Sales taxes are important for both state and local governments. When considering all Oklahoma governments together, the sales and use tax is the single largest source of revenue. It produced over $4.5 billion in 2016. The sales and use tax makes up 33 percent of total state and local tax revenue. Sales tax revenue grew at an average annual rate of two percent from 2006. Growth is often interrupted in economic downturns.
Advantages of the sales tax include:
- ability to generate large amounts of money at relatively low rates since so much of our economy is based on consumption of goods;
- easy for taxpayers to pay at the retail level, though it is less simple for the businesses that collect and pay the tax to the state; and
- may have a small part in encouraging saving, which helps investment in the economy.
- unfair to lower- and middle-income taxpayers, who spend a much larger share of their income on purchasing goods and thus pay a higher share in taxes than higher-income residents;
- the amount that can be collected gets smaller each year as more of the economy shifts to purchase of services rather than goods;
- when used at the local level, it encourages counties and municipalities to compete aggressively for new retail businesses regardless of the overall economic and community impact.
The sales tax applies to sale of tangible personal property, that is, things you can hold or touch. Many items are exempt from the tax, including most services, gasoline and other fuels, sales by selected nonprofits, the sale of newspapers and advertising space, residential utilities (exempt from state tax only), and sales to businesses that will resell the items. Retail customers pay the tax on each purchase; merchants submit all collections (except a small portion to help pay costs of collecting the tax) to the state once or twice each month.
Oklahoma first passed a sales tax of at one percent in 1933. Until 1987, a portion of the sales tax was earmarked for the Department of Human Service. Since 1990, when 0.5 percent was added for education reform under HB 1017, the state’s tax is at the rate of 4.5 cents for each dollar spent on taxable goods and services (4.5 percent). Local governments can also collect sales taxes and most do.
- Counties may levy a tax of up to 2 cents on each dollar of sales (2 percent). County rates range from 0.2 percent to 2 percent; and
- Cities and towns may levy sales taxes in any amounts as long as voters approve. City rates range from 1 to 5 percent.
The lowest possible total sales tax is 4.5 percent, while the highest possible total rate is 11.5 percent. Sales in the two largest cities, Oklahoma City and Tulsa, are taxed at total rates between 8 and 9 percent. Some local sales taxes are for general purposes and some are dedicated, or “earmarked,” for specific purposes, such as public safety, major capital investments, or jails.
The use tax essentially serves as a sales tax on imports to Oklahoma. It is charged when items are bought out of state but brought in for use in Oklahoma. Mail order sales and business purchases make up most of the use tax revenue, which is much less than from the sales tax. However, use tax is increasing as a result of a court ruling and legislative action, which enabled the state to collect sales tax on online purchases from out-of-state vendors and “market facilitators,” who connect buyers and sellers for purchases of goods and services. The tax is expected to generate $19.6 million annually.
Sales and use tax revenue received by the state is split between the General Revenue Fund (83.61 percent), the Education Reform (HB 1017) Fund (10.46 percent) and the Teachers Retirement Fund (5 percent), with the remaining 0.93 percent divided between several funds benefitting the Tourism Department and Historical Society. The use tax is apportioned the same way, except that the first $20.5 million is apportioned to the Education Reform Revolving Fund (also known as the “1017 Fund”) before the percentages above are applied to the remainder.
The state sends collects both state and local sales and taxes, then passes local collections to cities and counties each month.