As Missouri lawmakers consider changes to property taxes and look ahead to an election-year session where they again are likely to debate eliminating the sales tax on groceries, they face the unanswered question of whether the constitution allows them to take away a source of local revenue.
Two southeast Missouri counties are asking the courts to answer that question after losing one-fifth of their sales tax revenue because of an exemption enacted in 2021. In a bill designed to capture sales tax from online purchases, the legislature expanded an exemption for mines and factories, first enacted in 2007, for utilities and equipment purchases.
Ste. Genevieve County, which has five voter-approved sales taxes, saw its total revenue from the levies decline from $6.1 million in 2022, the last full year without the exemption, to $4.8 million in 2024. Iron County, which has a single half-cent sales tax for general revenue, saw a revenue decline 20%, to $1.1 million from $1.35 million.
In a case filed last week in Cole County, Ste. Genevieve and Iron counties accuse lawmakers of violating the Missouri Constitution by taking away revenue required for bond payments, reducing the funds available for state-mandated functions and adding excessive new tax burdens on Missourians without a statewide vote.
“If you look at the 115 counties in Missouri, there’s probably several other counties in a similar boat here,” attorney Stephen Jeffrey, who is representing the counties, said in an interview with The Independent.
There are no large retailers in Ste. Genevieve County, Presiding Commissioner Randy Ruzicka said. The county of about 18,500 people has sand and gravel mining. Not only did the exemption mean the county lost sales tax on utilities used in the operations, the companies no longer pay sales tax on equipment and maintenance supplies purchased locally.
Ste. Genevieve County is paying for a water park and community center financed by a $10 million bond issue in 2018. The revenue loss from the exemption means the tax dedicated to bond payments is $300,000 to $400,000 short of the funds needed to meet the debt service, Ruzicka said.
So far, he said, the payments have been made by tapping reserves. That can’t continue, he said.
“If every year you have to pull money out of what you have put aside, there comes that point where you don’t have any more money,” Ruzicka said.
It will likely be many months before the lawsuit comes to a resolution, so lawmakers will meet next year with the questions it raises pending.
“This would have an implication if the legislature tries to get rid of the local tax on food,” said Elias Tsapelas, director of state budget and fiscal policy for the Show-Me Institute, a conservative think tank. “Just more broadly, in the discussion of what to do with Missouri’s tax policy, I think it’s pretty big.”
The ‘Wayfair fix’
In 2018, the U.S. Supreme Court ruled that states could require residents to pay sales tax on purchases shipped to them from retailers outside the state. The decision reversed earlier precedents that determined a retailer had to have a physical presence within a state before it had to collect tax on retail sales.
The decision required each state to add language to its sales tax law to capture the revenue. Missouri was the last state to do so when the 2021 bill passed. Under the bill, Missourians who make online or catalog purchases must pay the state tax of 4.225%, while local governments were required to ask voters if they wanted to extend the sales tax to those goods.
The fiscal note, the legislature’s official estimate of each bill’s financial impact, pegged the additional state revenue from online sales at $111 million to $170 million annually, with local revenue expected to grow by $41 million to $62 million if enacted in every taxing jurisdiction.
As part of the deal to capture the new revenue, business lobbyists convinced lawmakers that they also had to extend every exemption from state sales tax to local sales taxes to simplify collections.
“One of the key parts of the United States Supreme Court decision in the Wayfair case was the fact that they have made it simple for businesses to comply,” said Ray McCarty, executive director of Associated Industries of Missouri.
That means local governments cannot tax anything that is not taxed at the state level, McCarty said.
The sales tax on food is an example. While the state does not impose the 3% general revenue sales tax on grocery purchases, it does collect a 1.225% tax — earmarked money for schools, conservation, state parks and soil conservation.
The 2021 bill did not have to include an exemption for food sales, McCarty said, because the state taxes it even if it is not the full tax imposed on other goods.
“You can imagine the complexity if you have different sales tax bases for state and local governments,” McCarty said. “If you’re not located in the state of Missouri, then you could have issues with that.”
Along with the exemption for purchases by manufacturers and mining companies, the bill enacting the online tax for Missouri extended state exemptions for purchases by broadcasters, defense contractors and commercial laundries to local sales taxes.
The Wayfair decision did not require any state to change how it levied sales tax or to make exemptions uniform, Jeffrey said.
“I have read the Wayfair decision on more than one occasion, and nowhere in the language, in that opinion, does it say a state must do this,” he said. “There is never this requirement that you have to do it this way.”
The lawsuit
The case filed by Ste. Genevieve and Iron counties alleges three violations of the Hancock Amendment, the tax limitation provisions added to the Missouri Constitution in 1980.
Those provisions are the guarantee that local governments will be able to impose the taxes necessary to pay voter-approved bond debt, that the state cannot reduce its support for any state-financed service or activity and that the state enacted revenue increases that exceed the limits.
The lawsuit asks the courts to order lawmakers to make appropriations to replace the lost revenue and declare the legislation void, restoring the taxes.
