The oddities and complexities of tax exemptions

A simple tax system would define the tax base and not have exemptions. When something(s) get carved out for different treatment, it is usually difficult to define that carved out item. Same thing when something is going to be taxed at a different rate. Two recent examples.

1. On March 6, 2012, the Missouri Supreme Court issued a ruling in Aquila Foreign Qualifications Corporation v. Dept of Revenue, No. SC91784. Aquila is a utility company selling electricity. One of its customers is a convenience store that also prepared food. The store tried to avail itself of a special sales tax exemption for processing so that it did not have to pay sales tax on the electricity used to prepare the food. The court upheld the Department of Revenue's denial of the exemption.  Per the court, the legislature "did not intend the term “processing” to include retail food preparation."

2. An article in the February 2012 Texas Tax Policy News explains the differences in definitions for "tangible personal property" and "motor vehicles" and how the sales tax exemption for "agriculture" equipment and the "motor vehicle tax agriculture exemption." operate.

Treating property, transactions, and activities the same broadens the tax base, allowing for lower tax rates. It also reduces compliance costs. But what about desires to incentive some activities or address spillover costs, such as are associated with R&D? Find the best way to define the activity. For example, if there are existing laws, such as patents, consider that. For example, allow a tax credit for the costs of patenting technology.

What do you think?