What does CoMO's sales tax have to do with interstate commerce, the internet, and online privacy?

Sales tax. Not a great opening line for journalists trying to educate people about how a city functions. The moment sales tax is mentioned eyes glaze over, something else suddenly becomes important, and we all casually scroll through twitter on our phones.

But sales tax is actually a really fascinating topic, especially right now in our city and country’s history. To learn why, we have to go back…way back, to 1970.

On December 16, 1970, the Columbia Daily Tribune had a relevant headline about sales tax. To give you a sense of the era the same day’s paper also included an article about Southern Vietnamese troops pushing into Cambodia, there’s a column naming Edmund Muskie the frontrunner for the Democratic presidential nomination in two years, and an advertisement for Schulte’s - that’s a grocer down in Jeff City - noted their acceptance of ‘Master Charge: the inter-bank card.’

Columbia Daily Tribune from December 1970 reports that voters approve a municipal sales tax.
Credit Columbia Daily Tribune

The important headline said: “Voters pass sales tax by six to four margin.”

What’s notable here is this was the first time Columbia ever had a municipal sales tax. Before 1969, cities in Missouri didn’t collect sales. But at the time the city of Columbia, and actually most American cities, were struggling to collect enough tax revenue to support their city budgets. Columbia was projected to have a $296,000 budget deficit by 1972. And as a way to address this, the Missouri legislature voted to allow municipalities to collect a sales tax so long as the tax was approved by voters.

So on December 15, 1970, the city of Columbia held a special election to vote specifically on whether or not to authorize a 1 cent sales tax that would fund the city government. Voter turnout was abysmal - a little more than 7,200 votes were cast, fewer than 30% of registered voters. Columbia’s population at the time was just under 60,000.

And the election was not even close. The yes votes nearly doubled the no votes and Columbia passed its very first sales tax. This was only 44 years ago. And it worked. The 1% sales tax collected $1.4 million in annual revenue. Municipalities all across the state and country started lobbying for, and ultimately gained more authority to collect sales taxes earmarked for specific purposes. And city voters approved several of those.

Now Columbia collects 2% in sales tax, which accounts for just under 27% of the city’s General Fund, more than any other single source. We have taxes earmarked for capital improvements, transportation, and parks.

Credit Abigail Keel / KBIA

Part of the reason voters, and politicians, like sales taxes is because they are paid in small increments, rather than large chunks like a property tax.

Terry Jones, professor of political science and public policy administration at UMSL gave another reason sales taxes sales tax became popular: some of it is paid by non-residents.

“Much of the sales tax, I would estimate probably 20-30% in Columbia's case,” he said, “is paid by non-residents of Columbia, particularly with the large number of students who live somewhere else but buy their retail stuff in Columbia. And so it’s shifting dollars from other parts of the state and nation into Columbia.”

Missouri municipalities have generally embraced sales taxes as revenue streams. In a 2014 report, the Tax Foundation lists the state as having the 6th highest local sales tax rate in the country. Local sales tax is the combined sales tax of a city and county.

But there are issues with sales taxes. Back in 1970 leading up to the sales tax vote, there was a group called ‘Columbians for Responsible Taxation’ that ran ads in the Tribune like this one, asking voters to vote against the sales tax. They called it “regressive” and said it would “hit the low and fixed income people the hardest.”

An ad from the Columbia Daily Tribune in 1970 encourages voters to vote against a municipal sales tax.
Credit Columbia Daily Tribune

That group wanted Columbia to pursue different options: a sales tax with exemptions for food and medication, an earnings tax, or an income tax.

These are many of the same arguments we heard against Proposition 7 last August, which was also a sales tax.

Sales taxes are also more vulnerable to changes in the economy than other types of taxes. During the recession, when people spent less, less money was collected in sales taxes.

But there’s another problem with sales taxes that’s a little less visible, but even more penetrating. It’s a problem that’s only developed relatively recently: the internet.

City manager Mike Matthes said that internet sales have had a huge impact on the local sales tax revenue Columbia can collect.

“Who doesn’t love the internet, right?” he said. “But when I go buy that iPod from Amazon instead of Best Buy I don't pay that 2% [tax] that comes to the city. And so what we've seen is that since 2001 we've had a 20% reduction per capita revenue from the sales tax.”

This is an important point. Even though the total amount of money the city collects from sales tax every year grows, the per capita sales tax revenue has actually dropped significantly. That’s because the growth in total revenue is accounted for by the growth in population – the university brings more and more people here who spend more money every year. But overall, the reliability of sales tax revenue for city government spending has collapsed.

And there isn’t a great way for the state and cities to capitalize on the internet sales happening in Missouri. There are no federal regulations about collecting sales tax on internet sales, which means, for the most part, we don’t pay them. There are different laws about this from state to state. In Missouri we fall back on a 1992 US Supreme Court (Quill Corps. v. North Dakota) decision that was actually made regarding mail-order businesses. That decision requires a company to collect sales tax in states where it has a “physical presence” - which could mean a warehouse, a store, an office, even just a business representative.

And an easy way around that is for companies to not have a physical presence in the state.

So instead what Columbia is turning to is property tax, unpopular though it may be, because it is a relatively stable source of revenue. If you’re attempting to fund 30 public safety officers – which is proposed property tax on the November ballot would do – you don’t want to do so with a tax that is dwindling.

The General Fund is the part of the city's budget that pays for things like police and fire services, transportation, and administrative costs. Over a quarter of this fund comes from the municipal sales tax. Another 9 percent of the General Fund is generated from property taxes. Other revenues come from interest, other types of taxes, and grants.
Credit Abigail Keel / KBIA

And if citizens want to move away from more property taxes in the future, that’s going to take some really big changes coming from the top down. Matthes said the whole country is going to need to make some decisions.

“I mean at the end of the day it’s just a willingness to change,” he said.  “Meaning you have to tax what's not taxable. We've given a massive tax break to everyone using the internet and that's helped build the internet into the tool it is. So we have to decide is that tax loophole still worth keeping? Or is the cost benefit too great and do we need to begin to tax it?”

And really when you think about it the idea that the country is giving the internet a tax break is entirely correct. If you were to go on to Amazon right now and order a Swingline stapler. It will cost us $6.07 plus shipping. But no sales tax. You’d be avoiding 7.975% in sales taxes from the city, county, and state.

Online retail has been benefitting from this for pretty much its entire existence, which isn’t due to a policy decision. The internet grew quicker than anyone could regulate it. And the question as Matthes posed it is: do we want to continue giving these taxes breaks for online sales? Really that question is about the survival of sales tax as a source of revenue for governments, and it is beginning to play out.

As Jones explained, “the future depends upon the ability to have the sales tax collected for electronic commerce.” Something he described as if, not when.

“There is a movement among the states to have legislation passed at the national level and within each state,” he explained. “The so-called streamline sales tax proposal, so that access to that revenue stream will become available.”

And this is where things really get complex and federal. According to the same 1992 Supreme Court decision mentioned above, it would require an act of the US Congress to grant states the authority to collect sales tax on online purchases from retailers with no physical presence in their state. On top of that, a decision would need to be made about how the taxes would actually be collected and distributed. 

So Columbia’s dependence on the sales tax is really a small part of a much, much bigger issue.

An earlier version of this article incorrectly stated regulation of sales tax would need to be done by the federal government and doled out to states.