Lee’s Summit is looking at a local use tax.
Essentially, it would be similar to a sales tax, but owed on taxable goods or services purchased from outside Missouri but consumed within the state.
The City Council’s Budget Committee began exploring the issue at its Dec. 9 meeting with city staff and hearing testimony from state officials and a local car dealer.
It would be on purchases such as cars from dealerships across the state line or online sales via the Internet, not subject to local sales tax.
Lee’s Summit’s use tax would be 2.25 percent in Jackson County, not including special tax districts, equivalent to the sales tax. It is not in addition to sales tax.
The city is considering the tax for two reasons:
Internet sales continue to cut into local tax revenue
Lack of a use tax puts local vendors at a competitive disadvantage to Internet sales
Budget committee members Dec. 9 supported taking a close look at the prospect.
Council member Derek Holland said the he’s concerned about revenue loss because of the continuing growth of Internet sales.
“Local taxes that supply local services are being eroded, now and in the future,” he said.
Councilman Bob Johnson, committee chair, said he was concerned about sluggish sales tax growth in the city and a use tax could help make up the gap.
“People are still spending, but not in brick and mortar stores in the amount we anticipated,” Johnson said.
City Manager Steve Arbo said he wanted to start discussion to be prepared for an April 2014 election, if that was the council’s preference, but it could go on other ballots. It would take a simple majority to pass.
Committee members quickly nixed the idea of going to the voters right away. The council already is committed to a bond issue for rebuilding the U.S. 50/Missouri 291 South interchange.
“If you put two tax issues on one ballot, you’ve got some risk,” Johnson said.
The city will have to act within the next couple of years, or it definitely will lose some current revenue.
The state already collects use taxes for cities on vehicle sales, but that is set to expire in March of 2017, unless cities hold local elections to renew the tax.
The background on that nuance is that the Missouri Department of Revenue previously collected sales tax on out-of-state vehicle purchases for cities. A recent, successful court challenge changed that, and the Missouri General Assembly this summer made a legislative fix. But it is a temporary measure.
To continue getting the revenue on residents’ purchase of vehicles out of state, cities will have to pass a local use tax by November of 2016.
Already, 107 Missouri cities have use taxes, including Kansas City.
Arbo said the city should consider making its use tax apply to all goods and services, not just vehicles.
Missouri also has a statewide use tax.
There is a set of rules, referred to as the “nexus” based on where offices, distribution centers or warehouses and such are located, and other factors, to determine whether a sales tax or use tax applies and who pays it.
Typically, a vendor without a physical presence in the state wouldn’t pay the tax, so then the consumer is responsible for paying.
In Missouri, residents are supposed to report more than $2,000 in annual purchases on their state income taxes.
“Nobody does,” Holland said.
The committee asked city staff to come back to the committee with estimates of how much current revenue the city will lose if it doesn’t pass a local tax.
Without the local tax, there would be incentives for people to buy vehicles and goods outside Lee’s Summit, which has about 10 new car dealerships which contribute to its economy.
“If you’re buying a $30,000 vehicle, it’s a significant amount of money to an individual,” said Conrad Lamb, director of finance.
Ray Adams, owner of a local dealership, said that without the local use tax Lee’s Summit dealers would be greatly affected while the city loses revenue to communities in other states.
“We can’t let that be poached by other states,” Adams said.
Holland characterized the tax as a “fairness tax.”
For example, a Lee’s Summit resident buying clothes at a downtown shop would pay local sales tax, while another resident buying the same clothes online may not.
He said Adams and other business people will need to help with the campaign if the city eventually puts it to an election, because a lot of education will required for it to pass.
“It’s going to sound like a tax increase,” Holland said.