non-resident sales tax: an evaluation of the impactsfaculty.cbpp.uaa.alaska.edu/afgjp/padm628 spring...

Non-Resident Sales Tax: An Evaluation of the Impacts

Dean Marshall

Natalia Mejia

Jeanette Reddington

Geran Tarr

PADM 628

Dr. Protasel

Non‐Resident Sales Tax: An Evaluation of the Impacts

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Special thanks to

Eric Larson, Senior Staff Accountant, for the Municipality of Anchorage Finance

Department for his assistance. Eric was kind enough to spend time with our

group helping us develop our research question and also provided our group

with background materials.


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TABLE OF CONTENTS Section I: Executive Summary 4 Section II: Introduction 6 Section III: History of Taxation and Taxes in the United States 6 History of Taxation 6 Tax History in the United States 7 Major Tax Structures in the United States 10 Non-resident Sales Tax 11 Section IV: Taxes Currently Paid by Non-Residents in Anchorage 12 Non-residents in Anchorage 12 Existing Taxes Paid by Non-residents 13 Section V: Non-resident Sales Taxes in Other Locations 15 Arizona 16

Ohio 16 Washington 17 Hawaii 17 Juneau 19

Section VI: Implementation, Administration & Enforcement of a Non-resident Sales Tax 19 Overview 19 Economic Effects of Implementation 21 Collectability 22 Section VII: Conclusion 28 Section VIII: References 29 Section IX: Appendices 32 Non-resident sales tax fact sheet 33 Resident exemption ID card 34 Group presentation 35


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Section I: Executive Summary

This paper evaluates the impacts of a non-resident sales tax in Anchorage,

Alaska. The research conducted for this evaluation included the history of taxation, the

history of taxes in the United States, information on taxes residents and non-residents

currently pay in Anchorage, taxes paid by non-residents in other states and

administration of those programs. The paper also addresses the implementation,

administration and enforcement of a non-resident sales tax in Anchorage.

Governments have long used taxation as a means of collecting revenue from

citizens to redistribute for public services provided. In the United States, common forms

of taxation include income taxes, goods and services taxes and property taxes. A non-

resident sales tax is a sales tax that can be used to capture income from those

individuals who receive the benefits of public services in one area but do not live there.

In Anchorage, non-residents are visitors, non-resident workers and seasonal workers.

These individuals may contribute through one of the existing taxes, mostly associated

with the tourism industry, but a non-resident sales tax would include more people and

therefore more revenue for the Municipality of Anchorage.

Non-resident sales taxes have been successfully implemented in other locations,

both at the local and state level, sometimes favoring residents and sometimes non-

residents. They come in the form of rebates and discounts, depending on the locality,

and each has a different program and rates of taxation.


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This analysis provides a limited view of the scenario. The exact amount of the

predicted revenue was not considered at the recommendation of Municipality of

Anchorage Senior Staff Accountant Eric Larson, who recommended against making

predictions about the economic impact due to the complexity of accurate forecasting.

There are a large number of variables that would affect the amount of tax collected;

further research and modeling could provide the necessary information for predicting

the economic impact of this tax.

The results of the research evaluated demonstrates that implementation of a

non-resident sales tax is feasible and could generate revenue for the Municipality of

Anchorage. The report suggests this tax could have a positive impact for residents of

Anchorage and recommends that the Anchorage Assembly conduct an economic

impact study for this tax.


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Section II. Introduction This paper evaluates the impacts of a non-resident sales tax in Anchorage,

Alaska. The research conducted for this evaluation included the history of taxation, the

history of taxes in the United States, information on taxes residents and non-residents

currently pay in Anchorage, taxes paid by non-residents in other states and

administration of those programs. The paper also addresses the implementation,

administration and enforcement of a non-resident sales tax in Anchorage.

Section III. History of Taxation and Taxes in the United States

History of Taxation

Throughout the history of humankind, governments and rulers have taxed

communities and countries in order to create a revenue source for expenditures.

Through the following paragraph a brief description of the history of taxation and

significant events will be evaluated and review.

One of the earliest accounts of taxation can be traced back to ancient Egypt.

During the reins of the Egyptian Pharaohs tax collectors were known as scribes. The

Scribes were responsible to make sure that the tax was being collected and that people

were not avoiding it. To such degree was their commitment that scribes would audit

households to ensure that appropriate amount of cooking oil were consumed and that

citizens were not using other substitutes (Adams, C. 1993).


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Later, the Greeks imposed various taxes during the times of war in order to pay

for the wartime expenditures, no one was exempt from this tax. However, when the

Greeks gained additional resources, they refunded the tax back to the people. Another

interesting fact about the Greeks is that they actually imposed a monthly poll tax on

foreigners, a tax that was referred to as metoikion (Adams, C. 1993).

The Roman Empire was also well known for their taxing. Caesar Augustus is

considered by many to be one of the most brilliant tax strategists for the Roman Empire.

The earliest taxes known to the Romans were taxes on imports and exports. Caesar

Augustus instituted an inheritance tax to provide funds for the military retirement, a

sales tax of four percent for slaves and one percent for everything else. He is also

known for having eliminated tax collectors for the central government, and giving that

responsibility to the cities (Adams, C. 1993).

After the fall of the Roman Empire the Saxon kings imposed taxes in Great

Britain on land and property as well as duties on imported goods. During most of the

tenth centuries, the taxes in Great Britain were progressive. However, they were

engaged in ongoing wars and in order to pay for the continuing war the parliament

imposed taxes on essential commodities like grain and meat making the taxes a lot

more regressive.

Tax History in the United States

The Tax History in the United Sates is one full of constant struggles due to the

need for revenues. During the late 1600’s various Acts were passed, which influenced

taxation history in the United States. One of those acts was called the Staple Act. Under


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the Staples Act, goods had to be directly shipped to England where subsequently they

would be re-exported to other countries at greater profits to English merchants.

