Local governments prepare to tax online sales

The Kenai Peninsula Borough is considering taxing online purchases after the Supreme Court of the United States reversed long-standing precedents protecting retailers from state and local taxation in places where they have little or no physical presence.

The Supreme Court decided June 21 on the case South Dakota v. Wayfair, based on a 2016 South Dakota law subjecting out-of-state retailers with more than 200 annual transactions or $100,000 of annual sales in that state to its taxes. The law was initially challenged in South Dakota court by online furniture seller Wayfair and other online retailers.

The Supreme Court ruled 5-4 in favor of South Dakota, with Justice Anthony Kennedy writing in the majority opinion that each year the physical presence requirement previously used to determine sales tax eligibility “becomes further removed from economic reality and results in significant revenue losses to the States.”

Local governments anticipated the ruling and are ready to take the new opportunity for revenue.

“With the change, we’re looking to make changes to our code that would follow the requirements laid out during the case,” said borough Finance Director Brandi Harbaugh.

Though online sales are difficult to track and the potential earnings from taxing them are speculative, the decision could potentially be a bump to the borough’s finances. Revenue from the borough’s 3 percent sales tax goes entirely to the Kenai Peninsula Borough School District — the largest recipient of borough funds, consuming about 40 percent of spending in recent budget years. School district budgets have become increasingly contentious as Alaska’s general economic downturn and decreased revenue sharing from state government have left the borough to pick up some of the remaining expenses, resulting in multiple years of budget deficits.

In 2016, the administration of then-mayor Mike Navarre looked into the possibility of assessing sales tax on online transactions, but discovered it couldn’t under federal law. Precedent dating back to a 1967 Supreme Court case over mail-order catalog retail established that companies must have some “substantial nexus” of physical presence in jurisdictions that seek to tax them.

More recently, Borough Mayor Charlie Pierce’s administration tried again. In early 2018 the borough sent letters telling online retailers including Amazon, Walmart, Apple, Home Depot, and Microsoft that they weren’t complying with the borough code by not paying sales tax on their sales in the area, Harbaugh wrote in an email. The Clarion has a pending public information request for correspondence between the borough and Amazon, Walmart, Apple, Microsoft, and Home Depot.

“The retailers largely responded that they did not meet ‘nexus’ requirements,” Harbaugh wrote in an email. “Seeking clarity on the ‘nexus’ issue with online retailers, the (borough) decided to take no further administration action until the United States Supreme Court ruled in South Dakota v. Wayfair. Now that the decision has been issued, we are evaluating options on how to best proceed.”

In the Supreme Court decision Kennedy wrote that a precedent restricting the legal notion of “substantial nexus” to physical presence in a state has “come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a State’s consumers—something that has become easier and more prevalent as technology has advanced.”

In the absence of that precedent, Kennedy wrote that for the South Dakota law “the nexus is clearly sufficient based on both the economic and virtual contacts (retailers) have with the State.”

“Be­tween targeted advertising and instant access to most consumers via any internet-enabled device, a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term,” Kennedy wrote.

It’s still an open question how easy it will be for Alaska’s local governments to take advantage of the Wayfair decision, regarding a state’s sales tax law, in a state with no sales tax of its own. Alaska Department of Law spokesperson Cori Mills said the department hadn’t found a reason boroughs and cities couldn’t implement online sales taxes, though the Department of Law hasn’t reached any formal conclusions on that question. Harbaugh also believed the decision would apply to the borough.

“My understanding is that because our sales tax code was already in place, we’ll be allowed to move forward without state action,” Harbaugh said.

Chief Justice John Roberts’ minority opinion names the possibility of having online tax requirements from a plethora of local tax jurisdictions as a danger of the decision.

“Over 10,000 jurisdictions levy sales taxes, each with different tax rates, different rules governing tax-exempt goods and services, different product category definitions, and different standards for determining whether an out-of-state seller has a substantial presence in the jurisdiction,” Roberts wrote.

Regarding the cost of complying with online sales taxes, Roberts wrote that “the burden will fall disproportionately on small businesses.”

“People starting a business selling their embroidered pillowcases or carved decoys can offer their wares throughout the country — but probably not if they have to figure out the tax due on every sale,” Roberts wrote.

Harbaugh said any form of online sales tax the borough administration might put forward would likely have some kind of minimum threshhold on sales and transactions, similar to South Dakota’s law, to exempt small online businesses.

Harbaugh said borough administrators are reaching out to city governments about their sales tax preferences and possible thresholds. The borough also collects taxes on behalf of its incorporated cities — at least one of which, Kenai, has also made plans to tax online transactions. Kenai city attorney Scott Bloom said he would work with the borough to shape such a tax before bringing it to the Kenai City Council.

Reach Ben Boettger at bboettger@peninsulaclarion.com.

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