The City of Kodiak is not ruling out the possibility of collecting tax from residents who live outside of its jurisdiction. However, Kodiak City Council has still not made any firm decisions on how to deal with its new authority to collect sales tax for online purchases, as it is still weighing its options.
At a council work session Tuesday, the council was presented with city attorney Brook Chandler’s answers to questions that council members asked in previous meetings.
City Manager Mike Tvenge began by giving an overview of a teleconference with the Alaska Municipal League that he and the City of Kodiak’s finance director took part in on April 5.
AML is working toward building a uniform system to coordinate the collection of sales tax. So far, it has hired an individual to analyze various tax codes throughout the state; an official proposal from AML is due by November. Also involved in the teleconference were representatives from various communities throughout the state, many of whom spoke of having issues similar to those experienced by the City of Kodiak.
“Some of the issues were: collecting tax outside of the cities –– how that fits in. Zip codes were an issue,” Tvenge told the council. “Exemptions were a big issue –– which items are exempt.
“The more we dig into this, the more questions there are. And, we’re not alone in this. Other communities are receiving sales tax remittance, they’re wondering what to do with it, they’re trying to update their codes.”
Chief among the questions posed by council members in past work sessions was: Is it legal for the city to collect sales tax from online sales that occur outside city limits?
In a memorandum outlining his findings, the city attorney replied: “In my opinion the answer is YES UP TO A POINT.”
The city attorney noted that, legally, the city can collect sales tax from online sales that occur outside the city limits unless prohibited by the state or federal constitution or by state law.
In his memorandum, the city attorney concludes that, since there is no state law prohibiting the city sales tax extending to borough residents, “a city within a borough that does not levy a borough sales tax does have authority to levy a sales tax on sales that take place outside city boundaries.”
While the city attorney notes that in various other parts of the country sales tax is “frequently collected from non-residents including those who may only set foot within a city for a very short time,” he goes on to write that there are constitutional limits to this.
“If a borough resident could show they literally had no opportunity to enjoy the benefits provided by city services, the resident could have a valid claim the tax as applied to them was unconstitutional,” he writes. “Such a challenge would be based on specific facts and would not invalidate the entire provision as to all borough residents.”
Chandler noted that this may simply be a policy issue.
“Can we tax outside the city limits? To a degree, yes we can. Is it real clear? Depends on the reader I guess,” Tvenge said.
During subsequent discussion, councilmember John Whiddon, who at past meetings expressed his concerns over attempting to levy an online sales tax on non-city-residents, had a slight change of tune.
“When we first started talking about this, my first thought was that we should not tax outside the city limits,” he said. “But I think another way to look at this is … I believe the city should tax anywhere they send an ambulance. The reality is we’re providing a service all throughout the road system.”
According to the city manager, the last time the city purchased an ambulance, it cost $250,000. Whiddon posited the idea that online sales tax could go into a fund that would specifically be used for a purpose that serves borough residents, as well as those who live in the city.
“Hence: for the nominal amount of taxes that we would derive from online sales, it’s not totally out of the question that we should collect taxes in those areas that we provide services,” he said.
Another questions raised at a previous meeting was: what should the city do with the tax revenue that it will begin to receive from Amazon? Chandler’s opinion was, “Keep it but don’t spend all of it.”
Chandler wrote that, if it’s possible to determine how much of the revenue was collected by city residents and how much came from borough residents, the city should keep the revenue collected from the latter “in the bank” while policies are still being figured out.
“Alternatively, the city could choose to keep all the sales tax received from Amazon in the bank until a final policy determination is made,” he wrote.
According to Tvenge, this is the action that the city is currently taking. Tvenge said that the city has already received a sum of money from Amazon, which indicates that they’re not sending the sales tax they’ve collected to the city on a quarterly basis.
“We’re not sure what the first payment was,” Tvenge said. “The bottom line is, right now, if we receive sales tax remittance … we are holding it.”
A third question asked of the city attorney was: is the city required to refund sales tax to individuals from whom Amazon and other online retailers collected sales tax if those people do not reside within the city limits?
“In my opinion, the answer is yes, if the refund is for less than one hundred dollars, but only upon request of the taxpayer,” wrote Chandler.
While the city is not obligated to search out specific Amazon customers and make refunds, Chandler wrote, under current code “sales made by Amazon to nonresidents are not taxable.”
City code prohibits refunding taxes remitted by Amazon back to Amazon. While there is no specific code provision for a refund to the taxpayer, code states that “[i]n the event the amount of overpayment is $100.00 or less, a cash refund may be authorized at the discretion of the finance director.”
Chandler went on to recommend that the city create a temporary process for individual taxpayers to request a refund, which should include an application with proof of payment of the sales tax.
“That would be an amendment to our code,” Tvenge said. “Once again, if we make code changes, I think there’s going to be multiple changes, because we’re never going to catch all the concerns at one time.”
Whiddon opined that the development of both an exemption process and a refund criteria/policy are the most pertinent items to work on.
“We have to put together some code that will help us over the next two years, until we’re ready to enact a more comprehensive code,” Whiddon said. “And I haven’t heard much pushback from people outside the city saying, ‘I refuse to pay it, I don’t want to pay it.’ I’ve heard one or two people saying some things, but not many at all. I think it’s a question of how the message is sent and we should respond to it and be sensitive to concerns.”
City Mayor Pat Branson said that more research should be conducted before any decisions were made regarding changes to the code. Branson also mentioned that the city would be issuing messages to the public to keep them abreast of city activity regarding the collection of online sales tax.