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Monday, October 6, 2014

DC Broadens Sales Tax Base for Good Tax Policy

In May, DC's Tax Revision Commission released its final report after hearing from experts and studying DC's tax issues. In July, changes from the report were enacted! That is amazing. Typically, reports of tax commissions sit on shelves.

Included in sales tax reform was base broadening to include some services mostly used by consumers and ones people won't obtain via e-commerce or by traveling out of state (although hair salons were not included in the final legislation, but in the commission recommendations). Instead of lowering the sales tax rate, they kept it where it is (1/4 point lower than Virginia and Maryland) and lowered individual income taxes.

From my original post at, which shut down in 2018.

In May 2014, the D.C. Tax Revision Commission released its report outlining numerous changes for its key taxes. Included in the sales tax recommendations:
·         Expand the base to include more services with a focus on those that are mostly used by consumers and are not easy to obtain outside of the DC area or online, such as health clubs and car washes.
·         Add a use tax line to the personal income tax form (like many states already do).
·         Raise the rate from 5.75% to 6% (to match the rate in neighboring Virginia and Maryland).
There were also specific sales tax changes not recommended:
·         Increasing the tax rate on parking, hotels and meals.
·         Expanding the base to include more goods, such as snacks (deemed "not worth the administrative challenges" doing so would create).
·         Adding an "Amazon" or affiliate nexus provision.
That was May. In July, passage of DC's Fiscal Year 2015 budget included several of the changes including expanding the base to include the following services, effective October 1, 2014 (OTR Notice: 2014-09; 8/29/14):
·         Bottled water delivery
·         Bowling alley and billiard parlor
·         Car washing
·         Carpet and upholstery cleaning
·         Health club (stories in the press referred to this as the "yoga tax" (see, for example, the Washington Post, 6/24/14))
·         Storage of household goods
·         Tanning
A service mentioned by the reform commission, but not included in the legislation is beautician services. That seems odd given that most people won't travel too far to get a hair cut.
Is DC's base broadening to include some services good tax policy? I say yes. Consider the following:
·         Administration and compliance - most of the newly taxed services are offered by businesses that also sell tangible personal property so they are already complying with the sales tax law. Expanding the base to include services should make it all easier - just charge sales tax on the entire amount charged to the customer.
·         Simplicity - while most of the services are clear - tanning and bowling for example, that is not true for storage of household goods. How does the owner of a storage facility know what you are storing?  There might also be some evasion if some people run the cost of storage of personal items through a business they own.
·         Equity - broadening the base of a consumption tax beyond tangible personal property will make the tax more equitable. For example, why must you pay sales tax on an exercise video or stationary bike, but not on an exercise class or gym membership?  Yet, lowering the rate while broadening the base would be more equitable (DC kept the rate the same). The DC legislation uses some of the new tax dollars to reduce the individual income tax. I think it would be better to reduce the sales tax given that it is the regressive tax. Or perhaps they could have done both.

DC also did something we don't see too often.  A tax reform commission was formed, it studied the issues, made recommendations and issued a report. Then, it was acted upon rather than just put on a shelf to collect dust! Impressive!  The report includes other tax changes and the rationale - it's a good read.

What do you think?

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