Taxing online sales in the last frontier
- Nov 19, 2018 | Gail Cole
Although Alaska has no statewide sales tax, more than 100 local governments levy local sales and use taxes. Currently, out-of-state sellers with no physical presence in Alaska aren’t required to collect and remit these local sales taxes. That may change in 2019.
States only recently won the right to tax remote sales when the Supreme Court of the United States overruled the long-standing physical presence requirement in South Dakota v. Wayfair, Inc. (June 2018). Since then, close to 30 states have adopted remote sales tax policies similar to South Dakota’s. Instead of physical presence, South Dakota’s economic nexus law imposes a sales tax collection obligation on businesses with substantial economic activity in the state in the current or previous calendar year, defined as $100,000 in sales or 200 transactions.
Alaska Municipal League considers remote sales tax
During its 2018 summer meeting, the Alaska Municipal League (AML) briefly discussed the potential impact of the Wayfair decision: “Without a state sales tax, work will need to be done for municipalities to effectively capture potential revenue from online sales taxes — where current sales taxes are in place — and streamline definitions and exemptions.” It called for an expert group to be convened “to address questions and develop a proposal that avoids state implementation of a statewide sales tax.”
The AML is understandably keen on avoiding opening Pandora’s box when it comes to a statewide sales tax. There have been numerous attempts to adopt a statewide sales tax in Alaska, and all have failed. Linking a remote sales tax to a state sales tax would be messy, and a potential deal-breaker.
AML Director Nils Andreassen emphasizes that a tax on online sales wouldn’t be a new tax: “It’s just implementing current taxes at the local level, and it doesn’t require a statewide tax, at all.” What it would entail, however, is “a lot of coordination between all of those municipalities that have current taxes.”
Local governments in Alaska have a lot of latitude in what they tax. According to the Alaska Department of Commerce, Community, and Economic Development, state law gives “very broad authority to cities and boroughs in enacting a sales tax ordinance and determining what is taxable. There are very few non-taxable items (exemptions) required by state law.”
While that seems to work well for local governments, it could complicate matters as localities pursue remote sales tax collections. In the Wayfair decision, the Supreme Court praised South Dakota for striving “to prevent discrimination against or undue burdens upon interstate commerce.” Three aspects of the state’s system were praised:
- The safe harbor for small businesses
- Prospective enforcement of economic nexus
- Participation in the Streamlined Sales and Use Tax Agreement, which standardizes taxes to reduce administrative and compliance costs
Since the Supreme Court didn’t replace the physical presence limitation with a similar, bright-line test, most states are sticking close to South Dakota’s economic nexus model to avoid a potential legal challenge. With no statewide sales tax, that will be difficult for Alaska municipalities; the lack of uniformity among local sales tax laws, as well as the numerous local filing requirements, could be considered overly burdensome to interstate sellers.
Of course, municipalities could work together to simplify local sales tax compliance in Alaska, and that’s what the AML seems poised to do. On November 15, 2018, it again broached the topic of online sales tax at its annual conference. The agenda explains: “There are many questions related to the recent Wayfair case, which leave Alaska municipalities trying to understand and make decisions about online sales taxes. This session will provide as many answers as are known and describe the path forward.”
The likely next step is the establishment of a special commission within the League to discuss:
- Creating a database of municipal boundaries
- Creating uniform definitions for taxed and exempt products
- Getting municipalities to adopt a uniform tax base using uniform definitions
- Creating a system to enable the Municipal League to function as a department of revenue
- Evaluating and getting enacted any state laws necessary to make all this work
Will municipalities in the last frontier be open to such change? The Municipal League doesn’t know. Yet there’s certainly interest in obtaining remote sales tax revenue: Unalaska City Manager Thomas E. Thomas said in July that he hopes the Wayfair decision will allow local governments to tax remote sales (Unalaska has a 3 percent local sales and use tax); and Kenai Finance Director Terry Eubanks said taxing remote sales is “a matter of fairness to the local ‘brick and mortar’ businesses that invest in communities and hire local residents.”
For now, with no remote sales tax policy currently in place, Alaska municipalities can’t provide any guidance to remote sellers. If the AML does eventually impose local sales taxes on remote sales, it likely won’t be until late 2019 or early 2020.