Furthermore, it also required that all the European exports shipped to the colonies, be

shipped through England first. Adding this “middle man” approach, inflated the prices of

other goods, making English goods a lot cheaper than the competition. In 1996,

Parliament passed the Navigations Act, which required American Governors to enforce

trade regulations as well as increase the legal powers f the customs agents. The Hat

Act of 1732 prohibited the export and inter-colonial sales of finished hats, therefore

discouraging the colonial manufacturing and economic system. Even though these acts

were designed to limit the colonial economy, the acts did not prohibited Americans to

own their own ships and transfer their goods, therefore enabling colonial merchants to

engage in commerce between the main land and the West Indies. But even after so, a

lot of control and restriction existed from the English government as an attempt to

control the economy of the colonies, which eventually lead to the American Revolution.

The other major war in the American history, the civil war also required financing,

which was provided forms of taxing. In the confederate side various methods of taxation

were used, as a tariff tax of 1861, as well as the issuing of bonds and excessive printing

of currency, which depreciated the Confederates money. In order to produce greater

revenues a progressive income tax, an eight percent levy on certain goods, and a ten

percent on wholesalers were enacted.

Unlike the Confederate the Union had the advantage that they had an

established and tariff structure. Nonetheless they also required a source of revenues in

order to finance the war. Like the confederates the union members also printed more


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currency, but the difference was that Congress required that citizens, banks and

governments accepted the currency as a form of payment for private and public debts

with the exception of federal bonds and customs duties. Additionally, the Unions

decision to implement a broad system of internal taxation insured a valuable source of

income, but also protected them from the inflation the Southern states were

experiencing.

The tax act of 1862 is considered the first income tax in the history of the United

Sates and was moderately progressive. The tax imposed a three percent tax on income

above $800 dollars and five percent on incomes above $10,000. This act exempted

businesses worth less than $600 dollars. The revenue was used to fund the Civil War,

but was not sufficient to cover all expenses so in 1864 congress approved new laws

that increased tax rates and expanded the progressiveness of income taxation. The

income tax was re-evaluated in the 1881 court case of Springer v. United States, where

the Supreme Court rejected the claim that the income tax was unconstitutional.

Needless to say, throughout history new forms of taxation have existed, making the tax

system progressive or regressive, due to the constant need for revenues. The most

recent tax, the tanning tax, proposed by president Obama will go in effect on July 1,

2010. This tax was created to help fund the 940 billion health care reform, by taxing

10% to individuals receiving indoor tanning services. The tanning tax is expected to

generate 2.7 billion on revenues over the next ten years.


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Major Tax-Structures in the United States

The individual and corporate income tax and the payroll taxes on wages and

salaries are currently the dominant government revenues sources in the United States.

In 2008, individual income taxes yield $1404.9 billion while corporate income taxes

yielded $263.3 billion revenues. As mentioned earlier the federal income tax was

originally created to help finance the civil war. The legality of this tax was upheld by the

US Supreme Court in Springer v. United States, because according to the constitution

the income tax was indirect and therefore valid (Mikesell, 2009). Revenue from

individual and corporate income taxes increased dramatically as a share of gross

domestic product (GDP) with the need to finance World War II (WWII), but fell modestly

when the war ended.

Taxes on goods and services are perhaps the main source of income for a state

level government. In the United States more than 535.9 billion taxes were collected on

goods and services on 2008 (Mikesell, 2009). As described by Mikesell, taxes on goods

and services have several desirable features. One is that they can generate a

considerable amount of revenue when applied to a broad base. Second, they provide

revenue from receiving payments from individuals with high economic capacities and

low current income (those who are living off inherited wealth). Third, some of these

taxes may function as quasi-prices to collect for social costs or to act as surrogates for

charges of certain government services. Lastly, taxes can have some production

effects because they tax according to what people consume, encouraging savings.

Generally taxes on goods and services can be general or selective, specific or ad

valorem, multi-stage or single state and finally for a general fund or earmarked.


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Property taxes are a major source of revenue, up to 90 percent, for local

governments. Property taxes were once the primary tax for both the local and state

government, but during the Great Depression property taxes were often not collected

from individuals who had lost their usual source of income. This encouraged states to

develop new taxes on goods and services, especially in retail sales and motor fuel.

Non-Resident Sales Tax

In order to understand the concept of a non-resident sales tax one must first

understand what a resident sales tax is. A resident sales tax is levied on certain goods

and services for individuals buying goods and services in a specific location. The

income generated generally helps to pay for the goods and services provided in that

community as the police and fire department, schools, library, etc. In 1921 West Virginia

became the first state to enact a sales tax. Currently, 45 states have sales tax with the

exemption of Alaska, Delaware, Montana, New Hampshire, and Oregon.

A non-resident sales tax would be a tax levied on goods and services on

individuals that are not permanent residents of the state, and whom are utilizing goods

and services in the state. Residents of the state could be exempt from this tax through

various means as by providing an identification card, or any other proof of residency.

The primary benefits of imposing a non-resident sales tax would be that it would

generate an alternative source of revenue and reduce the burden and need for property

taxes. As emphasized in the last section property tax could account for up to 90 percent

of a community revenues, and considering the recent housing crisis it is necessary to

look for an alternative source of income, and possibly preventing the similar events that


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occurred during the Great Depression where people were unable to pay the property

taxes and the state and local governments were left without a source of income.

Another benefit of a non-resident tax is that everyone who utilizes the services provided

by a community will contribute by paying for those services, instead of only the

residents. This would prove extremely beneficial for states with a high migrant

population or high tourism rates among other things.

A criticism of this tax is the argument that it might discourage people from

traveling to Anchorage. It has the potential to alter people’s consumption patterns and

some may choose to purchase a good in a location without the sales tax. Finally, the

strongest criticism is the fact that compliance from small business may be problematic

to administer and guarantee.

