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HomeMy WebLinkAboutReg 2003-02-03 Item 7 - Briefing - Streamlined Sales Tax by Alan Doerschel, Finance DirectorCAS Number: 03-013 Agenda Item Title: Streamlined Sales Tax Project Original Sponsor: Council Admin. X Timeline: Present update on potential impact to Tukwila. Sponsor's Summary: See Association of Washington Cities (AWC) attachments regarding the purpose of changing the source of retail tranactions and the potential impact per Alan's staff report Recommendations: Sponsor: Review the potential impact and influence on legislation. Committee: N/A Administration: Same as Sponsor I Cost Impact (if known): Potential of a $(1.8) million in net revenue loss I Fund Source (if known): General Government Funds r Meeting Date 2/3/03 2/3/03 2/3/03 COUNCIL AGENDA SYNOPSIS 1 Meetin Date 2/3/03 Prepared by ARD Initials Original Agenda Date: 2/3/03 VO3" 3'+' /.S '44 1 Action Meeting Date 2/3/03 January 13, 2003 letter from Katherine Washington 1 Mayor's review 1 Council review 1 1 tan/ I _Lee 1 Attachments ITEM NO. Januay 17, 2003 copy of Association of Washington Cities newsletter article on streamlined Sales Tax. Staff report from Alan Doerschel dated January 30, 2003 regarding potential impact and status of legislation. To: Mayor Steve Mullet Tukwila City Council From: Alan R. Doerschel Date: January 30, 2003 Subject: Proposed Streamlined Sales Tax Legislation Good News! Apparently the Department of Revenue has tabled the sourcing (point of sale) issue pending an in -depth study of alternatives over the next year or two. This is late breaking news and will be confirmed at a formal presentation on February 3, 2003 at the City Council meeting. What follows is an analysis of the legislation as originally proposed. It is important to note that at the time of this writing, that proposal is still active. Backeround As described in the two attached pages from the Association of Washington Cities, there is an effort to alter the sales tax rules to bring continuity among all states in how sales tax is collected. This presumably would provide a uniform method to tax E- Commerce sometime in the future. Of greatest concern is that portion of the proposal to change to a "point of sale" formula. Currently, goods are taxed where the consumer picks them up, or taxed from the site that delivers the goods to the customer. The proposal will tax goods where they are delivered (customers location and city). This would have serious consequences for Tukwila. Over 200 businesses here ship goods to the customer. Analysis I have interviewed by phone and in person over 50 businesses that may be impacted by the Point of Sale formula. (All businesses generating over $20,000 in tax revenue to Tukwila were contacted). The results of this survey are dramatic as shown below: Estimated Annual Tax Revenue Loss $(1,900,000) Less: Estimated Revenue Offset* 100,000 Net Estimated Loss $(1,800,000) *Tax revenue received due to the point of delivery now being in Tukwila This estimate is reasonably accurate. Approximately $1,750,000 is documented with an estimated $150,000 impact for the smaller affected businesses. We are working with other potentially impacted cities (Kent is estimated to lose about $4 million), the Association of Washington Cities, and the Department of Revenue to bring about a fair and equitable solution. From: "Katherine Washington" <katherinew @awcnet.org> To: "Katherine Washington" <katherinew©awcnet.org> Date: 1/13/03 2:54PM Subject: Impact Estimates Needed for Streamlined Sales Tax Legislation Please contact Jim Justin or Sheila Gall of AWC with any estimates, questions, or concerns at jimj©awcnet.org or sheilag @awcnet.org or by phone at (360) 753 -4137. To Mayors, City Managers /Administrators, IGRs, and Finance Directors: Streamlined Sales Tax Project: For the past several years, the State of Washington has participated in the Streamlined Sales Tax Project (SSTP), a national effort by a coalition of states to make sales and use taxes simpler and more uniform. The Department of Revenue has introduced legislation to implement some of the recommendations of the SSTP in our state. Once Washington adopts this legislation, it will qualify to become a member of the governing board, which will decide the rules for future streamlined sales tax provisions. A desired outcome of the SSTP is to convince Congress to pass enabling legislation allowing states to collect sales or use tax on remote sales. (e.g. mail- order, Internet, or television sales by persons with no physical presence in the state.) Under the U.S. Supreme Court's ruling in Quill v. North Dakota (1992), the Commerce Clause of the U.S. Constitution prohibits states from taxing such sales without the consent of Congress. Under current law, purchasers of goods from remote sellers are responsible for payment of use tax, but individual customers rarely know about or pay the use tax voluntarily, and enforcement is impractical. As internet sales in particular continue to grow In future years, sales and use tax I sses to local governments and the state are expected to be substantial. Summary of Proposal: Most of the changes under the SSTP are compatible with current practice in Wasl'rin�gton, and the Department of Revenue has predicted that there will be a small overall revenue increase as a result of the changes A summary of the legislation is available at <http://www.awcnetorg/email/streamlinedsummary011002.pdf> http://www.awcnet.org/email/streamlinedsummary011002.pdf