City Council hears presentation on use tax

September 22, 2021

Adoption of a use tax ordinance that would enable the City to collect existing sales tax on items purchased from out-of-state sellers — which could total as much as $3.7 million annually for the City — was the topic of discussion by the City Council during a meeting held Monday.

The council heard a presentation on use tax and its implications for Bartlesville if ultimately approved by the council. Adoption of the tax would not mean a tax increase for Bartlesville residents but rather would allow the City to collect the existing sales tax from out-of-state sellers, City Manager Mike Bailey told the council.

“Use tax is a companion tax to sales tax that was traditionally paid by the purchaser and not the seller. Until very recently, use tax had a very low compliance rate for individuals and, because of this it was primarily regarded as a business-type tax,” Bailey said.

But a change in the law based on a U.S. Supreme Court Decision (South Dakota v. Wayfair) in 2018 now requires most sellers to collect and remit use tax, ending use tax as it was traditionally known. Now a majority of use tax growth is related to sales traditionally considered sales tax. In Oklahoma, use tax grew an average of 12 percent from 2019 to 2021, compared to a 2 percent growth in sales tax.

“The growth in online sales has led to a substitution from sales to use tax, and purchases that have traditionally generated sales tax are now accounted for as use tax,” he said. “Due to these changes, use tax is no longer primarily a business tax and is increasingly composed of consumer purchases previously taxed as sales tax.

“As a result of this substitution, use tax growth is outpacing sales tax growth by a large margin. In fact, use tax has grown by 12 percent across the state in the last 24 months, while sales tax has only grown by 2 percent during that same period. Staff believes that the pandemic accelerated the growth in online shopping which harms our traditional sales tax. It is expected that habits formed during the pandemic will continue, so this effect will likely be permanent.”

In Bartlesville’s peer cities, use tax grew 22 percent over the two-year period, Bailey said.

An analysis performed earlier this year indicated that Bartlesville is in the minority in the state by not having a use tax. Statistics compiled prior to the most recent census based on population include:

  • Bartlesville is the 12th largest city in the state.
  • Bartlesville is the only city in the top 100 by population without a use tax.
  • The next largest city without a use tax is Bethel Acres with 3,147 population.
  • There are only two cities (including Bartlesville) over 1,500 population without a use tax.
  • 98.5 percent of the cities in the top 200 by population have a use tax.
  • 97 percent of the cities in the top 300 by population have a use tax.

“Traditional sales tax is still our largest source of revenue, but much of the growth in retail sales is shifting to online sales,” Bailey said. “Without a use tax, we will likely be forced to continually increase our sales tax to overcome the lack of growth. This is an unsustainable model that requires diversification to avoid long-term disruption to essential services.”

The council could consider adoption of an ordinance for use tax next month, but the tax would not actually be implemented until January 2023.

“If the council elects to implement a use tax, staff would recommend adopting an ordinance with a future effective date to allow for adequate planning by local businesses and residents, and that the tax be adopted before the expiration of the American Rescue Plan Act, which is Dec. 31, 2024,” Bailey said.

Starting the tax in mid-fiscal year (January) would allow staff to budget more accurately for Fiscal Year 2023-24.