Your budget-gap solution might be more complicated than you think

With the state’s fiscal woes looming over the next legislative session, there is a lot of talk about how to fill its multi-billion-dollar budget gap. Among the many suggestions are taxes, and communities are weighing several options. One suggestion is a tax on internet sales. The idea is to generate revenue and also level the playing field for in-state, brick-and-mortar shops.

Wrangell Chamber of Commerce’s letter to the Wrangell Assembly, Southeast Conference and the Alaska Chamber of Commerce.
Wrangell Chamber of Commerce’s letter to the Wrangell Assembly, Southeast Conference and the Alaska Chamber of Commerce.

Last month, the Wrangell Chamber of Commerce released a letter in support of a tax on internet sales in Alaska. The letter came just a day after Wrangell Assembly member Julie Decker added it to the panel’s agenda for discussion.

Decker urged the Chamber and the assembly to support an alternative to a statewide sales tax. The idea, she said, might satisfy communities with local sales taxes and those without.

“For a community like Wrangell, a state sales tax can be pretty negative since we already have a 7 percent city sales tax,” said Decker. “Cities like Anchorage that have no sales tax, a statewide sales tax is more supported. It’s less detrimental to them.”

On paper, Decker’s idea sounds like a good one. People may be more inclined to buy locally if taxes are applied to purchases on Amazon and other large internet retailers. But, online sales can’t be taxed in states and communities where retailers don’t have physical presence or in legal terms, nexus. Larry Persily, assistant to the Keni Peninsula Borough’s mayor, said Kenai looked into who the borough could tax for online sales in hopes of expanding its tax code’s reach this summer.

“In a nutshell because of federal law, if an online business does not have a physical presence, a connection in your jurisdiction, if they don’t have shop, a warehouse, agents working down there, employees down there taking orders, you can’t require them to collect and remit sales tax for you,” he said.

The goal was to start taxing some of the larger retailers such as Amazon, but under current federal law, Persily say it’s not possible without presence in the community.

“Now the question could the state impose a sales tax on online sales only and on nothing else? I believe that would be illegal. You can’t tax interstate commerce like that under federal law,” he said.

Keni isn’t the only community that’s painting a target on Amazon’s back. The Ketchikan Gateway Borough Assembly also looked into its abilities to tax big box internet retailers earlier this spring.

Estimated jobs lost for various potential fiscal solutions. (Graph courtesy of Muhcine Guettabi)
Estimated jobs lost for various potential fiscal solutions. (Graph courtesy of Muhcine Guettabi)

There are several states that collect taxes from these online retailers through so called “Amazon laws”, but the same idea of nexus applies. California requires retailers who have physical facilities and corporate affiliates who made more than $1 million in sales the previous calendar year to collect taxes. Texas only requires a physical building.

If Alaska were to implement a statewide internet sales tax, Amazon might still slip through its fingers. A quick job search for a job on Amazon’s website suggests they don’t have any locations in the state, so no nexus means no sales tax.

Walmart and Apple, two of the three largest online retailers, do have locations in the state. According to a Women’s Wear Daily report, Walmart comes in behind Amazon with $13.5 billion in sales and Apple in third with $12 billion. University of Alaska Anchorage Economist Muhcine Guettabi said if the state were to consider implement this, there are some questions to answer.

“The question that arises immediately is will the tax be high enough to potentially make consumers substitute away from the internet into brick-and-mortar shops, and are we actually buying goods and services from the internet that we actually have in Alaska,” said Guettabi.

He said there are a lot of ifs to most of the state’s potential fiscal and tax solutions such as an income tax, sales tax and PFD dividend cuts.

“They all are essentially going to have negative impact in the short run, not to say they aren’t necessary,” he said. “But, if we’re just looking at what they do to the economy in the short run, they take money away from it which means less jobs, less income.”

He said a state sales tax could equate to 500 to 750 jobs lost per $100 million of revenue,

and an income tax might result in 550 to 800 jobs lost. If the state decides to go the route of job cuts, it might cost about 1,500.  Guettabi said each tax may be good for one area of the state while having a negative economic impactsomewhere else. His answers reaffirm why many, like assembly member Decker, are thinking of new solutions to the problem.

Decker said with an internet sales tax being an unlikely solution for communities with sales taxes such as Wrangell, those communities will have to state their case against a statewide sales tax and make legislators understand the impacts.