Section IV. Taxes Currently Paid by Non-residents in Anchorage

Non-residents in Anchorage

There are three broad categories of individuals that can be considered non-

residents. These include visitors, non-resident workers and seasonal workers. Visitors

are the largest group of individuals. There are thousands and thousands of visitors

who come to Anchorage each year; each of these individuals use public services

during their visit (ACVB, 2010). The group of non-resident workers includes any

individual who earns a majority of their annual income in Alaska and even claims

residency here, but has a family and home elsewhere. There are unique employment


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circumstances in Alaska that allow for this to happen. Jobs in the natural extraction

industries, including oil and gas, mining and fishing, are often in remote locations and

shifts are often varying lengths of time. It is not uncommon for an individual to work

three weeks on, three weeks off or two weeks on, two weeks off. The individuals who

work on fishing boats might work for three months and then be at shore for several

months before the next season. These individuals can be in Alaska for the time they

are at work and then live elsewhere with their family on their time off. They benefit by

earning their income in a state without an income tax and residing in another. The

third category of workers, seasonal workers, are only in Alaska temporarily to fill the

demand for service workers in the tourism industry.

Historically, wages have been higher in Alaska and therefore someone working

here and not paying any income taxes had the potential to earn more, even after living

expenses, to make it a lucrative option. In recent times, wages are less competitive,

but a summer in Alaska is still a once in a lifetime experience and that adventure draws

a large number of people here.

Existing Taxes Paid by Non-residents

There are a number of taxes that non-residents currently pay. These include:

bed tax car rental tax cruise ship head tax other municipal taxes other Anchorage taxes


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The existing taxes are likely to affect visitors traveling to Alaska more than non-

resident and seasonal workers, who are more likely to use the goods and services with

existing taxes.

The bed tax was created to market Anchorage as a destination. This tax was

created in 1975 to have the funds necessary to create a Destination Marketing

Organization (DMO) that would function to attract and serve visitors to Anchorage. This

tax is unique because it was initiated by the visitor industry. They chose to tax

themselves to fund marketing efforts instead of looking to municipal, state or federal

funds. The original tax was 5% and in 1979 the tax was raised to 8% and the extra tax

collected was put in the MOA General Fund. Recently the tax was increased to 12%.

The tax collected today is split three ways with one-third supporting the Anchorage

Convention & Visitors Bureau (ACVB) marketing functions, one-third goes to MOA’s

general fund and one-third is utilized to service the bond debt and operations of the

Anchorage Convention Centers (Denina Center) (ACVB, 2010).

The car rental tax is under Anchorage Municipal Code (AMC) Chapter 12.45,

Rental Tax on Retail Rental of a Motor Vehicle. The code levies an 8% tax on all

rentals in the Municipality. This tax is required by law to be stated on the rental contract

and must be paid by each renter when the rent is paid to the rental agency (Municipality

of Anchorage, 2010). There is also a 10% State of Alaska vehicle rental tax and taxes

for cars rented from the airport in Anchorage. The airport rental fees include an 11.11%

airport rental tax and $4.87 per day vehicle rental fee.

The cruise ship head tax was passed by voter initiative in 2006. The tax is a

head tax that imposes $50 tax per person on each passenger. Visitors coming to


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Anchorage by cruise ship will have paid this tax before arriving in Alaska. This tax was

seen by some as excessive and the Legislature recently passed a law reducing the tax.

Non-residents might pay a variety of other taxes that apply to residents and non-

residents alike. These include taxes on liquor, tobacco, gaming (pull tabs) and a

studded tire tax levied on all studded tire purchases.

A final set of taxes that could potentially apply to non-residents in Anchorage are

the municipal taxes from other locations. These taxes are likely to impact visitors more

than non-resident and seasonal workers, but some non-resident workers and seasonal

workers might spend time in communities with sales taxes and therefore would be

subject to them when in that location.

Section V: Non-Residential Sale Taxes in Other States

Some states, counties, or cities offer different types of taxation based on

residency. For example, Manhattan has a sale tax on parking if the buyer for non-

residents. If an individual shows proof of residency they can receive a discount on the

sales tax. Some states combat the high cost of living by offering residents a discount

cards. In Hawaii, these cards are administered by property owners; the discounts are

offered by local establishments and used by residents. In Arizona, the state offers non-

residents a partial discount from Arizona taxes. At the federal level, the IRS has

different taxes for non-residents and residents. The federal system could provide a

guide for establishing limits for non-residents.


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Within the United States, alien and residents are taxed differently. The United

States is defined as all 50 states, territorial waters, seabed, and subsoil. However, it

does not apply to the airspace that the United States controls (Topic 851- non-

residential Alien Taxes, 2010). For the purpose of the Anchorage non-residential tax, it

should be applied to the airspace within Anchorage. Anchorage and other Alaskan cities

have a high density of aircraft. Many tourists and travelers use the aircraft services

within Anchorage, taxing the quality of air and often the water in which the planes land.

Arizona

There are some states that offer discounts on sales tax based on residency, take

for example Arizona R.V’s taxes and sale. Arizona has sales tax of 5.6%, and many

cities offer additional sales taxes (Arizona Sales Tax Rates, 2010). Within Arizona there

are tax exemption for non-residents. If a person buys an R.V within Arizona, that person

can file an exemption certificate, and the sales tax is waived. However, the buyer will

then have to pay the proper sales taxes within their resident state (Out of State Buying).

In addition, not all states are exempt from paying sales tax. Many states are

eligible for a partial reduction, which allows them to waive their resident sales tax. This

is done so that the buyer does not pay the tax twice. Residents of Arizona will have to

pay full city, state, and county sales tax. This is a system used to encourage out-of-state

buyers to buy bigger ticket items within Arizona.

Ohio

The state of Ohio applies a sales tax on all watercraft and outboard motors to

non-residents in Ohio (Ohio, 2007). The state of Ohio provided that watercraft dealers

impose compliance. Every non-resident that purchases a watercraft is to fill out the form


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that calculates the rate of tax, the dealer then sends the form in to the state. The

purchaser fills out the form with the county/city/ state of Ohio tax, then on a separate

line the state of registration’s tax rate, and finally there is a discount line for purchasers

that turn the form in on time. The discount is .0075 of the Ohio tax. Ohio collects the

difference between the Ohio tax and the discount. If no tax is collected in the resident’s

home state, then Ohio will not collect a tax (Ohio, 2007). This discount on watercraft

may be a way to encourage out of state buyers with a low tax discount.

