Sales Tax

The Costs of Tax Cuts

Joe Mathews — Wed, 28 Jan 2009 17:09:00 -0500

Here's an interesting bit of news from Sioux Falls, South Dakota. The city needs to borrow money -- about $38 million -- to pay for levee repair and other flood control programs. But there's an initiative on the local ballot to cut sales taxes. What does one have to do with the other? The city's financial advisor says that the borrowing will be more expensive because bond investors, jittery over municipal finances around the country, could worry that Sioux Falls would have less revenue to pay off the bonds.

Skelton: Stimulate California by Restoring the State Sales Tax Deduction

Joe Mathews — Mon, 19 Jan 2009 18:57:00 -0500

Los Angeles Times columnist George Skelton has an interesting idea for stimulating the economy: Have the federal government restore the tax deduction for state sales taxes.

In California, this would blunt some of the blow from the expected sales tax hike to help fill an estimated $40 billion shortfall in the state budget over this year and next. Skelton argues that the credit would spur consumer spending -- making it more of a pure stimulus. The sales tax credit existed before the 1986 tax bill. Under President Bush, taxpayers could take a credit for either state income tax or state sales tax, but not both.

Breaking News: Arnold Releases Another Budget Proposal

Joe Mathews — Wed, 20 Aug 2008 18:28:00 -0400

In a news conference, a frustrated and angry Gov. Arnold Schwarzenegger blasted legislators of both parties for failing to reach a budget compromise ("shameful") and offered another budget proposal. This is unusual. California governors typically release two budget proposals -- one in January, and one in May. But the governor has put forward a compromise plan that includes a temporary sales tax increase -- violating his promise not to raise taxes -- in exchange for budget reforms. He said he was taking a risk: "I'm stepping over the line here," he said.

There was a take-it-or-leave-it feel to the session, which was cut short after four questions. He said it was time for budget "dialogue" to stop. "This is not part of the kabuki or anything like that," said the governor, all but demanding his proposal be passed.

Other highlights:

-Schwarzenegger admitted openly that his first attempt to fix the state's budget problem--the ballot measures Propositions 57 and 58, which were approved by voters in 2004--had been a failure. "This year is coming out clearly that our budget reform that we attempted in 2004 with Props 57 and 58 does not work," he said.

-The governor's new budget proposal ramps up the size of the rainy day fund. 12.5 percent of general fund expenditures would be put into a budget stabilization account. That would give California the largest reserve in the country, if enacted. In boosting the rainy day fund, he appeared to drop the spending limit (based on an average of the spending increase in the previous 10 years) that had been attached to his earlier proposal At the least, there was no mention of it.

-He blasted Controller John Chiang for issuing paychecks to state workers without the governor's mandated reduction in their pay, a method Schwarzenegger embraced to save cash. "I'm upset about it, and I'm upset that he's not a team player," Schwarzenegger said of Chiang. The controller has argued that the state's computer systems make such a change in payroll impossible, and that such deductions could add to the state's costs when they are paid back.

-He said he would not attend the Republican National Convention if there is not a budget by then. Schwarzenegger is scheduled to speak on the opening night of the convention..

-He predicted that without compromise, the budget fight could go on forever. "We're going to sit here six months from now," he said, if legislators don't change their attitudes.

-He described Tuesday's Big 5 meeting (of the top two legislative leaders of each party, plus the governor), which ended with the Republican Assembly leader storming out, as very difficult. "Don't come to the table with the same stubborn position," he said, adding, "That's what happened yesterday at the Big 5."

In 'Total Meltdown' News

Joe Mathews — Thu, 14 Aug 2008 14:21:00 -0400

A gubernatorial spokesman predicts a "total meltdown" in the Capitol if there's not a deal for a new California budget by Saturday, the deadline for adding measures that would be part of any compromise to the November ballot. At Blockbuster Democracy, we're adopting "Total Meltdown" as a way to distinguish California posts from news from other states.

In Total Meltdown news...

DON'T TAKE PERATA'S WORD: The Senate Democratic leader said a deal was close. It wasn't.

DIFI SMACKDOWN: Democratic U.S. Sen. Dianne Feinstein, a rumored candidate for governor in 2010, went to Sacramento yesterday and criticized legislators for failing to put a $9.3 billion water bond on the ballot. She's right, of course. The state badly needs the infrastructure, and the bond represents a compromise reached by her and Gov. Schwarzenegger. But folks on the left and right hate it, and the California legislature's mantra right now might as well be: "Let's make the perfect the enemy of the good."

