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?