Alaska cities tap into online sales taxes

Over the past few years, Alaska cities and boroughs have been able to tap into an extra source of tax revenue that was out of reach before: sales taxes for online retailers.

Thanks to a U.S. Supreme Court case decided in 2018, municipal governments are able to implement local taxes on sales that occur online. That presented logistical problems initially — typically, businesses register with a local government and pay quarterly, and with brick-and-mortar shops, they only have one or two local governments they have to register with. With a sprawling business such as Amazon, which sells to customers all over the world and in every tax jurisdiction in Alaska, that made getting into tax compliance more complicated.

To make that easier, the Alaska Municipal League volunteered to serve as the central clearinghouse for that project. In its first year, AML collected about $10 million of sales taxes for the local governments that participate, all of which have their own varying tax levies and seasonal restrictions.

Nils Andreassen, the executive director of AML, said the way the local governments are able to work together and streamline the process through the organization is unique to Alaska.

“We’re the only state in the nation that is able to do this,” he said.

Though one of AML’s most visible roles is in advocating for legislation and funding for local governments, it provides multiple shared services. The sales tax collection service joins an existing health trust, cybersecurity program, notary service and retirement service, among others. Last year, AML also created new programs to help with administering the federal CARES and American Recovery Plan Act funds.

Andreassen said he sees the services as one of the core things AML does.

“When I came on, I thought we were more of an advocacy organization,” he said. “We’re also a shared-service organization.”

The online sales tax program has largely been successful, Andreassen said. Though only about 40 of the 165 member governments in Alaska participate, that’s in part because not all of them have sales taxes that fit with the remote sales tax collection model — notably, Anchorage and Fairbanks have no general sales taxes, though each have more specific sales taxes on items like alcohol and hotel rooms. AML’s remote sales tax collection program is only for general sales taxes.

Pandemic shutdowns and resulting tourism losses led to sales tax drops in many municipalities. The ability to collect taxes on online sales has helped soften that blow, resulting in significant revenue bumps for some municipalities.

The Kenai Peninsula Borough, for example, which implements a 3% sales tax areawide, is expecting between $2.5 million and $3 million in revenue from just the remote sales tax in the upcoming fiscal year. That’s about 7% of its total projected sales tax revenue, according to the borough’s proposed fiscal year 2023 budget. The revenue has been on an upward trend the last few years as well; in fiscal year 2022, the borough collected between $1.8 million and $2 million. The cities on the Kenai Peninsula each also have their own sales taxes, ranging between 3-4%.

However, that wasn’t free to collect. Brandi Harbaugh, the finance director for the Kenai Peninsula Borough, said the borough spent $480,000 in administrative collection fees. That tracks upward with the amount of sales tax collected, as well.

Other municipalities are also taking advantage of the revenue. The City and Borough of Juneau estimated in November 2021 that it expected to collect more than $2 million in remote sales tax revenue based on its 5% tax levy in 2021. The city of Wasilla noted in its budget documents this year that it is expecting its sales taxes to increase, in part due to the increasing number of businesses being notified and participating in the remote sales tax program.

Andreassen said the level of impact seems to vary by municipality, with the smaller and more remote areas being more affected than the larger communities on the road system, ranging between 5-20% of their total sales tax revenue.

Municipalities generally also spend a lot of money and time collecting sales taxes from physical locations. To help lift some of that burden, AML is also offering a centralized service for collecting physical sales taxes from within communities. That essentially allows municipalities to sign up for a collection service that will collect sales tax and distribute it back to them in exchange for 2.5% of their total sales tax revenue.

Andreassen said the purpose of the service is to help alleviate the burden on local governments, especially the smallest ones.

“Out of the 106 local governments that have a sales tax, the majority of those are very small,” he said.

The shared service also opens up the program to any kind of sales tax the municipality wants to enroll in, from bed taxes to tobacco to alcohol. That broadens the number of governments that can participate. So far, they have a handful signed up, including small cities such as Thorne Bay in Southeast and Selawik in the Northwest Arctic. Andreassen said he expects more local governments to sign up as time goes on — that was how it worked with the remote sales tax collection program, which now has more than 40 participants.

Reach Elizabeth Earl at [email protected].