WE DECIDE, YOU VOTE. The Los Angeles County Board of Supervisors reversed itself and voted to put a sales tax on the ballot to fund transit programs. But then the board voted to register its opposition to the package. Yes, it's confusing.

Beijing's New Polluter Pays Car Tax - Good Idea?

Annette Nellen — Wed, 13 Aug 2008 19:32:00 -0400

Tax systems get used for a lot more than raising revenue for the government. They are also often used to help change behavior and to make prices reflect costs of "negative externalities." If you want to discourage something, raise the tax on it. If you want to encourage something, lower the tax or offer a special deduction or tax credit.

One activity we want to discourage today is greenhouse gas emissions, such as CO2 from burning fossil fuels - like the gas in your car. So, despite some elected officials calling for ways to lower the cost of gasoline, we should really be looking to increase the cost because:

The higher cost will encourage people to drive less or find other ways to use less gasoline.
What we pay for gas at the pump is not the true cost. When we drive and burn gasoline, we cause air pollution, create GHG emissions that contribute to global warming, wear out roads, and cause congestion. These activities have costs - such as cleaning the air or refurbishing roads. When that cost is not included in the price we pay, the government doesn't get the money needed to deal with the problems - the negative externalities of driving.

Beijing seems to have the idea right. It was reported in several news outlets that on August 13, Beijing announced that there would be a much higher sales tax on large cars and a lower tax on smaller cars (see abcnews.go.com)

The US has something similar with the gas guzzler tax enacted in 1978. However, that only applies to new cars so trucks and some heavy SUVs are not covered. You can find a list of covered vehicles from the EPA (here).

A flaw with both approaches is that the tax is only assessed at time of purchase. This doesn't do a good job of tying the tax to the cost of the negative externalities or help modify behavior. Once you've paid the gas guzzler tax, on the purchase of a $350,000 Lamborghini Murcielago, are you going to care how much you drive it every year? On the purchase of an expensive gas guzzling car, is someone even going to notice the up to $7,700 gas guzzler tax tacked onto the price tag? Will it cause someone to not buy the car? Of course, the gas guzzler tax also applies to some less expensive cars and it does seem to have caused carmakers to avoid mass producing cars that are subject to the tax.

Even if you buy the gas guzzler and keep it in your garage without driving it, you owe the tax.

A solution to better encourage less driving of gas guzzlers and discouraging their purchase (and manufacture) would be to have an annual tax on their ownership in addition to a higher gasoline excise tax.

The funds generated from a gas tax increase could be used for environmental research and clean-up, education on how to help the environment, and to provide relief to low-income taxpayers, as well as to some hard hit industries which they retool to use less gasoline. The use of a polluter pays tax to reduce another tax is called a "tax shift."

Another stick to help discourage production of gas guzzlers would be to deny companies the manfucturing deduction for them (IRC Sectoin 199) or impose an excise tax on some part used in these cars.

As federal and some state governments start serious work on reforming their tax systems to make them work better in supporting economic, societal and environmental goals, polluter pays taxes and tax shifts need to be part of that discussion.

States Reaching to Find Sales Tax Nexus

Annette Nellen — Fri, 08 Aug 2008 15:29:00 -0400

In April, New York changed its sales tax law to try to make a few large vendors subject to sales tax collection - most notably, Amazon.com. The new law creates a rebuttable presumption that a vendor is soliciting business and thus required to collect tax if, per an agreement, they compensate New York residents for directly or indirectly referring potential customers. Referrals may be made through a website or other means. The presumption only applies to sellers with over $10,000 of sales to New York customers made via the referrals in the prior four quarters. Sellers may rebut the presumption by showing that the residents did not solicit sales in New York for them. (Bill Summary, p. 10)

Amazon's "Associates Program" causes it to have many associates who may be New York residents. Amazon filed a lawsuit as soon as the law went into effect challenging the new law as unconstitutional. It also started collecting the tax!

Another company that fell under the law change is Overstock.com. Their remedy was to cancel its agreements with its New York affiliates who were helping Overstock.com advertise.