The Hancock Amendment bars the legislature from imposing any new duties on local governments without an appropriation to pay the costs. But that hasn’t stopped lawmakers from doing so, said Jim Scaggs, presiding commissioner of Iron County.
The lawsuit lists some of those new duties without state support as “increasing compensation and training for officials, mandating law enforcement disciplinary proceedings, mandating assessment maintenance, and mandating administration of a new senior citizens property tax program.”
Any individual item “has not been that costly, but when we add them all together, the cost is pretty substantial,” Scaggs said.
At the same time that lawmakers are adding costs and taking away revenue, Scaggs and Ruzicka said, their small counties are losing businesses.
“My stores have closed down because they can’t compete with the big box stores,” Scaggs said. “So we just keep losing and losing.”
Ste. Genevieve, which once had three auto dealerships, lost its final one last year, Ruzicka said.
And neither has a marijuana dispensary, a substantial source of new revenue in many other locations, they said. Marijuana dispensaries pay regular sales taxes and a special tax just for pot sales.
Marijuana revenue, plus successful use tax elections, has spared some counties the pain as mining and manufacturing revenue is removed, Ruzicka said.
“A lot of other counties have, like our neighbors to the south Perryville, tons of retail,” he said. “They also have dispensaries, and there’s a 3% tax on dispensary stuff, so it has sort of papered over the problem for them.”
The lawsuit’s accusation that lawmakers exceeded their authority for increased taxes and fees is based on two bills, the Wayfair fix and an increase to the state gas tax, also passed in 2021.
The constitutional limit for new taxes and fees in fiscal 2022 was $111.8 million, according to the 2023 annual Hancock Amendment review from the state auditor. The allowable new revenue for fiscal 2024, according to a review issued earlier this year, was $144 million.
The Wayfair revenue was about equal to the allowable revenue, the lawsuit states, and the gas tax — 12.5 cents per gallon, phased in over five years — pushed the total of new taxes above the limit.
Local governments will be watching the lawsuit, said Steve Hobbs, executive director of the Missouri Association of Counties, because the Wayfair bill represents a shift in how lawmakers interact with local governments.
In the past, large sales tax exemptions excluded local governments or gave them an option on whether to participate, such as on back-to-school tax holidays.
“Now we’re seeing a trend at the state level where they’re saying, ‘No, voluntarily is not enough, we’re going to tell you that you’re going to roll this revenue stream back, even though the local citizens have voted on it,’” he said. “That’s the biggest discussion we’re having in the General Assembly and in the state right now.”
The lawsuit was a last resort, Scaggs said.
If Iron County voters approved a use tax, it would about make up the shortfall, he said. But that represents a shift of the tax burden from businesses to individuals that he opposes, he said.
“This is not something I want to be involved in,” Scaggs said. “This is not good government, in my mind. But at the same time, we can’t continue to go down this road where these small, third class counties will not have enough revenue to support themselves.”
Food sales and property taxes
The biggest sales tax exemption on the books at the state level that is not allowed at the local level is for food sales in grocery stores. Enacted in 1999 when state revenues were exceeding the Hancock Amendment allowance, it removed the 3% general revenue portion of the tax.
The state continues to charge 1.225%, with 1% dedicated to public schools and the remainder for conservation, state parks and soil conservation. Local taxes are also charged at the grocery check-out.
Expanding the exemption would reduce funding available for schools by about $200 million annually. The loss to local governments, according to a fiscal note for a bill filed in this year’s session, would be about $850 million.
A loss like that would be devastating to local governments, Hobbs said.
“I am starting to wonder if the state believes that we actually need local services, like firefighters, ambulance districts, libraries, levy districts and special road districts,” Hobbs said.
Every attempt to expand the general revenue exemption to local taxes has been met with stiff resistance. It helps that there is unity among local governments large and small to lobby to protect that revenue, Ruzicka said.
“That helps us, because they generally have the ear of the powers that be,” he said. “The small counties, it is kind of like, they nod and say whatever, and then it’s like, ‘just go away.’”
Legislative committees in both chambers are studying property taxes. The goal is to write legislation that can be enacted next year to make tax bills more predictable.
There are some conservatives who have pushed to eliminate personal property taxes — the tax on vehicles and other high-value goods that are not real estate. That would eliminate about 20% of the statewide property tax base.
Tax rates on other property would have to rise or local governments would have to do without the revenue if that is included in the final bill.
“It’s going to get to the point where these counties are not going to be able to pave their roads or provide the services for their people,” Ruzicka said.
The lawsuit over legislative powers to change taxes in ways that reduce revenue is flawed, McCarty said, because the taxes were created by the General Assembly and can be changed by it.
“I do believe that the state has the ability to control what is included in the sales tax base, and the local ability to tax flows from the state,” McCarty said.
The lawsuit, if it survives a motion for dismissal, could set a firm boundary for the legislature and how far its powers extend over local revenue.
“Well,” Hobbs said, “it’s about time.”
