States Look to Sales Tax to Raise Revenue
- Sales and Use Tax
- February 18, 2013 | Scott Peterson
Since no rich uncle died leaving Kansas, Louisiana, Nebraska, North Carolina, or Oklahoma enough money, they must either reduce spending or rely on another tax to close budget gaps. In each of these states, governors considering sales tax a good candidate for raising revenue. As a result, those doing business in these states might find themselves on the wrong side of sales tax compliance.
States typically rely on these four methods to generate more sales tax revenue:
1. Hire more auditors
If a state wants to increase sales tax collections hiring new auditors works. Auditors do not cost much and because sales tax is complicated they will most certainly find a business making mistakes. The only question is whether it is you or your neighbor they find making a mistake
2. Raise sales tax rate
The quickest way to increase collections is to increase the sales tax rate —an option that can raise a specific amount of revenue with a specific rate change. For good or bad, most businesses can quickly collect at a different rate. The opponents and the press will focus on how the sales tax is regressive, and raising the rate certainly amplifies that effect. Increasing the sales tax rate impacts nearly all businesses and citizens while eliminating the income tax can impact a completely different set of businesses and citizens. For example, a new business that hasn’t yet made a profit will not benefit much from eliminating the income tax but will probably pay more sales tax because their consumption will be taxed at a higher sales tax rate.
3. Broadening the sales tax base
Broadening the sales tax base means taxing products or services not currently taxed, which in most states means expanding taxation of services. In some cases —Hawaii, New Mexico, and South Dakota —states tax almost all services.
Periodically, the Federation of Tax Administrators surveys states to determine the extent they tax 185 different services. While Texas and South Dakota tax a majority of the 185 services, North Carolina and Oklahoma tax very few. Of the other states wanting to make this change Louisiana taxes 71, Kansas taxes 86, and Nebraska taxes 89.
A state that broadens its sales tax to include services will most certainly impact businesses like veterinary services, horse boarding, taxis, construction labor, fur storage, boat docks, carpet cleaners, dance instruction, lobbying, security, custom software, attorneys, accountants and engineers.
4. Ask Congress to let them tax remote sales
The last way a state can change its sales tax is to ask Congress to let them tax remote sales. So far the states have been waiting since 1973 when the first bill was introduced giving states this authority. That bill was the “Interstate Sales and Use Tax Act” and the states have been waiting ever since.
Even with all these options history does not have many examples of major tax changes. The latest attempt at a large change was in North Dakota in 2012. Instead of having a rich uncle, North Dakota struck oil and has a $1 billion state surplus that grows every month. Even with all that money the voters rejected a ballot measure to use that money to replace their local property tax.
A prudent businessperson should remember what Judge Gideon Tucker said: “No man’s life, liberty or property are safe while the legislature is in session.” Always pay careful attention when your Legislature is in town.