Arguably, the associates who have a link to Amazon or Overstock on their website are third party advertisers, not sales agents or representatives of these companies.

For more information on this law change and vendor reaction, see this short article - Grabbing Remote Vendors.

In a hard to find NY Senate bill - S 8638, senators voted on June 24 to repeal the provision. Here is information from the NY Legislative website:

"STATUS:
S8638 RULES No Same as
Tax Law
TITLE....Repeals provisions of law relating to an evidentiary presumption to facilitate the administration of the sales and use tax


06/19/08	REFERRED TO RULES
06/24/08	ORDERED TO THIRD READING CAL.2231
06/24/08	PASSED SENATE
06/24/08	DELIVERED TO ASSEMBLY
06/24/08	referred to ways and means

BILL TEXT:
STATE OF NEW YORK
________________________________________________________________________

8638

IN SENATE

June 19, 2008
___________

Introduced by COMMITTEE ON RULES -- read twice and ordered printed, and
when printed to be committed to the Committee on Rules

        AN ACT to repeal subparagraph (vi) of paragraph 8 of subdivision (b) of
          section 1101 of the tax law relating to an evidentiary presumption to
          facilitate the administration of the sales and use tax where a person
          making sales of taxable property or services in the state uses resi-
          dents in the state to solicit sales

The People of the State of New York, represented in Senate and Assem-
bly, do enact as follows:

     1    Section 1. Subparagraph (vi) of paragraph 8 of subdivision (b) of
     2 section 1101 of the tax law is REPEALED.
     3    § 2. This act shall take effect immediately."

There appears to be no other action on this proposal. The April law change was estimated to generate $47 million in 2008/2009 and $73 million in 2009/2010 (see links in above article - Grabbing Remote Vendors). That's a lot of money. If this estimate is anywhere close to being accurate, it means that lots of New Yorkers are not self-remitting use tax on purchases they make from the vendors who are subject to the law change. (All states have similar problems - most people don't know what a use tax is or don't keep sufficient records to measure it every year or ignore it.)

All of this illustrates the challenges sales and use taxes face in e-commerce where it is very easy to have a physical location in just one state, but customers in all states. Such a vendor is only legally obligated to collect sales tax from customers in the state where the vendor resides (where they have a physical presence). Customers in other states must self-report their use tax on the purchases.

So, some states modify their sales tax laws to grab remote vendors by trying to connect them to some physical location in the state (such as Amazon's New York Associates). But, there are constitutional restraints that limit this. Given current case law, New York will likely have difficulties defending its law change.

States should do a better job educating their citizens about use tax and the benefits to the state (and its citizens) of collecting it. New York law allows individuals to use a table to estimate the use tax owed so they don't need to keep records. Given the revenue estimates attached to the April 2008 law change, compliance must be low. New York should take out some on-line ads to help buyers understand the use tax and how to pay it. In the long run, that would be better than enacting laws of questionable constitutionality that will be challenged in court.

Another option for states is to not allow the state or its agencies to purchase from sellers who do not collect sales tax. Unless a state has perfect recordkeeping (or doesn't require its agencies to pay sales tax), when purchases are made from remote vendors, it is possible that the use tax payment gets overlooked. Also, some schools and home-and-school clubs have Amazon links on their websites. Perhaps those sites should at least be told to include a note about the need to pay use tax (which in most states helps fund schools!).

What do you think states should do to get more of their residents to pay use tax?

Thursday Round Up: Oregon, Arizona and Colorado

Joe Mathews — Thu, 08 May 2008 16:19:00 -0400

OREGON GAMING MEASURE DROPPED: Backers of an initiative to establish Oregon's first non-tribal private casino say they've decided not to go forward. They could revive the proposals, but want to see how proposals for two tribal casinos fare first.

IMMIGRATION COPS: The Arizona legislator who wants to allow police officers to enforce immigration laws is pursuing dual tracks -- a ballot initiative and legislation at the same time. The initiative is back-up, he explains.

COLORADO GOV RAIN ON SPEAKER's INITIATIVE: Gov. Bill RItter, a Democrat, questions the political strategy behind an effort by the Democratic House speaker in his state to qualify a measure lifting some of the state's spending limits. Ritter has been trying to reduce the number of measures on the November ballot.

