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 SalesTaxSupport.com, 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?

Vermont Sales Tax Committee to be Formed

Vermont H.782 enacted in April 2012 made several changes including creating a 7-member Study Committee to "examine the sustainability of the sales and use tax in the context of Vermont’s changing economy." The committee seems to have come about due to controversy over taxation of cloud computing (see BloombergBusinessweek article of 4/2/12).

Per the legislation: "The committee shall study how to make the Vermont’s sales and use tax more sustainable and equitable in light of Vermont’s changing economy. Specifically, the committee shall consider:
  (A) the taxation of software, platform, and infrastructure as services accessed remotely;
  (B) the taxation and sourcing of sales of tangible personal property made via the internet; and
  (C) the feasibility of taxing services more broadly than under current law."

The report is due to the legislature by 1/15/13.

Observations:

• A study of any state's sales tax base is generally a good idea because of our changed ways of living and doing business. Personal consumption today consists of a lot more than tangible personal property. It includes services, intangibles and items purchased over the Internet (rather than at the local store). While not specifically mentioned, the committee should also consider digital goods.
• The committee should also look at how it can stop applying sales tax to business purchases to avoid pyramiding of the tax.
• Services to be taxed should not include ones used by businesses. Time should be given to implementing any new tax on personal services so that the affected business and the state tax agency have time to get procedures and processes in place. A few years ago, Michigan enacted legislation to start taxing specified services in two months. The legislation was then repealed on the first day. Many view that as evidence that sales taxes on services are doomed to fail. What is doomed to fail is legislation that is not allowing for an effective implementation process.  I'd also suggest providing a refundable income tax credit for some portion of the costs the service businesses incur in getting ready to collect the sales tax.  I have more on this here.
• The committee should take some steps to ensure that its work will be of use. Too often, tax commissions diligently study the tax system and its problems, get public input, develop recommendations and issue a report. The report then sits on a shelf. For details on some suggestions, click here.
• Broaden the base AND lower the rate.

What do you think?

Spending, recession and sales tax

The California Board of Equalization Economic Perspective report for November is on Impacts of the Recession by Income Class and Type of Purchase. The report analyzes U.S. Bureau of Labor Statistics data on spending and income. Some findings:

• Form 2007 to 2010, spending in all income quintiles is down except for the lowest quintile where spending increased which the BOE expects is due to prices increases for rent and food.
• As shown in Chart 3 posted here, spending on items not subject to sales tax increased while spending on non-taxable items decreased. Per BOE: "This pattern of larger declines in spending on taxable goods than nontaxable goods and services partially reflects the design of the tax system, which excludes from taxation spending on necessary items such as food for home consumption."
  
• "One component of consumer spending that seemed to be relatively “recession proof,” was spending on pets, hobbies, toys, and playground equipment."

The spending patterns affect sales tax collection as recession spending affected spending on taxable and non-taxable items differently. But the greater spending on non-taxable items versus taxable ones is a longstanding trend where consumption of services and intangibles has been growing for decades which spending on goods has declined. With movement of some purchases from tangible goods to the digital equivalent (software, music and books for example), the California sales tax base erodes. See June 2011 BEA report, table 1 - here, showing that from 1959 to 2009, personal consumption spending on goods dropped 22% and spending on services increased 22%.

As I've discussed here many times, it is well past time for California to modernize its sales tax base to cover 21st century consumption. The sales tax should be expanded to personal services and digital downloads purchased by consumers (not businesses) and the rate lowered.

See:

• Nellen, sales tax base is too narrow - here
• California Budget Project, Budget Backgrounder - Should California Extend Its Sales Tax to Services (October 2011)

What do you think

Taxing Services - Michigan

An article today in the Detroit Free Press says that Governor Granholm has given up on a tax reform plan to extend the sales tax to services and lower the rate. That is too bad.

In 2007, the Michigan legislature did extend the sales tax to specified services, but then repealed it the day it was to go into effect (see prior post). Problems with that original proposal included:

• There was insufficient transition time for the law to take effect - just 2 months. That is not enough time for the tax agency and the businesses, such as palm readers and house sitters, to get ready to collect the tax. So, unfortunately, the initial legislation was really written with a time bomb that would lead to repeal - that was unfortunate. More time should have been given before implementation and funds allocated to help both the tax agency and the new tax collectors get ready.


• Do not tax services primarily used by businesses. Businesses should not pay sales tax, only final consumers. This prevents pyramiding of the tax where businesses add it to their costs and consumers pay tax on that amount. While most of the services identified in 2007 were personal ones, there were others, such as landscaping, also consumed by businesses.


• The base expansion was not accompanied by a rate reduction !!
  

The purpose for expanding the sales tax base is to tax all personal consumption (with limited exceptions, such as for basic health care and education). This makes the system more equitable. The law is inequitable when for example, it taxes a music CD, but not an iTunes download or concert ticket. And worse, some of the exempt consumption is by high income taxpayers (personal trainers, concert tickets, downloads requiring broadband access, etc.).

It is also important for lawmakers to squelch the loud but misplaced arguments that the tax will hurt small businesses. Small businesses that sell tangible personal property have been collecting sales tax for decades and surviving. The collection process won't hurt small businesses and the initial implementation costs should be subsidized with a refundable income tax credit. And, tax agencies should be required to find simple ways for companies to comply.

I've written about this for some time now. It is an issue that California needs to address as well. California should broaden its sales tax base to tax more types of personal consumption while lowering the rate and removing the sales tax paid by businesses to remove pyramiding. For more - click here ("tax base is too narrow").

What do you think?