Washington

The state of Washington extends a tax exemption to non-residents. The

Department of Revenue generally taxes the exportation of goods sold to other states.

The State of Washington chooses to give states and provinces an exemption of taxes if

the home residence had a sale tax less than three percent (Washington). The seller

may opt to collect sales tax whether or not the buyer qualifies for the exemption. If the

buyer pays a sales tax, they cannot file for a refund. The buyer has to tell the seller that

they are a non-resident and that they qualify for an exemption, the buyer needs to show

a state ID from the qualifying state or territory.

Hawaii

Hawaii does not have a sales tax; they utilize a General Excise Tax and some

islands also levy a surcharge. If a retailer pays four percent tax they pay the tax on the

consumer plus an extra .167 percent to cover his own expenses (Beebe, 2004-2010).

When a non-resident sells a piece of real estate in Hawaii, the state withholds five

percent of the sale price for taxation. The non-resident vs. resident tax difference is one

percent. The HARPTA is a withholding tax on sales of Hawaii real property by non-


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residents. It requires all non-residents to remit or withhold taxes within 20 days of a

property sale (Government, 2010).

Within HARPTA it is assumed that every seller is a non-resident. Every seller that

is a resident has to remit proof to the buyer that he/she is a certified resident. The seller

is exempt from the five percent tax if he/she has a Hawaii Resident Certification. It is the

sellers responsibility to provide the resident certificate and the buyers responsibility to

obtain and file the certificate. If the buyer does not file the certificate, the buyer is liable

for all penalties and interest due to the state (Government, 2010).

The many different islands in Hawaii offer resident cards. The island of Maui has

a resident card that is offered to property owners or people that can verify residency.

The Maui Property Owners LLC issues the residency card (How to get your card). When

a card holder walks into an store or establishment, they will generally ask the cashier if

they accept the residency card, if the store does, the buyer generally receives a 20%

discount. It is left up to the buyer to endorse the establishments that accept the card.

The Kamaaina discount card is not a state id; in fact, the state id will not get the

customer any discounts.

On a much smaller discount scale, the City of Manhattan offer residents a sale

tax discount on parking. The City of Manhattan has a parking tax of 18.357%. Resident

can apply for a 8% exemption if they qualify for the exemption. To qualify for the

exemption the resident has to show that they rent a long term parking space, the vehicle

must be registered at a residential Manhattan address, and the vehicle must be for

personal use only (York, 2010). In addition, the exemption expires every two years and


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it can be renewed online.

Juneau

The City of Juneau repealed a nonresident sale tax exemption in 2005 (Juneau,

2005). The ordinance (CBJ 69.05.0404) to repeal the non-resident sale tax exemption

went into effect in 2005. Juneau stopped issuing exempt card January 1, 2006, and

continued to honor exempt card until July 1, 2006. Previously the exemption applied to

non-residents that purchased goods and personal property within Juneau to be used

outside of Juneau (Juneau, 2005). The exemption did not apply to non-residents that

were temporarily living in Juneau. Those that were receiving the exemption had to

provide the seller with a sales tax exemption card and other personal identification at

the time of purchase.

Within Anchorage, the city could issue an exemption card for Anchorage

residents. Most states offer exemptions on sales tax to boost sale within their city, state,

or industry. Most of these state have high sale taxes due to the state issuing a sales tax

and combined with a city sales tax. A sale tax targeted to non-residents would primarily

target buyers outside of Anchorage.

Section VI: Implementation, Administration & Enforcement of a Non-resident Sales Tax

Overview

Like other forms of government, the Municipality of Anchorage has the sovereign

power to collect revenues by means of coercive payments called taxes. According to

Mikesell (2010), “Furthermore, businesses and individuals would rather not pay taxes


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because, by and large, the amount of government services anyone receives is

independent of the tax that person or business pays.” Mikesell goes on to say, “The

tax is the law and tax collectors enforce the application of the rules of collection to a tax

base” (Mikesell, 2010).

Sales Taxes are the second major revenue source for local governments.

According to Mikesell, “Around 6400 local governments levy general sales taxes.”

Mikesell goes on to say that sales taxes are second only to property taxes as a major

revenue source” (Mikesell, 2010).

In 2009, local governments generated approximately $1.38 billion in revenues from

property, sales and severance taxes” (Department of Commerce, 2010). According to

State of Alaska Office of the State Assessor:

Sixty-two (62) Alaskan municipalities (reporting) levy a general sales tax. Sales tax rates range from a low of 1% to a high of 7%. The "typical" sales tax rates are from 2%-5%. Other types of local taxes levied are raw fish taxes, hotel/motel "bed" taxes, severance taxes, liquor and tobacco taxes, gaming (pull tabs) taxes and fuel transfer taxes (Department of Commerce, 2010).

According Alaska Taxable (2009), Alaska Statutes 29.45.650-710 authorizes the

levy of sales and use taxes at the municipal level. The statutes give broad authority to

municipalities to levy taxes on sales, rents and services provided within the municipality.

Alaska statute includes a couple of limitations for municipalities that apply a sales tax:

Orbital space facilities are exempt from the levy of sales tax and alcohol may not be taxed unless other items are similarly taxed. Also, a municipality may not levy a sales tax on a construction contract awarded to a contractor or subcontractor that has been awarded by a state agency or on a subcontract awarded in connection with a project funded under the construction contract. Other exemptions may be granted by a local ordinance (Alaska Statutes, 2010).


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Economic Effects of Implementation

The collection of sales taxes is a major component of any taxation plan. If given

a choice, people would prefer not to pay taxes. When public goods and services are

financed, the tax collected by the government has to be mandatory and collectable or

people won’t pay. (Mikesell, 2010) In 1776, John Smith said, “The tax which each

individual is bound to pay ought to be certain and not arbitrary. The time of payment,

the manner of payment, the quantity to be paid, ought to all be clear and plain to the

contributor, and to every other person (Smith, 1937).

