Can cities in Alaska streamline sales tax enough to tax remote sales?
- Sep 12, 2019 | Gail Cole
Alaska is unique among the 50 states in that while it has no statewide sales tax, more than 100 municipalities levy local sales and use taxes. Those communities now want to tax remote sales.
Like the 45 states with a sales tax (plus Washington, D.C.), Alaska cities have historically only required businesses located within the taxing jurisdiction to collect and remit sales tax; businesses with no physical tie to the jurisdiction could not be compelled to collect.
Yet states won the right to tax remote sales on June 21, 2018, when the Supreme Court of the United States overruled the physical presence rule in South Dakota v. Wayfair, Inc. The high court determined that economic activity alone could establish a sales tax collection obligation. Thus, while physical presence nexus still exists, states can now also enforce economic nexus.
Since the Wayfair ruling, 43 states and Washington, D.C. have adopted an economic nexus law or rule. Alaska won’t because it doesn’t have a general sales tax — but that doesn’t seem to be stopping Alaska’s cities from pursuing economic nexus at the local level.
This begs the question: Does Wayfair sanction taxing remote sales at the local level when there’s no statewide sales tax?
The City Council of Nome, Alaska, clearly thinks it does.
Nome: The advance guard
Economic nexus took effect in Nome on September 1, 2019.
Ordinance 0-19-08-01 was approved by the Nome City Council in late August. It requires remote sellers and marketplace facilitators to register with the city of Nome and collect and remit Nome sales tax* if, in the current or previous calendar year:
- The seller’s gross revenue from sales of property, digital products, or services delivered into the state is $100,000 or more; and
- The seller sold property, digital products, or services into Alaska in at least 100 separate transactions.
Whether the city is prepared to enforce economic nexus at this time is unclear: With just a few days between passage of the ordinance and its effective date, the city didn’t give itself much time to get its ducks in a row. And as of this writing, there’s no mention of economic nexus or remote sellers on the City of Nome website.
Assuming Nome does enforce economic nexus as planned, and other cities in Alaska follow suit, the Last Frontier could become quite a challenging place for remote sellers to do business.
Local sales taxes are administered by the state tax authority in most states. Thus, a business can go to the California Department of Tax and Fee Administration to learn about sales tax in Los Angeles, San Francisco, or any other jurisdiction — and it’s generally (though not always) true that what’s taxable in one city in a state is taxable in another.
Sales tax compliance is still a hassle: There are hundreds of sales and use tax rates in California alone. It’s even more complicated in home-rule states, like Alaska, where localities have the authority to administer and levy their own taxes. Yet at least most states have a statewide sales tax system that helps balance the local sales taxes.
Alaska is one-of-a-kind. It’s the only state in the union with local sales taxes but no state-wide sales tax. In some respects, it’s the polar opposite of South Dakota.
What South Dakota’s got that Alaska doesn’t
When the Supreme Court of the United States overruled the physical presence rule in South Dakota v. Wayfair, Inc., it didn’t replace it with another bright-line test. However, the court did call out several features of South Dakota’s tax system that “appear designed to prevent discrimination against or undue burdens upon interstate commerce.” These are:
- It provides safe harbor to those who transact limited business in the state
- It prohibits retroactive enforcement of economic nexus
- It’s a member of the Streamlined Sales and Use Tax Agreement, or SST
Most of the 43 states that have adopted economic nexus since the Wayfair ruling provide safe harbor for small sellers and prohibit retroactive enforcement of economic nexus; 24 of them are also members of SST.
SST was created in response to two earlier Supreme Court decisions — National Bellas Hess v. Illinois Department of Revenue (1967) and Quill Corp. v. North Dakota (1992) — that upheld the physical presence rule because of the complexity of state sales tax systems. The purpose of SST is “to simplify and modernize sales and use tax administration in order to substantially reduce the burden of tax compliance.”
