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Sunday, April 5, 2015

Designing sales tax exemptions - what is necessary?

Several sales tax exemptions fall under the "necessity of life" category - or at least that is typically how a state might describe them. For example, see page 1 of California Board of Equalization Pub 61 which lists food, health and housing under this category. One that caught my attention recently is Idaho's addition of  “eyeglasses and eyeglass component parts” as a sales tax exemption effective July 1, 2015.

While the lens are health related, the frames are often fashion related. Frames range in price from $50 including the lens (!) to over $250 for just the frames. If I'd been asked, I would have suggested that Idaho just exempt the cost of the lens and the cost of a basic frame (perhaps $20). The rest should be subject to sales tax. That helps the system be more equitable as expensive frames are not a necessity of life and more likely to be purchased by individuals who can afford the more expensive frame AND the sales tax.

For a bit more and the links, see a short post originally posted to Sales Tax Support.

Idaho recently amended its list of sales tax exemptions to include "eyeglasses and eyeglass component parts" (HB 75, 3/24/15, effective 7/1/15).  There were already exemptions for drugs, hemodialysis supplies, braces and orthopedic appliances, dental prostheses and other medical related items. While eyeglasses seem to fit the list, there is a significant difference between eyeglasses and most medical supplies and devices. Eyeglasses are also a designer item where the cost can be quite high due to the choice of frame. Also, for most medical items, the doctor prescribes the item and the patient has no choice of style or manufacturer. In contrast, patients have a lot of choice in eyeglass frame.
So, the exemption helps any one in need of corrective lenses, but provides a bonus to individuals who want the $300 (or higher) frame rather than a $40 frame. This could be alleviated by only providing the sales tax exemption for the glass and then only the first $50 of the cost of the frame. It would not be difficult to compute. It also sends the message to consumers that the exemption is only for the medical aspect of the purchase, not the designer element of it.

What do you think?


Bob said...

This reminds me of the example you have used before with respect to the variety of foods available at the grocery store. There is the $4 block of cheddar or the $19 specialty cheese that pairs with a particular wine. One seems to fit the “necessity of life” category while the other clearly does not; yet both are exempt from the sales tax base likely because of the simplicity of applying the exemption to cover all types of cheese.

To baseline the “necessity of life” portion of the price of all the items in the grocery store would be a daunting task. For example, is buying organic milk a necessity? And then are the values adjusted for CPI annually?

For the Idaho law, I like your idea to segregate the costs between lens and frame because it’s usually already done on the invoice. The only difference is that I think you apply the tax to the entire cost of the frame without regard to what a basic frame should cost because of the simplicity of application.

Professor Nellen said...

Bob, thanks for the comments. You make some great points. Food is a challenge unless the relief can easily be provided by an existing mechanism such as a refundable income tax credit (but that does not help from week to week) or some type of voucher distributed with same application as for free school lunch or other program. Yet, a lower rate possible with a broader base will also help many people.