Income tax versus sales tax - recent activity in Missouri

In recent years, some states have reduced income taxes and increased sales tax or proposed doing so. Recently, Missouri had Amendment 5, Income Tax Elimination and Sales Tax Changes Amendment, on their August 4, 2026 ballot. The proposal would have amended the state constitution to reduce the personal income tax per revenue growth until the tax was eliminated, but allow expansion of sales tax to reduce the income tax. Once eliminated, lawmakers would be prohibited from bringing back. Sales tax increases would via expansion of the base to include more goods and services. Reductions to the income tax would start with the top rates. See Ballotpedia and House Joint Res. Nos. 173 & 174,

The amendment was defeated with 83% of voters saying no (Missouri Independent, 8/4/26). Apparently a stated rationale for the proposed tax shift, per Governor Kehoe, was to make the state more competitive.

For several reasons, any proposal to replace an income tax with a sales tax violates principles of good tax policy. Foremost on the violation list is equity. An income tax can readily generate revenue based on ability to pay, even if the rate is flat rather than progressive. Also, income = consumption + savings. This layout of a basic formula indicates that if similar income is to be raised by an income and consumption tax, the consumption tax rate needs to be higher (since it excludes taxing savings). And if the sales tax base remains narrow, such as not being imposed on food, household utilities, personal services, entertainment, the rate has to be quite high. This exacerbates the regressivity of a consumption tax - lower income individuals must use a greater percentage of their income to pay it while higher income people use a lower percentage of their income to pay it.

Missouri taxes food but at a lower rate. While a sales tax exemption for food is applied in most states, it provides a greater savings to higher income individuals than lower income individuals because higher income people spend more on food. Accounting to data from the US Department of Agriculture, in 2024, households in the lowest income quintile spent, on average, $5,498 on food (about 33% of their pre-tax income) while households in the top income quintile spent about 3 times that amount - $16,989 (about 6.4% of their before-tax income).

Data is similar for most other spending categories - clothing, entertainment, household utilities, and personal services (such as a gardener, hair stylist, personal trainer). If Missouri was going to generate sales tax from taxing currently exempted consumption common to higher income taxpayers, such as entertainment and personal services, that would alleviate some regressivity, but likely the state would have to increase the rate too.

What about competitiveness? The proposal would not change the 4% corporate income tax, but elimination of the individual income tax would be a boon to sole proprietors and individuals who own partnerships and S corporations. This violates equity and neutrality as more businesses would aim to be passthroughs rather than corporations if possible. What about these measures to increase competitiveness?

1. If businesses do not want to locate or expand in Missouri (I'm assuming this is a problem since competitiveness was a stated purpose of the tax shift), find out why.

2. Significantly change the sales tax from being imposed at point of sale to only be assessed on individuals (remove businesses from paying sales tax or even having to collect it) by using a formula approach; Consumption = Income - savings. I and colleagues proposed this several years ago and the paper is here - https://21stcenturytaxation.blogspot.com/2017/02/more-than-one-way-to-tax-consumption.html.

This approach results in all personal consumption being subject to sales tax but not business consumption (sales tax is intended to address personal consumption). And with the formula (above), individuals below a certain income level can be exempted. This is a much better way to have sales tax exemptions for necessities of life only benefit people below some specified income level. While removing businesses from paying sales tax is a revenue hit, expanding the base for middle to high income individuals will make up for some of that. And, the state could keep sales tax on the purchase of registered vehicles for businesses as well as individuals (this is helpful to individuals financing the purchase of the vehicle because it would include the sales tax). And since these vehicles have to be registered, there is a relatively simple way to collect the sales tax.

Imagine businesses no longer having to collect sales tax, file sales tax reports or pay sales tax (except perhaps on vehicles). Wouldn't that make the state competitive? The costs and risk of error under the current and odd sales tax regime we use in the US is high.

What do you think?

Sales Tax Discounts - Still Warranted?

I've got a blog post on the sales tax discounts that several states offer to vendors to help address the costs they incur in getting sales tax remitted. See below for post originally at SalesTaxSupport.com on 4/10/18. Two things caught my attention recently that led to me to this topic.

1. Governor Greitens of Missouri has proposed repealing that states 2% unlimited discount. Certainly, it would raise revenue, but he also states that with improve compliance technology, the discount is no longer needed.

