State sales tax would affect municipalities

If a proposed 3 percent statewide sales tax now being considered by state legislators is enacted, how would it work?

As in other states with sales taxes, the tax would be automatically computed in transactions by merchants. In Alaska municipalities with sales taxes, the state would collect the combined taxes and send the local government a check for its share.

It’s a convenient arrangement for businesses that is followed in most states with sales taxes. Merchants only have to fill out one sales-tax report.

"A 3 percent state tax would bring in about $240 million in new revenue at tops and maybe less," said Deputy State Revenue Commissioner Larry Persily.

The tax would also cost about $3 million to $5 million each year to administer, according to estimates by the department.

If the current version of House Bill 303 becomes law, the state will become the collector and administrator of the combined state and local sales taxes. Only the exemptions listed in the state measure will be allowed in the combined state and city tax, Persily said.

In its current version, HB303 allows exemptions for only a few things, such as medicines, health care and some services, like construction. The proposed state tax does not exempt food. The portion of any transaction over $2,000 will be exempt from tax.

The exemptions could become a problem for cities like Juneau, which taxes sales of utilities like electricity, water and sewer, Persily said. Juneau’s utility tax is a major source of local revenue that would be lost if HB303 becomes law.

"Each municipality has its own list of tax exemptions, limits and rules, such as a cap on the maximum amount of a single purchase subject to sales tax, to ease the burden of purchasers of big-ticket items like automobiles," Persily said.

"There is no uniformity across the state. In this respect, merchants would likely appreciate a state-governed sales-tax program, with one set of rules statewide," he said.

However, municipalities would be free to enact their own, additional sales taxes on transactions exempted from the state tax, such as utilities in Juneau’s case, Persily said.

The same is true for a local hotel-bed tax, or a local alcohol or fuel tax.

But these taxes would be administered by the municipality and would require an additional sales-tax report for merchants to file in addition to the state tax. "It would be a pain," Persily said.

If the current version of House Bill 303 becomes law, some Alaska communities will have the dubious distinction of having some of the highest, and possibly the highest, combined state and local sales taxes in the nation.

Wrangell, in Southeast Alaska, currently has a 7 percent sales tax. With a 3 percent state tax added, the combined rate of 10 percent could become the highest in the nation, according to data collected by the Department of Revenue.

Petersburg, Kodiak, Cordova and Kotzebue now have 6 percent sales taxes. A 3 percent state tax could bring the combined total to 9 percent.

A survey by the department showed some areas of Oklahoma with combined sales taxes as high as 9.75 percent, and jurisdictions in Louisiana with combined rates as high as 9.5 percent.

Persily said the revenue effect of exempting transactions over $2,000 is difficult to estimate. Consumers may be tempted to alter purchasing habits to beat the tax, "bulking up" their purchases of supplies or other goods so that sales invoices reach or exceed $2,000, he said.

About one-third of Alaskans live in communities with a sales tax, according to data compiled by the Department of Revenue. Ninety-seven cities and boroughs that levy sales taxes collected $125 million in fiscal year 2001, or about $600 per capita among residents of those communities.

However, the state’s two largest municipalities, Anchorage and the Fairbanks North Star Borough, do not have a sales tax. Anchorage has never had a sales tax, and Fairbanks repealed its tax after the state began sharing large amounts of oil and gas revenues in the early 1980s.

Updated: 
04/14/2002 - 8:00pm

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