The imposition of a tax, Non-resident Retail Sales Tax (RST) is likely to have an

effect on the spending patterns of consumers. “Whenever a tax produces a difference

in the return that can be gained between two or more competing economic activities,

individuals and businesses can be expected to respond to the alternative leaving a

greater after-tax return” (Mikesell, 2010).

Mikesell goes on to say, “High tax rates on goods—cigarettes, liquor, or retail

sales in general, for instance—in some states induce their residents to purchase those

items from nearby states with lower tax rates” (Mikesell, 2010).

One of the impacts of a non-resident sales tax might be a reduction in the items

purchased by visitors to our city. The tourist might make some purchase in other

locations that would spare them the non-resident sales tax. An example of the impact

that a tax can have on consumer behavior was observed in Ireland in 2002. “In 2002,

Ireland passed a tax of one-quarter of a euro on plastic bags. As a result of the tax,

plastic bags are no longer available at store checkout registers (Mikesell, 2010).


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Collectability

The Municipality of Anchorage does not have a Retail Sales Tax (RST), but it

does have the following special Tax: 1) Room or Bed Tax, 2) Cigarette & Other Tobacco

Products Excise Tax, and 3) Rental Vehicle Tax (Municipality of Anchorage, 2010). As

of March 2010, The Municipality of Anchorage had collected the following associated

revenues:

12% Room or Bed tax: $18,322,725.35 Cigarette & Other Tobacco Products Excise Tax: $16,365,061.78 8% Rental Vehicle Tax: $4,344,508.75

Total $39,032,295.88

Special municipal sales and excise taxes are administered by the Revenue

Management Section of the Treasury Division, and this division will be responsible for

administering the Non-resident sales tax. One of the primary concerns for

implementation is keeping the tax collection costs as low as possible (Mikesell, 2010).

The purpose of a non-resident tax is in part to gain revenue to support the

municipality from the tourist and visitors that use our city services, but don’t live here so

don’t pay property taxes. It is important that the collection system not be overly

burdensome to the tourist or to those charged with collecting the tax.

Jean-Baptiste Colbert finance minister in Louis XIV’s court is alleged to have

said, “The art of taxation consists in so plucking the goose as to obtain the largest

amount of feathers with the least amount of hissing” (Mikesell, 2010). Mikesell goes on

to say, “we want a tax system that behaves like a pickpocket and not like a mugger—

the government wants the money to finance services, but doesn’t want the taxpayer to

lie bleeding on the sidewalk” (Mikesell, 2010).


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Tax systems are designed to manage the cost of collecting the tax to the lowest

cost possible. Ideally, the non-resident tax should have low collection costs, or risk

defeating the reason for having it. The collection costs can’t exceed the revenue

gained. According to Mikesell (2010), “Narrow based taxes, particularly selective

excises, often simply cannot be collected at low cost and are poor choices for revenue

systems. The taxes used in their collection can be more profitably used in

administration of other taxes” (Mikesell, 2010).

To have a chance at success, the non-resident tax has to be an efficiently

collected tax. According to Mikesell, (2010), “Efficient collection avoids complex

provisions and regulation; multiple filing and reporting requirements; and numerous

deductions, exclusions, and exemptions.” When administrators attempt to correct a

perceived inequity in a particular tax or to adjust for a desired impact on the economy or

economic incentives, it usually makes the tax collecting system more complex (Mikesell,

2010).

There are two (2) basic systems used for tax collection: 1) a taxpayer passive

system and 2) a taxpayer active system (Mikesell, 2010). The passive system relies on

the tax collectors to do most of the work and bear most of the cost for raising revenue.

The government performs all of the calculations and maintains all of the records. Very

little effort is required of the taxpayer. The current municipal property tax collection is a

great example of a taxpayer passive system. The taxpayer active system privatizes

much of the collection effort. In a sells tax, the business would have to provide all

relevant information, compute the tax base, calculate the tax, and pay the tax or some

installment of it when he or she files their return (Mikesell, 2010). According to Mikesell


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(2010), “Neither collection system is always best. Most taxes could be administered

with different mixes of taxpayer and tax collector responsibilities.” The municipality

should consider the compliance environment, economic conditions and available

technologies to facilitate the collection mechanism. In all cases there are collection

costs: the combination of the administrative (tax collector) and compliance (taxpayer)

activities (Mikesell, 2010). The administrative cost of tax collection varies from state to

state: Washington State has 0.7 percent of their general sales and use taxes revenue

goes towards administrative costs. In Idaho it is 0.8 percent and in California it is 0.68

percent (Mikesell, 2010).

The requirements for administration of a tax system should allow the taxpayer to

have access to the administrators of the tax and to the procedures that guide the tax. In

addition, “the tax should be based on explicit and objective criteria that should be

apparent and reasonable to all” (Mikesell, 2010).

The requirements for taxpayer compliance ensure that the way a tax is calculated

is clear and easy to understand. “Everyone should be given full information about all

rules and regulations governing economic transactions so all potential competitors can

base their decisions on and accurate assessment of potential costs, returns, and market

opportunities” (Mikesell, 2010).

The Anchorage Municipal Charter, Code and Regulations Article XIV, Section

14.01., Taxing Authority, (b) states:

No sales tax ordinance is valid until ratified by three-fifths (3/5) of those voting on the question at a regular or special election, except the tax imposed by Charter Section 14.05 shall be effective if approved by a majority (50 percent + one) of the qualified voters voting on the question (The Municipality of Anchorage, 2009).


25

Once the voters approve a non resident sales tax, there are three distinct groups

to consider in the payment and collection of non-resident sales tax; “Buyers consisting

of businesses and household consumers pay taxes when they pay for purchases.

Vendors with taxable sales over a given period, calculate the amount they should have

collected and then submit a check to the municipality. The municipal tax administrators

record the returns, review the returns, and follow up if it appears the vendor paid

incorrectly” (Tax Foundation Inc., 1970).

