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Sunday, April 22, 2012

Sales tax simplicity, equity and economic efficiency

The Texas Comptroller of Public Accounts publishes an interesting and informative monthly Tax Policy News. The March 2012 issue includes an article - "Spring is in the Air." It explains how Texas sales tax applies (or does not apply) to seeds, bulbs, trees, landscaping, stepping stones, pool cleaning and more.  The article is almost 2,500 words long. There are a variety of special rules depending on who is selling, the income derived, etc.

Here is an excerpt from the article:

"Dirt and Stepping Stones
Purchases of stone or rock that is cut, crushed or mixed with other products (such as processed soil, dirt, sand or gravel) are taxable as processed materials. But, purchases of unprocessed dirt, sand, gravel, stone, rock or similar materials are not taxable.

Dirt, sand, rocks and gravel that are merely sorted, sized, screened, washed or dried are not considered processed materials.

A person performing a taxable real property service, such as landscaping, may issue a resale certificate instead of paying tax on the purchase of processed materials that will be incorporated into a customer’s real property as part of the taxable service. See Rule 3.356 for more information about real property services. A person performing a nontaxable service must pay tax on processed materials.

A charge to a customer for unprocessed materials that are incorporated into the customer’s real property as part of a taxable real property service, such as landscaping, becomes taxable as part of the total charge for the taxable service. A charge to a customer for unprocessed materials that are incorporated into the customer’s real property as part of new construction (under either a lump-sum or separated contract), such as a rock wall, is not taxable. See Rule 3.291 for more information about contractors who add new improvements to real property."

Special rules, rules that are not intuitive (such as washed, dried and sorted gravel is not considered processed), and the need for long explanations of the rules, indicates a complex tax system. Special rules usually often create inequities where similarly situation taxpayers (or items) are not taxed similarly. Also, the exemptions do not seem to be aimed to serve the only two good purposes - a sale to a business or a necessity of life.  (Note - as I've often noted in this blog, a problem with exempting necessities of life, such as food, is that it provides a tremendous savings to higher income individuals who spend more on necessities.  Taxing them with some type of relief to low-income taxpayers, such as a refundable income tax credit or monthly subsidy would be better.)

How could these rules be simplified?  How about this for a statute:
Texas sales tax is imposed on all items sold to non-business customers. Such tax is to be collected and remitted by the seller.  Sellers must register with the state and will receive a tax identification number. Such number must be provided to sellers in order to receive a sales tax exemption. The only sales transactions not subject to sales tax are non-elective medical care and school tuition. Sellers with less than $10,000 of sales in the prior year may elect to remit sales tax on an annual basis either on a special sales tax reporting form or with their business income tax return.

With a broad base (although all business purchases would be exempt), the sales tax rate could be lowered. The above language could apply to any state, not just Texas.

What do you think?

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