When population determines class, and class determines a city’s tax capability – Wacky Tax Wednesday

When population determines class, and class determines a city’s tax capability – Wacky Tax Wednesday

Embedded in the American rags-to-riches archetype is an acknowledgement of social stratification. While we may not like to dwell on class in this country, we can’t help but notice it from time to time: I certainly do when shuffling past the first- and business-class sections of a plane to the considerably less roomy coach seats. Yet, never once have I considered the class of a city. An oversight, given that it can impact a city’s sales tax.

Clearly, I haven’t paid enough attention to local governments.

It turns out it’s not uncommon for a state to use the class system to distinguish its cities. My home state of Washington does it. So does Pennsylvania. And Minnesota. And Wisconsin. You get the picture.

Population is typically a primary determinant. For example, a first-class city in Washington must have a population of 10,000 or more at the time of organization; a second-class city has a population of 1,500 or more (but less than 10,000) at the time of organization; etc. Missouri’s classification of municipalities points out that while a municipality may change classification by a majority vote of the people, “the municipality does not automatically change classification with a gain or loss of population.”

How a city or town is classified largely determines its government and powers. In Washington, for example, the mayor of a second-class city has veto power over ordinances, while the mayor of a town does not. The general laws of incorporation affect the rate of taxation a Michigan city or village can impose, as well as how much they can borrow. In Pennsylvania, a third-class city can conduct sales of property but can’t impose a sales tax. Fascinating.

The classification of cities in Missouri impacts sales tax, because not every city is entitled to levy its own local sales tax. Yet, sometimes laws are passed that change a city’s right to tax. This happened recently with the 2017 enactment of Missouri Senate Bill 112, which extends the right to levy a local sales tax to certain fourth-class cities, and removes it from others. Steel yourself for some dizzying figures.

Easy come

The right to impose a local retail sales tax of up to 0.5 percent for public safety purposes has long been the purview of any fourth-class city in Missouri with more than 8,900 but fewer than 9,000 inhabitants, or more than 2,600 but fewer than 2,700 inhabitants and located in any first-class county with more than 82,000 but fewer than 82,100 inhabitants.

As of Aug. 27, 2017, the right to impose this 0.5 percent retail sales tax is expanded to fourth-class cities with:

  • More than 4,500 but fewer than 5,000 inhabitants
  • More than 7,000 but fewer than 8,000 inhabitants
  • More than 9,500 but fewer than 10,800 inhabitants (through Dec. 31, 2038 only)
  • More than 13,500 but fewer than 16,000 inhabitants

In addition, the right to impose a sales tax of up to 0.5 percent on retail sales is extended to fire protection districts operating in a third-class county with a population of greater than 14,000 but less than 15,000. Any such tax would be in addition to all other sales taxes allowed by law and be approved by popular vote.

Easy go

However, the right to impose an additional 0.5 percent retail sales tax for public safety purposes is revoked from Missouri fourth-class cities with more than 2,600 but fewer than 2,700 inhabitants that are located in any first-class county with more than 82,000.
So, there it is.

Retailers making sales in Missouri (or any other state) probably don’t need to closely monitor the changing classification of cities, or how powers wax and wane in different classifications. However, these changes can impact sales tax, and changes in sales tax do need to be accounted for.

Tax automation software enables businesses to comply with the most up-to-date sales tax rates, rules, and regulations without wading through cumbersome legislation like Missouri SB 112. Learn more.

Photo credit.

Recent posts

The 2021 sales tax changes report: midyear update

Your guide to navigating the complicated world of tax compliance and preparing for the future 

The 2021 sales tax changes report: midyear update

Hear tax and industry experts break down the latest legislative updates and industry trends in our upcoming virtual event.

Stay up to date

Sign up for our free newsletter and stay up to date with the latest tax news.