The Kentucky House of Representatives is considering House Bill 399 to allow local governments to impose up to a one-percent local sales tax. The Kentucky Retail Federation has serious concerns about the proposal's impact on businesses and consumers as well as on the commonwealth itself.
A recent Herald-Leader editorial stated that a local-option sales tax would affect all local retailers equally and implied it would not hurt competitiveness. The statement ignores the realities of today's world of e-commerce. Kentucky's retail industry is already struggling with the competitive advantage enjoyed by out-of-state and Internet retailers that are not required to collect the Kentucky sales tax.
Kentucky retailers currently lose $3.3 billion annually in sales because of this disparity. This translates to more than $200 million in lost state sales tax revenues that could be used to help address many of the commonwealth's needs. Adding another one percent sales tax would make this situation even worse, driving more sales to out-of-state retailers and costing Kentucky businesses sales, the commonwealth revenue, and Kentuckians jobs.
A local-option sales tax will also have an impact on competitiveness within Kentucky's borders. Consumers "shop" sales tax rates between communities within a state. Retailers in a community that elects to impose a local-option sales tax would be put at a competitive disadvantage to those in neighboring communities that elect not to do so. Consumers could save one percent by crossing the county line or, in some areas, by merely crossing the street.
A local-option sales tax places an additional burden and cost on retailers. Kentucky retailers, which already collect over $2.5 billion in state sales taxes, would be responsible for collecting the sales tax in each of the jurisdictions in which they do business. As an example, a Lexington furniture store may deliver to consumers in counties outside of Fayette County.
The store would potentially be responsible for collecting differing rates for multiple jurisdictions. The accounting and reporting requirements would be a significant burden for businesses. There is no provision for reimbursing retailers for the added expense of collecting taxes for local governments.
The business community pays a considerable amount of sales tax on products and services that they use such as supplies, equipment and utilities. A one-percent local-option sales tax would add a considerable cost to their operations.
Finally, while one percent doesn't seem like much, it will affect consumer spending. If enacted in all Kentucky communities, it would lower disposable income by $500 million annually.
That means less sales for Kentucky's retailers and less revenue for the state's General Fund.
The legislature should reject HB 399 and not burden Kentucky's businesses and consumers with yet another costly tax.