A proposed ordinance that would allow the Ketchikan Gateway Borough to apply sales tax to online purchases got one step closer to reality at Monday’s Ketchikan Gateway Borough Assembly meeting, though not without scrutiny.

Ordinance 1917, which the Assembly on Monday unanimously voted to introduce, would allow an intergovernmental entity called the Alaska Remote Seller Sales Tax Commission to collect sales taxes from online purchases on behalf of members of the commission. To facilitate that end, the ordinance would adopt the commission’s remote sales tax code as a new section of the borough’s existing tax code, potentially generating between $400,000 and $1 million in new revenues each year for the borough, according to Monday’s agenda statement.

Borough Finance Director Cynna Gubatayao — who is the secretary of the commission’s board of directors — and Borough Attorney Glenn Brown have worked closely with Alaska Municipal League to establish the commission since 2018, when the U.S. Supreme Court’s decision in South Dakota v. Wayfair established a precedent for the collection of sales tax from remote retailers.

After getting approval from the Assembly, the borough in November joined the sales tax commission with 14 other municipalities, including the City and Borough of Juneau, the City and Borough of Wrangell, the Kenai Peninsula Borough and the cities of Kodiak, Seward, Palmer, Soldotna, Wasilla and Homer. The cities of Ketchikan and Saxman have signed an agreement to adopt the commission’s sales tax code in the future.

On Monday Brown clarified for Assembly members and citizens how the remote tax code would work and addressed concerns about its efficacy.

In written comments read into the record at Monday’s meeting, citizen Dan Bockhorst expressed several concerns about the equitable implementation of the bill. He said he was wary that he would be overtaxed because the sales tax would be applied for the City of Ketchikan, not for the borough. (The borough’s sales tax rate is 2.5%; people living in and making purchases within the city pay a 4% sales tax on top of that.)

Brown clarified that the tax levels for remote purchases would be determined for each sale according to the address of delivery. Brown explained: deliveries to places within the city would be taxed at the city rate, and deliveries outside the city would be taxed at the borough rate. In order to avoid placing an “undue burden” on remote retailers — a condition upon which the South Dakota v. Wayfair ruling relied — the tax commission will act as a middleman, collecting information from its members about their respective sales tax jurisdictions and distributing that information to retailers in the form of geographic information software.

A portion of all tax revenue collected by the commission on behalf of its members would pay for the cost of administering and enforcing the tax collection, Brown explained.

In order to make sure the software would set the correct tax rates, Brown said, the borough and commission tested the software for tricky tax situations in the borough.

“We provided them test addresses, ones that were kind of on the fringe, ones that we thought were likely to confuse the system about where the person actually resided and what sales tax rate they were actually subject to,” Brown said. “We gave them seven tests, and all seven, they were correct in which municipality they were in and which tax rate was levied upon that sale.”

Bockhorst, in his written remarks, also questioned how the borough derived its estimates of the revenue generated by the remote sales tax collection. Brown explained Monday that AML had based its estimates on the revenue increases of other municipalities in the country that had begun enforcing online sales taxes.

“That’s actually a lower number than what we’ve also discussed (at previous Assembly meetings), just in an effort to be conservative about what we may generate with this remote sales tax,” Brown further explained. “At one point, I think a number that was provided by AML was as high as $1.7 million a year. (Given) all the things going on right now, it seemed wise to bracket that significantly lower. The finance director and I talked about what that range should be in the agenda statement, because we’re finally at the point that we’re putting this before the Assembly.”

Bockhorst asked whether online sales tax information would be confidential, and whether there would be provisions to address falsification of records by purchasers. There would be, Brown said, and the commission’s code provisions were similar to the borough’s existing provisions.

Brown also addressed concerns about sales tax exemptions on Monday.

The borough’s sales tax exemptions for specific products and services would remain in place for online purchases with the commission’s tax code. But for entity-based tax exemptions — such as the borough’s sales tax exemption for residents over 65 years of age — that’s less clear, Brown said, and the borough is still working with the commission to implement those exemptions in the retailer’s software.

If the senior sales tax exemption doesn’t pan out for online transactions through the system, Brown said, those individuals qualifying for the senior tax exemption still would be able to apply for an exemption with a form.

“We’re still really hoping to have that be minimal,” Brown said Thursday.

To that point, Brown said the remote sales tax code won’t be a static document. It will be changed according to the needs and feedback of member municipalities.

“I think this is going to be dynamic for some time to come,” Brown said. “Chances are likely that after six months of implementation, we will begin to find, really through transactions, through transactional experience, we’ll begin to find wrinkles between the existing (local) sales tax code ... and the remote code that we’ll then address. I’ll probably gather them all up and we’ll come with another ordinance to kind of mop up and begin to edit as we go.”

He emphasized that such “wrinkles” should be expected with any tax code, even the borough’s own existing code.

“Just in my time here, we’ve had, I don’t know how many instances where (the Borough) Finance (Department) will call and say, ‘We need to come up and talk to you about ... this transaction happening,” and when you read it in our code, the answer is not apparent,” Brown explained. “So, even as old as our existing sales tax code is, you still find wrinkles that need edits.”

But recognizing that too many small changes to the code in a short period could cause issues with consistency between members, Brown noted, the commission would update the code in “waves” over a longer period of time. Brown said in a Thursday telephone interview with the Daily News that he expects those updates to occur once per year.

Assembly Member Alan Bailey asked whether there would be consequences if the borough waited for the cities of Ketchikan or Saxman to adopt the remote seller sales tax code first. Brown responded that due to the borough’s role as a tax-collecting entity for both cities, Saxman and Ketchikan would be waiting for the borough to adopt the code.

“I think they are certainly watching for the Assembly to go first.”

Ordinance 1917 is set for public hearing at the Assembly’s July 20 regular meeting. If the Assembly adopts the ordinance, a 30-day period would begin on the date of adoption for the borough to share its tax jurisdiction information with the tax commission and for online retailers to register that they’re selling into the borough. (The tentative date of adoption for the code, if the Assembly approves it, would be 12:01 a.m. on Aug. 1, Brown said Thursday.) After that 30-day period, all remote sales delivered to the borough would be subject to the borough’s sales tax.