,” said Pat Kelly, executive director of the Municipal League of Metro St. Louis. “It’s just one – already approved by voters – that we [as a state] are failing to collect. That’s bad for brick and mortar stores because internet sellers are not collecting local sales taxes and that’s a competitive disadvantage. But I think one of the bigger concerns going forward is that because of the stay-at-home orders over the last six to eight weeks, people are going to become even more accustomed to purchasing items over the internet.”
Throughout St. Charles County, local governments have pointed toward internet sales as a major player in the loss of operating revenue. As such, several cities have put use tax measures on previous ballots. This June, only O’Fallon has a use tax measure on its ballot. The ballot language reads as follows:
“In order to increase funding for O’Fallon police services and road improvements, shall the City of O’Fallon impose a local use tax at the same rate as the total local sales tax rate, currently two percent [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.”
Thomas Drabelle, O’Fallon’s communications director, explains that under the current system, use taxes are self-reported. That means individuals who purchase more than $2,000 from out-of-state vendors are obligated to report their purchases on a separate tax return at year’s end and remit a check for the use tax [sales tax] only on those purchases over $2,000.
“It’s complicated,” Drabelle said.
Further complicating matters is
Sen. Andrew Koenig [R-District 15] currently has a bill in the Senate [SB 648] that, if passed, could help to address that concern. The bill was the last item being debated on the Senate floor prior to the COVID-19 closures. Its goal, according to Koenig’s policy director, Daniel Wilhelm, is to level the playing field so that whether someone purchases something online or at a brick and mortar location, the local government receives the same approved sales tax, which they can use to pay for city expenditures as allowed by voters.
Missouri is one of only two states in the nation that does not collect local sales [use] taxes on internet purchases.
“In most states, they just collect sales tax but in Missouri we have a use tax system that’s built into our tax code,” Kelly explained. “So we need to pass legislation at the state level to start capturing the internet sales tax, and local municipalities or taxing districts need to pass legislation in order to collect it.”
Koenig was quick to point out that passage of SB648 would not immediately affect municipal budgets impacted by COVID-19.
“If passed, it has an effective date of Jan. 1, 2022,” he said. “[But] it is good policy because under the current system we create an incentive to purchase from non-Missouri businesses and that’s not an incentive that we want.”
Additionally, Koenig pointed out that his bill is designed to “offset any increased revenue to the state with an income tax cut so that the bill is revenue neutral.”
“My bill also has sales tax caps in it that would prevent cities raising sales tax above a specified level, which the state Municipal League is in agreement with,” Koenig said.