ONE CENT SALES TAX TO FUND TRANSPORTATION: Arizonans, including Gov. Janet Napolitano, have launched an initiative to pay for $42 billion in transporation spending with a one-cent sales tax. The full plan for how they would spend the money is due next month.

RIGHT TO WORK TAB: It cost more than $300,000 to qualify the "right-to-work" initiative in Colorado for the ballot, according to the Denver Post.

'PERSONHOOD' OPPONENT: Here's an interesting profile of the former Boulder mayor and current Planned Parenthood official who is leading the campaign against Colorado's "personhood" initiative, an anti-abortion measure that would seek to protect the unborn by giving them all the rights of human beings.

NOT COMING TO KANSAS CITY: The mayor there wants a ballot measure to establish light rail on the November ballot, but he's not getting much support.

TAKE IT TO THE PEOPLE, JR: Members of the Dallas city council are seeking a public referendum on whether the city should own a hotel development outright.

Repealing Tax Changes Before They Take Effect -- Is There a Better Way?

Annette Nellen — Tue, 22 Apr 2008 14:09:00 -0400

In the past year, we have seen both Michigan and Maryland enact new taxes, only to repeal them soon thereafter and before they became effective, due to complaints. That's a lot of work for no effect. What could have been done differently?

On 12/1/07, the day a use tax on specified services was to go into effect, Michigan repealed the law (see prior blog post). More recently, Maryland repealed its expansion of the sales tax to computer services. In November 2007, the legislature added computer services to a measure designed to address a budget shortfall (see Washington Post article of 12/9/07). The tax was to become effective on July 1, 2008. Fierce opposition by the business community led to its repeal in April 2008. The tax would have mostly applied to businesses since they purchase more computer services than do individual consumers.

Back in 1987, we saw Florida expand its sales tax to include specified services, only to repeal that tax 6 months later. In 1990, Massachusetts expanded its sales tax to services, but repealed it before the effective date.

This seems like a lot of wasted effort. In Maryland, the Comptroller's Office was struggling to write regulations to help businesses be ready to comply - a project now pulled.

What night have helped lead to more productive legislative efforts and more lasting tax changes? Here are a few suggestions:

Transition: In creating a new tax or expanding an existing tax to include new taxpayers, provide sufficient time for the tax agency to provide guidance and assistance and for taxpayers to get their computer and business systems ready to handle any new collection, reporting and payment procedures. In Michigan, the expanded sales tax was enacted in October to be effective on December 1. That's not enough time for businesses to get ready to collect the tax.
Use Prior Research: Many states have had commissions to study tax reform in their states. Typically, there are hearings and months of thought and discussion. Commission final reports tend to sit on shelves. Legislators should look for such reports to see what was suggestion as typically a lot of thought and research goes into these reports. NCSL keeps a list.
Avoid Sales Tax Pyramiding: Plans to expand sales tax to more types of services should stay away from services that are primarily purchased by businesses. This will avoid pyramiding in the sales tax.
Accompany Any Base Expansion with a Rate Reduction: If a tax base is to be expanded, the rate should be lowered. Typically, a tax with a broader base and lower rate is simpler (fewer rules needed to define what is not taxed or is treated specially), can have higher compliance rates (less interest in tax planning due to lower rate), and is more neutral (fewer special rules causing the tax law to influence decisions). Base expansion accompanied with a rate reduction is more likely to be accepted as tax system improvement by taxpayers than just a base expansion.
Educate Taxpayers: Use advertising to help taxpayers understand the current flaws in the tax system and why they need to be fixed.
Fix Tax Systems in Good Times: Tax law changes made during times of budget crisis are likely to be focused more on what raises the requisite revenue rather than what makes best sense for modernizing a tax system within the principles of good tax policy.

A Dynamic Tax System

Annette Nellen — Wed, 05 Mar 2008 22:07:00 -0500

Tax systems can get out of date. For example, an income tax designed with a rate structure to apply to specified income levels (some type of progressivity goal), will become out of date if the tax brackets are not adjusted for inflation. That is, if individuals with income between $30,000 and $40,000 are to have a 15% rate, they will start to creep into the next higher rate as their income increases with inflation (for example, a person gets a cost-of-living raise), even though their buying power has remained constant (they are really no richer). So, one way to keep the system current, is make an inflation adjustion to the income levels at which each tax rate bracket begins.

