Sales Tax Slice: Are Local Taxes Creating Compliance Issues for Businesses?

 An increasing number of municipalities are enacting new taxes and stepping up enforcement to drive economic development goals.  This adds an extra layer of compliance issues for multistate corporations that must now contend with more local tax jurisdictions in addition to state jurisdictions.   

 “An increasing number of localities are looking for additional revenue, especially since they are not getting as much funding from the state.   Localities are looking for money anywhere they can,” said Debra Reason, Master Commissioner of Revenue of Hopewell, Virginia.

Municipalities in West Virginia seem to be following this trend. In recent months, 21 cities in West Virginia have sought to impose municipal sales taxes, designed to fund in-state projects including infrastructure and civic improvements, economic development and retiree pensions. Currently, only seven West Virginia cities impose a municipal sales tax.

In West Virginia, municipal business taxes can take effect two ways. The major source of revenue for most of the state is the broadly based business and occupation (B&O) tax, which is imposed for the privilege of engaging in certain business activities. Cities that do not impose a B&O excise tax are allowed to impose a municipal sales tax.

The second method is through West Virginia’s Municipal Home Rule Program. Created in 2007, the program offers broad-based home rule authority to participating municipalities by allowing them to implement ordinances, acts, resolutions, rules and regulations without regard for many state laws. This includes levying local sales taxes.

Many of the cities have argued that their suggested tax changes will make it easier to attract new businesses and compete with neighboring Virginia and unincorporated areas. Other applicant cities cited concerns that businesses will locate just outside municipal lines and then will not be subject to local B&O taxes.

However, the home rule option in West Virginia remains a pilot program. All proposed taxes must be approved by the Municipal Home Rule Board, whose volunteer members operate under the state Department of Commerce. Additionally, under home rule, in order to impose a sales tax, cities must reduce or eliminate certain B&O taxes.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What effect do local taxes have on multistate businesses?

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By Mark J. Kennedy and Radha Mohan

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