Sourcing Rule: The SSTP legislation does include a "sourcing rule" for allocating local sales tax that differs from the one currently in effect. Under current law, the local sales tax on sales of goods is allocated to the jurisdiction of the retail outlet at which or from which delivery is made. The SSTP would shift local sales taxes to the place of delivery instead. In most instances, the customer accepts delivery at the retail outlet and there would be no practical difference between current practice and the SSTP proposal. However, in those instances where goods are delivered to the customer at a separate location, the SSTP proposal would allocate sales tax to the jurisdiction in which the customer is located rather than the jurisdiction in which the retailer is located. In particular, the Department of Revenue has identified the potential for substantial shifts in revenues from jurisdictions with businesses that involve delivery of goods to customers in other areas (such as software sales and warehouses that deliver goods like fumiture to retail customers outside the jurisdiction). One jurisdiction has estimated that the impact of this revenue shift could be as much as 20% of its sales tax base. Impact Estimates Needed: AWC has been asked to help identify jurisdictions that may be substantially impacted by the changes under the SSTP proposal and help estimate the magnitude of revenue shifts between jurisdictions. The Department of Revenue is also working to identify jurisdictions most severely impacted. It is our hope that this information will assist us in evaluating potential solutions to help mitigate severe revenue impacts to individual jurisdictions. An initial legislative work session on this issue will be held on Friday, January 17, 2003 in the House Finance Committee. Streamlined Sales Tax Project The House Finance Committee held an initial Legislative work session on lkiday afternoon, January 17, on the Department of Revenue's (DOR) legislative proposal to implement some of the :.mdatlons of the Streamlined Sales Tax Project (SSTP) In our state. If Washington adopts this legislation, DOR will qualify to become a member of the governing board, which will determine future streamlined sales tax provisions. For the past several years, Washington has participated In this national effort by a coalltion of states to make sales and use taxes simpler and more uniform. The primary denired outcome of the SStP is to convince Congress to pass enabling legislation allowing states to collect sales or use to on remote sales (e.g. mail-order. Internet, or television sales by persons with no physical presence hi the state). Under current law purchasers of goods from remote sellers are responsible for payment of use tar, but individual customers rarely pay the use tax voluntarily, and enforcement is impractical. As Internet sales in particular continue to grow, sales sad use tax losses to local and state 6. are expected to be substantial. Most of the changes under the SSTP are compatible with current practices In Washington. The Department of Revenue predicted that Washington will aperients a small overall revenue Increase as a result of definitional changes, resulting in the taxation es exemption of certain Items (ex bottled water would be exempt and beverages with less than 50% fruit juice would be subject to tax as a soft drink). Souring Rule The SST1 legaaletttoa also includes a "sourcing rule' for allocating local sales tax that Was from the one currently in effect Under current law, the local sales tax on sales of goods is allocated to the jurisdiction of the retail outlet at which or from which delivery is made. The SSTP would shift the local sales taxes to the place of delivery. 'Ibis change Is needed H DOR were ever able to collect sales tax from remote sellers. In most Instances, the customer accepts delivery at the retail outlet and there would be no practical difference between current practice and the SST? proposal. However, In those Umtata where goods are delivered to the customer at a separate location. the SST? proposal would allocate sales tax to the jurisdiction in which the customer Is located rather than the jurisdiction in which the retailer is located. The Department of Revenue has identified the potential for substantial shifts ill revenues from jurisdictions with a high level of businesses that involve delivery of retail goods to customers in other areas (such as software sales and warehouses that deliver goods to retail customers outside the jurisdiction). Impact Estimates Needed ARC has been asked to help the Department of Revenue identify jurisdictions that may be substantially Impacted by the changes under the SST? proposal and help estimate the magnitude of revenue shifts between jurisdictions. This information will help us evaluate potential solutions to help mitigate severe revenue Impacts to Individual jurisdictions. In general AWC supports this proposal because we recognize the long-term abjective of tart equity and fairness for remote sellers. However we remain concerned that some titles and towns may be negatively impacted by the sourcing rale. We continue to collect data on the impacts of the bill as we formulate various remedies for those most severely impacted' We will keep you posted on this Issue Including spedfic bills and hearing schedules. Please contact Jim Justin or Sheila Gall of ARC with any estimates, questions, or suntans A WC )1n103