2. I reviewed many parts of Texas' tax law in preparing for testimony I presented to the Texas Commission on Public School Finance on April 5. I first noticed that they gave a discount for paying hotel taxes on time. They also have penalties for filing and paying late. The discount along with the penalty seemed to me worth addressing. After all, who gets a bonus for doing what they are supposed to do? I have not heard of employees getting bonuses for showing up for work on time. I also noted they had both a discount and a prepayment bonus in their sales tax system. A prepayment bonus is intriguing and one that technology can certain eliminate the need for.  If states want their tax dollars earlier, such as to pay bills rather than have to borrow to pay bills, why not use technology to get the payment to the government real time rather than have the sales tax first go to the vendor and then to the government (see my 6/23/08 (!) post for this topic).

For more on discounts, what states use them, which have limits and which do not and the tax policy considerations of them, please take a look at the post.

What do you think?

With Sales Tax Software, Are Sales Tax Discounts Still Appropriate?

Anyone looking at their sales receipt upon leaving a store will believe they paid the sales tax rather than the vendor. The vendor though, must maintain proper records, file a sales tax form and remit the sales tax collected from customers. Should the vendor be compensated for its efforts? Many states do so, typically referred to as a vendor discount.

The Federation of Tax Administrators maintains a list of what each state offers as a discount, if any, and if there is a cap on that amount. The discount is often based on a percentage of tax collected. The likely rationale for providing a minimum is that the compliance costs are unlikely to increase much as the amount to collect and remit goes up. But not all states have a cap on the discount.

Per the FTA list, 28 states offer a discount with 18 of them imposing a cap on the discount. The discount amount ranges from .25% in Nevada to 5% in Alabama and New York. Some states have a range of percentages, typically, higher for a initial stated amount of collections, and decreasing for collections above that amount, to account for the economies of scale that exist in the compliance process. The discount is also likely to only apply for timely compliance.

Why don't all states offer a discount? Well, cost is an obvious one. The discount in effect lowers the rate of the sales tax. The 0.5% discount offered by Texas cost the state $132 million in 2017. Texas also offers a 1.25% early payment discount which also cost the state about $132 million in 2017. These are significant costs for governments running on tight budgets.

States that don't offer a discount may also just view the collection costs as the cost of doing business. That hinders economic efficiency though in that not all businesses have to collect sales tax.

Missouri Governor Greitens has proposed repealing the state's sales tax discount as part of a tax reform plan to lower rates and close loopholes. His rationale for repealing the state's uncapped 2% discount for sales tax collection follows (from a 1/29/18 press release):

"Eliminating Timely Filing Discounts: Missouri currently offers a 2% discount to businesses for filing withholding taxes on time. Missouri is one of the only states in the country to provide an uncapped discount as high as 2% to vendors for filing sales taxes on time. At one time in history, it was a great difficulty for businesses to manually calculate and send their sales tax to state and local governments. This discount was intended to factor those difficulties into the tax collection system, and reward those who paid their taxes on time. Today, with modern technology, paying taxes on time is the norm, not the exception. In effect, Missouri's tax system rewards businesses for doing what they are required to do by state law. Families do not see a similar discount for following the law, and the issue that this attempts to address is not relevant in today's modern economy. These discounts complicate the tax code and offer no competitive advantage to Missouri. The Withholding Tax Timely Filing Discount and Vendor Timely Filing Discount should be eliminated, in favor of a simple reduction in tax rates."

So, Governor Eric Greitens raises another consideration for not offering a discount for sales tax compliance - technology has lowered the costs.

Well, technology has certainly made sales tax compliance a lot easier in recent years, but it still requires purchase and maintenance of the software and hardware, as well as humans to make it all work.

Perhaps it would be better to lower the discount percentage and impose a cap. For Texas and any other state offering a discount for early payment, technology should be considered that would allow the sales tax to go directly to the state at time of sale without even the need to file a return (even cash payments could be converted into immediate transfer of the sales tax when those deposits are made to the bank). That is, when a person's credit card is charged, the cost of the goods are charged to the vendor and the sales tax is charged to the state (who also then pays the credit card charge fee for the tax rather than the vendor). (See Texas Comptroller report, pages 12 - 15.)