What about keeping a tax base current and relevant? That is, enabling a tax base to reflect current ways of doing business and how people live even as things change. That's harder than the rate adjustment which can just be built into the law by having a rule that tells the IRS to adjust the rate structure annually for inflation. Keeping a tax base current and relevant requires regular attention from legislators and making tough decisions. For example, perhaps decades ago it made sense to provide special tax breaks to a particular industry. Yet, if such breaks are not looked at regularly, they remain even when no longer needed. And, it is politically difficult to get a tax break removed once it has been there for a while.

One remedy to the need to regularly update the tax base is to have a broad tax base (with few special rules) and a lower rate. This should reduce the need for special rules. Another solution is to have a termination date on all special rules. What about drafting rules that can self-adjust?

Keeping a tax base relevant is challenged due to changes in technology, society and the ways of doing business. A significant example today is the sales tax base in many states. Most sales tax systems include tangible personal property and a few services in the base. Today, some things that traditionally were consumed in tangible form can be consumed in digital form, such as books, movies and music. These changes (assuming these digital items can't be called "tangible" under the state's law), cause the tax base to decline even though consumption levels are the same. The solution is to modify definitions of what goes into the tax base. Not doing so, can lead to drops in tax collections.

In California, the California Budget Project did the work to measure the drop in revenue that can result when a base has not kept up with changes in consumption and the meaning of "goods." The CBP estimates that if the same percentage of personal income were subject to sales tax today as was subject to the tax in 1966-1967, California would collect almost $16 billion more in sales tax today (source, pg 33) Of course, prices and income need to be considered as well, but clearly, the base has diminished to some degree just due to the change in the form of products people can consume today.

Given continued changes in technology, consideration should be given to use of language that will not be outdated in a few years (although not always an easy thing to do). One interesting example of trying to keep a tax base from getting outdated by technology (and being clear in describing what you're trying to tax) was a change Florida made a few years to ensure that "communications services" would be taxed despite the possibility that new ways to make a phone call would continue to arise. Here is their definition (emphasis added):

"Communications services” means the transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals, including cable services, to a point, or between or among points, by or through any electronic, radio, satellite, cable, optical, microwave, or other medium or method now in existence or hereafter devised, regardless of the protocol used for such transmission or conveyance."

Back in the 1930s when many states enacted sales tax laws, if they had considered the possibility that goods might someday be acquired in intangible or digital form, they would have most likely written their tax rules differently. To be clear that they wanted to tax certain types of consumption, they would have said the sales tax applied to "goods or products no matter how obtained, provided they are used for personal consumption/enjoyment."

As Congress and state legislatures continue to consider tax reforms, they should also think ahead and carefully chose the language for defining the tax base to enable the law to self-adjust as business practices and ways of living change. Where feasible to do this, it will possibly lead to a more certain tax law (the intent is more clear), eliminate delays in updating tax bases and keep tax revenues where expected.

Michigan Changes Course -- Repeals Sales Tax on Services

Annette Nellen — Sat, 08 Dec 2007 00:00:00 -0500

Recently, to address budget problems, Michigan lawmakers agreed to expand the sales tax base to include many more types of services (see prior post). Big surprise - taxpayers and service providers did not like the change - a $725 million tax increase (see story in The Detroit News, 11/1/07)

On 12/1/07, the effective date of the expanded tax, Governor Granholm signed HB 5408 (PA 145) to repeal the tax on services. That expected sales tax revenue will be replaced with a business tax surcharge.

There are many good reasons for having a sales tax cover all types of personal consumption rather than just tangible personal property (see prior post). However, change is difficult. Expanding the sales tax base to include more types of services means that businesses, such as nail salons and child care facilities, who have not collected sales tax before and not had to file returns, now have to.

How might the Michigan sales tax expansion to services have been done in a way that might have reduced the desire to immediately repeal it?

Transition in the expansion. This gives the tax agency more time to help businesses that must now collect and remit the tax.
Do not tax services primarily used by businesses. Businesses should not pay sales tax, only final consumers. This prevents pyramiding of the tax where businesses add it to their costs and consumers pay tax on that amount. (see prior post)
Start with education efforts to help consumers better understand the sales tax and why some types of consumption should not be exempt.
Expand the base along with a rate reduction !!!!!

This post was originally published at http://21stcenturytaxation.blogspot.com.