According to the Tax Foundation (1970), “Sellers serve as both collectors of tax

from their customers and remitters of tax to the municipality. Thus, their compliance

costs include:

1. The wages they pay sales personnel for time spent collecting tax 2. Administrative expenses associated with maintaining records of taxable and

exempt sales 3. Preparing returns to submit to the municipality 4. Training sales people in tax matters 5. Dealing with municipal officials

According to the Tax Foundation (1970), the total cost of compliance is impacted by the

cost of collection:

An important element of compliance cost is the cost of collection itself - the amount of time required for determining whether a sale is taxable, computing the amount to be charged, and recording payment. Other things being equal, such costs - in relation to total sales volume - tend to vary directly with the amount of time it takes a sales clerk to collect and record payment of tax, and inversely with the price of the item purchased (Tax Foundation Inc., 1970).

Fortunately, modern computer programs and point of sales (POS) software

eliminates much of this cost. The costs are related to additional clerk/cashier hours that

are needed because of the extra time added to transactions because of non-resident

sales collection, the cost of sophisticated POS software, additional customer service


26

personnel, and staff training time (Washington State Department of Revenue, 1998).

Anticipated additional cost will occur in the following circumstances:

Re-program POS registers whenever the non-resident sales tax rate changes Process sales tax on debit and credit card purchases Respond to audits related to sales tax issues Storage of sales tax related records Penalties for mistakes

A benefit not mentioned is the ability of businesses to use the float accrued

during the time that the taxes are held during the reporting period, prior to filing the

quarterly tax return and giving the remittance to the municipality. This is a monetary

benefit for the business and can offset some of the cost associated with collecting the

non-resident sales tax. The Washington State study (1998) describes the process as

follows:

Retailers accumulate the sales tax throughout the month. (Note that for credit and debit card sales there is a lag between when the sale is made and when the retailer receives the money.) Monthly taxpayers then remit the tax on the 25th of the following month. Quarterly and annual taxpayers remit the tax at the end of the month following the tax period. During this time the retailers are holding the collected retail sales tax in trust for the state. However, the retailers can presumably gain some value from the holdings by earning interest in either a separate account for sales tax, or the taxpayer’s general account, or by co-mingling the sales tax with the rest of their cash flow. (Washington State Department of Revenue, 1998)

A part of the burden of collecting a non-resident sales tax is making the

adjustments for items and people that are exempt from the tax. There are three basic

categories types of exemptions:

1. The item is exempt: the retailer must determine whether an item qualifies for exemption.

2. The customer is exempt: If the customer is eligible, the retailer must document the taxpayer’s eligibility.


27

3. The item is exempt only for certain uses.

Department of Revenue audits can cover a period of four years plus the current

year. Therefore, retailers must retain the above documentation for five years

(Washington State Department of Revenue, 1998).

Residents of Alaska would be exempt from paying the non-resident sales tax in

the municipality of Anchorage. According to the Washington State, Dept. of Revenue

Study (1998):

The most common exemptions that retailers deal with are: food, prescription drugs, food stamps, resale certificates, exempt nonprofits, freight forwarder sales, sales delivered to Indian reservations, sales to U.S. government agencies, machinery and equipment certificates, trade-ins and refunds.

The municipality has to determine which items will be exempt. The list above is

fairly comprehensive but is not all inclusive. Items that would cause an unnecessary

burden on the poor or underprivileged should be considered for exempt status

regardless of residency status. Generally, food for off premise consumption, and

medical purchases are exempt from sales taxes.

One of the concerns is how to differentiate between non-residents and residents

in applying the tax at the point of sale. One simple method would be to apply the tax

across the board to all allowable items and services, and then apply the amount of sales

tax as a discount for those showing valid State of Alaska Identification.

As outlined previously, there have been numerous attempts to pass a local sales

tax in the municipality of Anchorage. A recent attempt was in 2005. In each case the

tax failed to pass the required voter approval, but the issue was studied rigorously. The

data from those studies gives a clear estimate of the administrative infrastructure

required to implement a local, non-resident sales tax.


28

According to information provided by Eric Larson, there were approximately

16,000 businesses in Anchorage in 2005. Approximately 12,000 would be subject to

the sales tax ordinance. Businesses would be required to file quarterly tax returns

totaling 48,000 returns per year. Approximately 50% of the returns would be filed

online. The staffing breakdown is shown below:

1. 31 positions at $2.1 million 2. Non-labor costs at $1 million 3. Start-up costs at $1.7 million

Section VII: Conclusion

A non-resident sales tax is not a widely used form of taxation although it

has been successfully implemented in several locations. After review of the current tax

burden for a non-resident in Anchorage, it is suggested that a non-resident sales tax will

not impose an undue burden on the tax base. As demonstrated by the recent downturn

in the economy and declining property values, diversification of our revenue sources

can help stabilize revenue during times of revenue shortfalls. In addition, this tax would

not require significant administration. The economic feasibility of implementation and

the ongoing economic benefits were not evaluated.


29

Section VIII: References

Alaska Convention and Visitors Bureau. (2010).

Adams, C. (1993) For Good and Evil: The Impact of Taxes on the Course of Civilization.

Madison Books

Arizona Sales Tax Rates. (2010, Jan 18). Retrieved April 7, 2010, from about.com:

http://phoenix.about.com/od/govtoff/a/salestax.htm

Beebe, L. (2004-2010). Lure of hawaii. Retrieved from Tax information:

http://lureofhawaii.com/tax.shtml#harpta

Cannon, M. F., & Tanner, M. D. (2007). Healthy Competition: What's Holding Back

Health Care and How to Free It (2nd Edition ed.). Washington, DC: Cato

Institute.

Department of Commerce, C. &. (2010). Alaska Taxable 2009. Anchorage, Alaska:

Office of the State Assessor.