The topic of sales tax discounts for vendors could get even more attention in all states with a sales tax should the U.S. Supreme Court rule for South Dakota in the South Dakota v. Wayfair case it will hear on April 17, 2018. If vendors without a physical presence in a state have to collect sales tax from customers in those states, their compliance costs will go up (including for the technology they will need) and they are likely to demand some type of compensation.

We'll see what happens in Missouri and more broadly.

Your thoughts?

One logical way to get vendors to collect use tax

For decades, states have sought ways to get remote (non-present) vendors to collect sales/use tax when they sell to customers in the state. States have been pushing Congress to provide assistance and many have enacted laws to broaden their nexus reach (see a nice list from Sylvia Dion here; my list needs updating but links are useful).

I've been researching, writing and testifying on this topic for many years. One of my suggestions has been to only let the state and its agencies purchase from vendors that are registered with the state to collect sales tax. That is, if a vendor wants to have the state or any of its agencies be a customer, it must register to collect sales/use tax.

Before California enacted its "Amazon law" in 2011, I always thought it was odd that my employer (the State of California) did not mind that I purchased books, such as for speaker gifts or students, from Amazon.  Of course, I paid the use tax since it was on my credit card and then I got reimbursed (perhaps the State paid the tax as well).  (And, I've been paying my use tax obligations since long before there was even a line on the state income tax form.)

I see that Missouri has a law that any vendor that wants to do business with the state must register to collect use tax even if it has no physical presence in the state.  Here is an excerpt from its website:

"Vendors Contracting with the State of Missouri Must Collect and Remit Sales/Use Tax
      Any vendor and its affiliates selling tangible personal property to Missouri customers should collect and pay sales or use tax in order to be eligible to receive Missouri state contracts, regardless of whether that vendor or affiliate has nexus with Missouri."

Why don't more states do this? It only seems fair and logical - if a vendor wants to do business with the state, one of the requirements should be registering for sales tax. Why should the state do business with a company that doesn't collect sales tax for the state? 

What do you think?

Additional links:

• Sales and use tax nexus
• Testimony and other information on California tax collection

How sales tax exemptions can waste one's time

Recent litigation in Missouri over whether converting frozen dough into baked goods is "processing," such that the electricity used is exempt from sales tax, shows the time and money that can be wasted with pointless rules.  The solution is to not have businesses pay sales tax - instead, only have it paid by the final consumer (the same was a VAT works).  Please see my summary of the case and issues in this SalesTaxSupport.com post.

Missouri tax reform woes

Missouri tried to make various reforms to its tax system this year. One bill that would have lowered income tax rates a bit was vetoed by Governor Nixon and it was reported on September 11 that the legislature was not able to override the veto. ("Missouri Republicans Fail to Block Vetoes on 2 Bills," New York Times, 9/11/13.) Much of the debate seemed to center on whether the state could afford the cut. One rationale for the cut is that Missouri exempts some remote sales from use tax and if Congress ever gets the Marketplace Fairness bill enacted, Missouri residents would see a tax increase (the exemption would, in effect, go away).  I wrote about that recently in my last post as part of the state efforts to collect sales tax on e-commerce sales.

I had an interesting conversation with Columbia Daily Tribune reporter Rudi Keller recently about the proposals and its analysis using principles of good tax policy.  He has a detailed article on the bill, controversy and tax policy (!) in his 9/8/13 article -"Lines are drawn over taxes as Missouri lawmakers return for annual veto session." I encourage you to take a look - a very good article.

What do you think?  What does it take for state tax reform - a tax cut? proof that it would be better from a policy perspective? lower rates than neighboring states? a completely different system? something else?

States still seeking sales tax

States continue to find ways to improve sales tax collection from online sales. They would like to see Congress help, but in the meantime, they find other ways.  In 2010, Colorado enacted a law to require vendors with over $100,000 of sales to Colorado customers to notify the customers of possible use tax responsibilities. In addition for any customer with over $500 of sales in the year, the remote vendor also had to issue an annual summary statement to the customer, and a report to the state of all customer purchase totals. When first challenged, an injunction was issued to not enforce the law. That was recently found improper.

Utah and Missouri have taken more recent actions to address varying aspects of the sales tax colletion issue.  I have more in a short article in the 9/12/13 AICPA Tax Insider - Still seeking sales and use taxes.  Please take a look.

What do you think states should do to improve sales and use tax collections?