Participating states hoped SST would help overturn the physical presence rule, and it did. The Supreme Court noted in Wayfair that SST member states have simplified sales tax administration and reduced its associated costs by establishing:
- A central, electronic registration system
- Consumer privacy protection
- Simplified administration of exemptions
- Simplified state and local tax rates
- Simplified tax remittances and returns
- State administration of sales and use tax collections (no self-collecting local jurisdictions)
- Uniform state and local tax bases
- Uniform sourcing rules for all taxable transactions
- Uniform tax base definitions and rules
Alaska isn’t a member of SST, of course. However, Alaska cities are keeping the Wayfair decision — and the SST — in mind as they move forward with their plan to tax remote sales.
Alaska cities seek unification and simplification
After Wayfair, the Alaska Municipal League (AML) spent months researching the issue of remote sales tax. It concluded that “while physical nexus is not necessary, collection of an online sales tax must not become burdensome to interstate commerce.”
How to avoid burdens? The AML proposes the creation of:
- A single-level, statewide administration of online sales tax collection and administration
- Common definitions among the 105 taxing jurisdictions
- Common caps and exemptions among the 105 taxing jurisdictions
- A Geographic Information System (GIS) to establish sales tax boundaries
In addition, “where physical sales are codified, municipalities will need to change their tax codes to include online [remote] sales.”
This is a bold move, according to Vice President of Government Relations at Avalara, Scott Peterson: “Central administration, or one place sellers could interact with government, is a key component of the Streamlined Sales Tax initiative. Knowing that, and knowing the Supreme Court liked that South Dakota was a member of Streamline, the Alaska Municipal League has taken a very bold decision to see if they could facilitate the creation of something that looked like central administration for Alaska cities.”
Will it work?
The AML concedes in its Frequently Asked Questions that “the word ‘municipality’ appears nowhere in the Supreme Court decision [South Dakota v. Wayfair, Inc.],” but it points out that Alaska is unique: It’s “the only state that allows municipal sales taxes without an overriding set of rules in a state sales tax.”
As is fitting, Alaska municipalities are preparing to “set their own trail.” The AML will endeavor to “adhere to the intent of” the Wayfair ruling by avoiding placing undue burdens on interstate commerce and retroactive taxation. It will also strive to establish “a system that standardizes tax rules to reduce administrative and compliance costs for remote merchants.”
Above all, the AML stresses the need for cities to work together and take a coordinated approach. That may prove challenging in such an independent-minded place: Already, Nome has jumped the gun.
Non-SST states embrace simplification
Other non-SST states are also working to facilitate sales tax compliance for remote sellers.
Alabama created a simplified sellers use tax: Remote sellers can opt to collect a flat 8 percent sales tax on all sales into Alabama rather than the varying state and local rates in effect at each location.
Similarly, Texas is allowing remote sellers to collect a single local use tax on top of the state tax, rather than mess with the actual rates in effect in the more than 1,500 different local taxing jurisdictions.
Arizona’s economic nexus law strives to simplify the state’s transaction privilege tax (TPT) collection requirements for remote vendors. But it may not go far enough. Municipalities still have the power to administer local TPT on certain sales and exempt other sales.
California has established simpler sales tax requirements for in-state sellers. And the home rule state of Colorado is working to simplify its fantastically complicated sales tax system. It’s already mandated destination sourcing for Colorado sellers, and the Colorado Department of Revenue is working to create a sales and use tax simplification system to facilitate the collection and administration of state and local sales tax. The department won’t require home rule jurisdictions to use this new system, but it expects them to choose to do so.
In addition, several states have eliminated laws adopted prior to Wayfair that attempted to tax remote sales: Arkansas and Colorado repealed affiliate nexus laws. Arkansas, California, Colorado, Ohio, and Washington all repealed click-through nexus laws. And Georgia, Kentucky, and Washington repealed non-collecting seller use tax reporting laws.
As Scott Peterson notes, “All these changes are extremely positive improvements in state and local sales tax administration.”
Learn more about state efforts to tax remote sales on Avalara’s sales tax nexus law by states resource page.
*Fun fact: The sales tax rate in Nome changes with the mercury. It’s 5 percent from September through April, and 7 percent during the tourist-heavy months of May, June, July, and August.