Unusual sales tax exemptions – Wacky Tax Wednesday

For the most part, anything that can be taxed can also be exempted from sales tax. What I find fascinating is what different states choose to exempt, and especially state proposals for new sales tax exemptions.

For example, Alabama Senate Bill 165 seeks to exempt “the rental or sale of detection dogs.” Alabama has more familiar exemptions on the table, including one for food for home consumption and another for feminine hygiene products and diapers. But detection dogs? That’s a first for me.

To be clear, SB 165 wouldn’t exempt all sales, rentals, or leases of detection dogs — only sales, rentals, or leases from or to “a certified dog trainer or company employing certified detection dog trainers.” The measure specifies that, for the purposes of the exemption, “a detection dog is a dog trained to use its senses to detect substances such as weapons, explosives, illegal drugs, accelerants, wildlife scat, currency, blood, plant and mammalian viruses, bed bugs, and contraband electronics.”

Lawmakers in Rhode Island have also proposed several interesting sales and use tax exemptions this session, including one for COVID-19 take-home tests (H 7493), one for cloth or disposable face masks and facial coverings (H 7391), and one for reusable bags used as an alternative to single-use plastic or paper bags (S 2048/H 7240). I get these: It’s in the best interest of the state to encourage sales of such goods. What caught my eye was a proposed sales tax exemption for bicycles.

Senator Alana DiMario explained the thinking behind the bill: “S 2266 would exempt bicycles from sales tax. Why? To encourage more people to ride bikes and make them more cost-accessible. Did you know that if 10% of people replaced one car trip per day with a bike trip, we would reduce transportation emissions by 10%?”

I didn’t know, and I wonder if lawmakers in Oregon are familiar with that statistic. A state with no general sales tax, Oregon started taxing the sale of bicycles in 2017.

Why do states exempt some products but not others?

Most states exempt certain products deemed essential, such as prescription drugs or medical devices. Thus, about 37 states exempt food for home consumption, and more and more states are providing an exemption for diapers and/or feminine hygiene products. Some states also exempt clothing, which most of us consider a necessity.

Such exemptions are provided to all consumers. Many states also provide an exemption for specific consumers (e.g., nonprofits) or for certain uses, such as equipment used in agriculture or manufacturing, or products purchased to resell. Often, such exemptions are at the behest of the taxpayers who will benefit most from them.

And each year, about 17 states offer one or more sales tax holidays — temporary exemptions for qualifying sales.

Sales tax holidays

New York created the first sales tax holiday in 1997 to compete for business with New Jersey. Since then, the idea has taken hold. Sales tax holidays are said to help ease the tax burden on low-income residents (though exempting some products for one day, one weekend, or one week likely won’t make much of a dent in the taxes people pay). Tax-free periods can also encourage sales of certain products.

For example, sales tax holidays for energy efficient products encourage consumers to replace energy-sucking appliances with greener machines. Disaster preparedness sales tax holidays encourage residents to buy items that can help them weather a storm. More recently, sales tax holidays encourage sales at businesses hard-hit by COVID-19; Tennessee temporarily exempted prepared food in 2020 and in 2021.

Balancing sales tax exemptions with a need for sales tax revenue

Every sales tax exemption translates to less sales tax revenue for the states and communities that provide the exemptions, so it’s in the best interest of lawmakers to carefully weigh the pros and cons of an exemption before introducing it. That’s why I find Alabama’s proposed exemption for detection dogs and Rhode Island’s proposed exemption for bicycles so interesting.

If any of the above bills make it to law, we’ll let you know at the Avalara Tax Desk.

Cover photo by Canva

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