Cities see no benefit from rising Internet sales tax

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While Mississippi’s sales tax collections have remained static for the current fiscal year, use-tax revenue has skyrocketed.

The increase in the use-tax revenue has provided much needed funds for the state to offset the sluggish collections of other sources of revenue, such as the corporate tax and the income tax, as well as the sales tax.

But the increase in collections of the use tax – a 7 percent tax on items purchased from out of state, such as automobiles or on the internet and catalog sales – is doing nothing to help municipal governments with their budget needs.

The bottom line is that the municipalities receive a portion of the sales tax revenue – a flat revenue source for many cities and a declining source for others – but do not receive a share of the use tax revenue, a growing source of funds.

The slowdown in the sales-tax collections comes at a time municipalities are looking for additional funds to help with growing infrastructure needs. Now, they might have to deal with the fact their funds received from sales tax is static or declining in some instances.

Shari Veazey is the executive director of the Mississippi Municipal League.

“We are very concerned about flat revenue from the sales tax,” said Shari Veazey, executive director of the Mississippi Municipal League. “We don’t see the sales tax as a growing revenue source.”

With two months left in the fiscal year, sales tax collections for the state are up $11.2 million, or .70 percent, while use tax revenue is up a significant $30.4 million or 16.12 percent.

Rep. Trey Lamar, R-Senatobia, vice chairman of the House Ways and Means Committee, believes the trend of growing use tax collections and static sales tax collections will continue – primarily because more people are going to the internet to do their shopping.

“It is a critical concern,” Lamar said. “I think the government has a responsibility to keep up with the technology and the changing culture. It is not unlike 100 years, 150 years ago when the government was not so involved with highways because we did not have cars.”

That is why Lamar said he was one of the primary architects during the 2018 session of legislation that would have diverted a portion of the use-tax revenue to local governments for infrastructure needs. That proposal passed the House without a dissenting vote, but died in the Senate.

The House and Senate leaders continue to be at loggerheads on efforts to pass legislation to deal with what most agree is a deteriorating infrastructure system on both the state and local levels.

Mississippi law mandates that the state collect a 7 percent tax on the sale of most retail items, regardless of whether the item is purchased in a traditional brick and mortar store or via the internet. The difference is that if the transaction is made in the store, the retailer is required by law to collect the tax and remit it to the state.

The state then reimburses 18.5 percent back to the municipality where the purchase was made. Sales tax revenue is a significant portion of the overall municipal revenue – along with property tax collections. In some cases, the sales tax revenue is the largest portion of the municipality’s overall funds.

Kathy Waterbury, a spokeswoman for the Mississippi Department of Revenue, attributed the growth in the use tax at least in part to the fact that more internet retailers are collecting it for the state.

A 1990s Supreme Court ruling prohibited states from mandating retailers to collect the tax on “remote sales,” such as through catalogs or via the internet, if the retailer does not have a physical presence in the state. But in 2017, Department of Revenue Commissioner Herb Frierson reached a deal with many online retailers, such as Amazon, where they would collect the tax voluntarily for the state.

Earlier this month, the U.S. Supreme Court heard oral arguments from multiple states asking that the 1990s ruling be reversed and they be allowed to require online retailers to collect the tax. A reversal by the nation’s highest court could mean even more growth in the use tax.

But it is not clear how much additional growth it would generate. Waterbury said the Department of Revenue is currently trying to compile the latest data on the amount of the collections from the voluntary taxpayers. During a June 2017 to October 2017 period, the state collected $47.8 million from the voluntary taxpayers.

And an earlier study by the University Research Center estimated that during 2016 the state would have collected between $105 million to $122 million from remote sales if the retailers were required to collect the use tax.

In other words, most of the major online retailers, such as the behemoth Amazon, already are collecting the tax based on the agreement Frierson reached with them. A Supreme Court ruling might have little impact on the already natural progression in use tax revenue as internet shopping continues to increase in popularity.

In the meantime, many municipal governments are taking notice.

“Certainly it is a concern,” said Starkville Mayor Lynn Spruill. “You don’t want to see a decline in a source of revenue you depend on to help provide a good quality of life for your citizens.”

Sales tax revenue for Starkville is down slightly through April – $5.82 million for 2018 compared to $5.85 million in 2017. But for many municipalities, the issue is they need a growing source of revenue – not a flat one – to deal with costly infrastructure needs.

Many other cities and towns, like Starkville, are dealing with declining collections, though, some are growing.

“I just had a discussion with several local officials about the sales tax and sales tax is booming here,” said Rep. Hank Zuber, R-Ocean Springs. “That is just an indication of the strength of our economy.”

But even in Ocean Springs, the growth in sales tax is minimal, according to statistics from the Mississippi Department of Revenue. For this fiscal year, July through April, collections are $4.19 million, compared to $4.14 million during the same time period the previous year.

Veazey said the Municipal League has supported the House leadership’s effort to divert use tax revenue to the local governments. She conceded, though, that she understands the argument that diverting the funds would take money from the state, which also has been dealing with budget issues caused by overall sluggish state revenue collections.