Government, H. (2010). Retrieved from

http://hawaii.gov/dcca/real/real_ed/ce_prelic/harpta_firpta_handout_-_final.pdf

How to get your card. (n.d.). Retrieved from Maui Resident:

http://www.mauiresident.com

Juneau, A. (2005). Ordinance of the City and Borough of Juneau, Alaska. Retrieved

April 12, 2010, from Serial No. 205-40:

http://www.juneau.org/assembly/agendas/2005/2005-11-04/2005-40.prf

Mikesell, J. L. (2010). Fiscal Administration. Boston: Wadsworth.

Municipality of Anchorage. (2010). Treasury. Retrieved April 8, 2010, from Other Taxes

and Surcharge:


30

http://www.muni.org/Departments/finance/treasury/programtaxes/Pages/default.a

spx.

National Research Council and National Academy of Public Administration. (2010).

Choosing The Nation's Fiscal Future. Committee on the Fiscal Future of the

United States. Washington, D.C.: The National Academies Press.

Office of Management and Budget. (2010). Office of Management and Budget.

Washington, DC: Government Printing Office.

Ohio. (2007, July 1). Ohio Tax. Retrieved April 10, 2010, from ODT Sales and Use Tax

Division: http://tax.ohio.gov

Out of State Buying. (n.d.). Retrieved from usedrvs.net/outofstate.html

Penner, R. (2004). Searching for a Just Tax System. Washington, DC: Urban Institute.

Rubin, I. S. (2010). The Politics of Public Budgeting: Getting and Spending, Borrowing

and Blalncing. Washington, DC: CQ Press.

Ryu, J. E., Bowling, C. J., Chung-Lae, C., & Wright, D. S. (2008). Exploring

Explanations of State Agency Budgets: Institutional Budget Actorsor Exogenous

Environment? Public Financial Publications, Inc., 1-26.

Samuelson, P. (1954). The Pure Theory of Public Expenditure. Review of Economics

and Statistics , 387-389.

Smith, A. (1937). An Inquiry into the Nature and Cause of the Wealth of Nations,

Modern Library Edition. New York: Random House.

State of Alaska Division of Community and Regional Affairs. (2010). Office of the State

Assessor. Retrieved April 8, 2010, from Alaska Tax Faxs:

http://www.dced.state.ak.us/dcra/osa/taxfacts.htm


31

Tax Foundation Inc. (1970, August 1). Tax Foundation. Retrieved April 15, 2010, from

State and Local Taxes:http://www.taxfoundation.org/publications/show/1861.html

The Municipality of Anchorage. (2009, December 31). Municode Online Library.

Retrieved April 15, 2010, from Municipal Charter:

Topic 851- non-residential Alien Taxes. (2010). Retrieved April 7, 2010, from IRS:

http:www.irs.gov/taxtopics/tc851.html

Washington State Department of Revenue. (1998). About Us. Retrieved April 15, 2010,

from Retailers' Cost of Collecting and Remitting Sales Tax Study:

http://dor.wa.gov/content/aboutus/statisticsandreports/retailers_cost_study/defaul

t.aspx

Washington, S. o. (n.d.). Department of Revenue. Retrieved April 10, 2010, from Retail

sales to nonresidents: http://dor.wa.gov

York, C. o. (2010). NYC Finance. Retrieved April 10, 2010, from Parking and Vehicles:

www.nyc.gov/html/dof/html/parking/park_manhattan_res.shtml


32

Section IX: Appendices

Major Tax Structures in the United States Income taxes Sales taxes (goods and services) Property taxes

What is a residential sales tax? A residential sales tax is a tax that would be levied on certain goods and services for individuals buying goods and services in the Municipality of Anchorage. What is a non-residential sales tax? A non-residential sales tax is a tax that would be levied on certain goods and services for indi-viduals that are not permanent residents of the state of Alaska buying goods and services in the Municipality of Anchorage. Residents would be exempt and would be provided with several different options to establish their residency. Non-residents in Anchorage Visitors Non-resident workers Seasonal workers

Current tax burden for non-residents Bed tax Car rental tax Cruise ship head tax Other municipal sales taxes Other Anchorage taxes

Non-resident taxes in other municipalities and states Some state and local governments offer rebates or discounts. Some of the rebates and dis-counts favor residents and some favor non-residents. How would a non-resident sales tax be enforced? Alaska Statute 29.45.650-710 authorizes sales and use taxes at the municipal level. The Anchorage Municipal Charter requires approval of 3/5 of qualified voters to impose a tax Any new tax would be administered by the Revenue Management section of Treasury Division. Two types of tax systems Taxpayer Passive System (property tax) Taxpayer Active System (non-resident sales tax)

A non-resident sales tax A non-residential sales tax is not widely used as a form of taxation, will not impose an undue burden on non-residents, has been successfully implemented else-where and would not require significant administration. The economic feasibility of implemen-tation and administration was not evaluated. Prepared by Dean Marshall, Natalia Mejia, Jeanette Reddington, Geran Tarr

Non-Resident Sales Tax: An Evaluation of the Impacts

Non-Resident Sales Tax Resident Exemption Card

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NonNon--Resident Sales Tax:Resident Sales Tax:An Evaluation of the ImpactsAn Evaluation of the Impacts

Dean MarshallDean MarshallNataliaNatalia MejiaMejia

Jeanette Jeanette ReddingtonReddingtonGeran TarrGeran Tarr

OverviewOverview

Introduction & HistoryIntroduction & HistoryWhat Taxes Do NonWhat Taxes Do Non--residents Payresidents PayNonNon--residential Taxes in Other Locationsresidential Taxes in Other LocationsEnforcement, Administration and Enforcement, Administration and ImplementationImplementation

History of TaxesHistory of Taxes

History of taxationHistory of taxation

Taxation in the USTaxation in the US

Major Tax Structures in the U.S.Major Tax Structures in the U.S.

Income taxesIncome taxes

Goods and services taxesGoods and services taxes

Property taxesProperty taxes

Sales TaxSales Tax

What is a residential sales tax?What is a residential sales tax?

What is a nonWhat is a non--residential sales tax?residential sales tax?

