Use tax on November ballot in Boone County
Posted On: 10-12-2017 | Posted By: Jessica Lehmen, CPA
Columbia, Ashland, Harrisburg, and Boone County will ask voters on the November 7 ballot to consider imposing a local use tax. If the measure passes, local and city use taxes will be imposed on remote purchases made by residents of these areas, making those purchases subject to the same percentage of sales tax as in-store purchases. According to the Notice of Special Election posted on the Boone County Clerk’s website as of October 12, 2017, none of the other Boone County cities have added use tax questions to their ballots yet.
Background: How sales and use taxes work
As a starting point, it’s important to understand how sales and use taxes are assessed. Both taxes are based on retail sales of most tangible goods and some services. If there is a taxable purchase, either sales or use tax will apply, but not both. Sales and use tax apply to both individuals and businesses. There are exemptions for certain goods and for certain businesses, such as manufacturers. Please consult your WK advisor for issues related to specific exemptions.
Generally, a sales tax is collected by a Missouri seller at the time of the sale to a Missouri buyer. A use tax is collected either by the seller or the buyer. The seller collects use tax when they are making the sale from outside Missouri to a Missouri purchaser and the seller has nexus with Missouri. The buyer remits the use tax to the state when a purchase is made from out-of-state and the seller did not collect use tax because the seller did not have nexus with Missouri. Nexus is explained more fully later.
Use tax applies to all varieties of remote retail sales, whether the order was made online, on the phone, or by mail. This includes everything from individuals making purchases on Amazon to construction companies buying large shipments of construction supplies from out-of-state suppliers. Our examples below focus on online shopping but we want to emphasize this issue applies to all purchases from out-of-state sellers.
Before the popularity of online shopping exploded, the clear majority of sales were made in-person at a physical location. If you wanted to buy a new pair of shoes, you drove to the store and bought the shoes. At the time of the purchase you paid sales tax on the purchase. If that store was in the city of Columbia and the sales tax rate was the same then as now, you would have paid 7.975% sales tax on the purchase. This total represents a 4.225% State of Missouri sales tax, a 1.75% Boone County sales tax and a 2% Columbia sales tax. The cumulative rate charged depends on the location of the sale. Sales outside of city limits will only have the Missouri and Boone County taxes. Sales within other city limits will have the rates for those cities charged, which may be different than the 2% rate Columbia uses. Ashland’s city rate is currently 2% and Harrisburg’s city rate is 1%.
What the Nov. 7 ballot issue could change
Today, consumer and industrial spending patterns and behaviors have changed. Many people prefer to shop online or make orders remotely. If you choose to make your purchase with an online retailer from another state but who has nexus in Missouri, that retailer should collect a use tax from you at the time of the sale. Presently, Columbia and Boone County do not impose a local use tax. Therefore, the retailer you purchased the shoes from would charge you only 4.225% which is the Missouri use tax rate. If your online retailer does not have nexus with Missouri and does not charge you use tax, the sale is still subject to the tax at the 4.225% rate. However, you are responsible for remitting this on your own by filing a Consumer’s use tax return, but only after your cumulative taxable out-of-state purchases in a year exceed $2,000. The tax should be calculated and remitted using the Missouri Form 53-C. Both individuals and businesses are subject to use tax reporting and payment but many individuals have been unaware of this filing requirement and the Department of Revenue doesn’t have the resources to track compliance for all residents of the State of Missouri.
In all three scenarios, you have made the same purchase. However, by making the purchase physically in Columbia, you pay local and city sales tax. By buying online, you do not pay local and city taxes because Columbia and Boone County have not yet enacted local and city use taxes and this out-of-state purchase is subject to use tax instead of sales tax.
If this ballot measure passes, the use tax rates in Boone County, Columbia, Ashland, and Harrisburg will become the same as the sales tax rate. Therefore the same amount of tax is owed regardless of whether the purchase was made in-person in these localities or online.
As previously mentioned, nexus is a key consideration in this measure. Nexus occurs when a business has enough contact with a state for the state’s tax laws to apply to that business. Whether an online seller has nexus is the deciding factor in whether the seller will collect use tax.
Over the last several years, the definition of sales and use tax nexus has evolved. Historically, the vendor was required to have physical presence in Missouri which meant something such as the presence of a store, employees or inventory. In recent years, Missouri and other states have adopted provisions such as “click-through” and affiliate nexus that no longer require the presence of the seller, but only the in-state presence of the seller’s affiliates. States are becoming more and more aggressive in asserting nexus with sellers, and there has been some push for Congress to pass a law that requires all online sellers to collect use taxes regardless of their nexus with a state. As more sales move online and states continue to experience budget issues, nexus is likely to continue to evolve. If the seller doesn’t collect the tax because they don’t have nexus, it doesn’t mean the buyer isn’t responsible for the tax.
This ballot measure is intended to equalize sales tax revenue in Columbia, Ashland, Harrisburg, and Boone County for in-store and remote sales. Whether passage of the initiative will improve local tax revenue will depend on how many out-of-state sellers are collecting use tax and whether buyers actually remit use tax when the seller didn’t charge and remit it for them. Passing this measure will not increase the number of sellers required to collect use tax, it will simply increase the rate for those who already do. Further state or federal legislation would be necessary to require all out-of-state sellers to collect use tax.
If you have any questions about this issue and how it might affect your personal situation, please contact your WK advisor at (573) 442-6171 or (573) 635-6196.