Pros & consPros & cons

NonNon--residents in Anchorageresidents in Anchorage

VisitorsVisitors

NonNon--Resident WorkersResident Workers

Seasonal WorkersSeasonal Workers

Existing TaxesExisting Taxes

Bed taxBed taxCar rental taxCar rental taxCruise ship head taxCruise ship head taxOther municipal sales taxesOther municipal sales taxesOther Anchorage taxesOther Anchorage taxes

Bed TaxBed Tax

Established in 1975Established in 1975

Intention of the bed tax was to create a Intention of the bed tax was to create a collective Destination Marketing Organization collective Destination Marketing Organization (DMO) to attract and serve visitors to (DMO) to attract and serve visitors to Anchorage. Anchorage.

Visitor industry chose to tax itself Visitor industry chose to tax itself

Originally 5%, rose to 8% (1979) and now 12%Originally 5%, rose to 8% (1979) and now 12%

Car Rental TaxCar Rental Tax

Anchorage Municipal Code (AMC) Chapter 12.45, Rental Tax on Retail Rental of a Motor Vehicle

8% vehicle rental tax

Vehicles rented at the airport also includes11.11% airport rental tax $4.87 per day vehicle rental fee

Cruise Ship Head TaxCruise Ship Head Tax

Other Anchorage TaxesOther Anchorage Taxes

LiquorLiquorTobacco Tobacco Gaming (pull tabs) Gaming (pull tabs) Tire taxes Tire taxes

Other Municipal Sales TaxesOther Municipal Sales Taxes

62 Municipalities collect a general sales tax62 Municipalities collect a general sales taxRange of between 1% and 7 %Range of between 1% and 7 %

Typical sales tax rates are 2% to 5% Typical sales tax rates are 2% to 5%

Other StatesOther States

Different states offer different types of taxationDifferent states offer different types of taxation

Some offer rebate or discounts Some offer rebate or discounts

All are based on residencyAll are based on residency

NonNon--residencyresidency

Manhattan parking tax 18.357%Manhattan parking tax 18.357%

An exemption for residents of 8%An exemption for residents of 8%

User must meet residential requirements and User must meet residential requirements and show proof of residencyshow proof of residency

HawaiiHawaii

A resident discount at organizationsA resident discount at organizations

Private property home owners associationPrivate property home owners association

Voluntary efforts save customers moneyVoluntary efforts save customers money

Discounts to Improve SalesDiscounts to Improve Sales

Ohio sales tax nonOhio sales tax non--resident watercraft salesresident watercraft sales

.0075% sales tax discount.0075% sales tax discount

Does not tax buyers if home state does not have Does not tax buyers if home state does not have a sales taxa sales tax

Discounts to Improve SalesDiscounts to Improve Sales

Washington tax exemptionWashington tax exemption

Less than 3% for state and province Less than 3% for state and province

Optional for sellers and buyersOptional for sellers and buyers

Enforcement and AdministrationEnforcement and Administration

Alaska Statute 29.45.650Alaska Statute 29.45.650--710 authorizes sales 710 authorizes sales and use taxes at the municipal leveland use taxes at the municipal level

Anchorage Municipal Charter requires approval Anchorage Municipal Charter requires approval of 3/5 of qualified voters to impose a taxof 3/5 of qualified voters to impose a tax

Administered by the Revenue Management Administered by the Revenue Management section of Treasury Divisionsection of Treasury Division

Administrative GoalsAdministrative Goals

Low collection costsLow collection costs

Efficient collection avoidsEfficient collection avoidsComplex provisions and regulationsComplex provisions and regulationsMultiple filing and reporting requirementsMultiple filing and reporting requirementsNumerous deductions, exclusions, and exemptionsNumerous deductions, exclusions, and exemptions

Collection SystemsCollection Systems

Taxpayer Passive SystemTaxpayer Passive SystemTax collectors do most of the workTax collectors do most of the workGovernment performs calculations and maintains Government performs calculations and maintains the recordsthe records

Property tax is a Taxpayer Passive SystemProperty tax is a Taxpayer Passive System

Collection Systems (cont.)Collection Systems (cont.)

Taxpayer Active SystemTaxpayer Active System

Tax collection is privatizedTax collection is privatizedBusinesses collect informationBusinesses collect informationCompute the taxCompute the taxFile returnsFile returnsPay the taxPay the tax

NonNon--resident sales tax is a Taxpayer Active resident sales tax is a Taxpayer Active SystemSystem

Collection CostsCollection Costs

Administrative Activities : The Cost to Collect Administrative Activities : The Cost to Collect the Tax in 2005 $$$the Tax in 2005 $$$

31 positions: $2.1 Million31 positions: $2.1 MillionEquipment and supplies: $1 MillionEquipment and supplies: $1 MillionStartStart--up costs: $1.7 Millionup costs: $1.7 MillionTotal startTotal start--up: $4.5 Millionup: $4.5 Million

Collection CostsCollection Costs

Compliance Activities: the cost to the business Compliance Activities: the cost to the business to pay the taxto pay the tax

Personnel wages and staff trainingPersonnel wages and staff trainingComputerized point of sale equipmentComputerized point of sale equipmentRecords maintenance and storageRecords maintenance and storage

Preparing and submitting quarterly returnsPreparing and submitting quarterly returns

Municipality of AnchorageMunicipality of Anchorage

16,000 businesses in Anchorage16,000 businesses in Anchorage12,000 eligible for non12,000 eligible for non--resident Sales Taxresident Sales Tax48,000 quarterly returns per year48,000 quarterly returns per year50% filed electronically50% filed electronically$75 Million to $125 Million projected revenue $75 Million to $125 Million projected revenue for a general sales tax for a general sales tax

ConclusionConclusion

A nonA non--residential sales tax residential sales tax is not widely used as a form of taxationis not widely used as a form of taxationwill not impose an undue burden on nonwill not impose an undue burden on non--residentsresidentshas been successfully implemented elsewherehas been successfully implemented elsewhere

would not require significant administrationwould not require significant administration

The economic feasibility of implementation and The economic feasibility of implementation and administration was not evaluated administration was not evaluated

Questions?Questions?

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