Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...
State efforts to carve out business personal property from taxation are gaining steam amid continuing calls for states to remove business inputs from the sales tax base.
According to consulting firm Multistate Associates, states are increasingly motivated to pull away from taxing businesses’ tangible personal property (TPP). More than 20 bills have been introduced this year to reduce or remove the property tax.
This legislative shift aligns with a long-standing view held by several organizations that including business personal property in the tax base is bad tax policy. Task forces with the National Conference of State Legislatures and the American Legislative Exchange Council adopted 2016 papers that decried the taxes for distorting markets by “discouraging capital investment, expansion and replacement.” The organizations encouraged states to eliminate or limit such taxes, and if repeal isn’t feasible, suggested administrative simplification.
As states migrate away from the tangible personal property tax, tax groups have reiterated requests for states to exempt business inputs from sales tax liability as well. A Feb. 10 report from the Tax Foundation disagrees with the inclusion of business inputs in the sales tax base. And the Council On State Taxation this week offered support for Utah’s S.B. 197, which would expand manufacturing exemptions to select machinery, equipment and materials.
Joe Henchman, Tax Foundation vice president of state and legal projects, told Bloomberg BNA that taxation of business inputs wasn’t an issue during the early sales tax era in which the economy was predominantly local, goods-based transactions, with few or no intermediaries in the process.
The laws were never updated, and “it’s just the autopilot that resulted,” he said.
Opposition to taxation of business inputs often points to the pyramiding effect in which taxes pile on other taxes through the supply chain, forcing businesses to embed those costs in the final consumer price or cutting economic activity in a state.
In its report, the Tax Foundation echoed criticism of the distortive impact of taxing inputs that aren’t final consumption.
“Consumers end up paying the tax in the form of higher prices—they just do so in a nontransparent way,” according to the report. It further noted that “taxing business inputs disproportionately harms industries with long production chains, and consequently can encourage vertical integration for tax reasons even if it makes no business sense.”
COST has similar concerns with increased consumer prices and competitive disadvantages. The association will be issuing next month its first Sales Tax Administrative Scorecard, which will factor in business input exemptions.
“As a result of the choices businesses are forced to make, the economic burden of taxes on business inputs inevitably shifts to labor in the State (through lower wages and employment) or consumers (through higher prices),” according to a policy statement.
Michael Mazerov, with the Center on Budget and Policy Priorities, explained that it’s not always clear if consumers shoulder the burden from taxation of business inputs.
For example, businesses may face competition from out-of-state companies not subject to taxation for specific inputs. In that case, the business may not be able to pass through the input tax—rather than burden the consumer, however, the tax incidence would fall on the business.
But a blanket exemption for all business inputs may present risks.
In a 2009 report, Mazerov counseled against states expanding their sales tax base by targeting business-to-business services. However, he told Bloomberg BNA that an exemption for all business services may facilitate tax evasion.
“We’d have people claiming that their cell phone bill was entirely for business use, when it’s probably substantially for personal use,” said Mazerov, a senior fellow with the center’s State Fiscal Project. “So you have to weigh practical enforcement issues, real-world enforcement issues against what theory would say about the inappropriateness of taxing business-to-business services.”
A sizable revenue impact from exempting business inputs may be tough for several states to stomach.
In conjunction with COST and the State Tax Research Institute—COST’s affiliated research foundation—Ernst & Young LLP prepared a December 2016 report that found “general sales and use tax revenue derived from businesses on purchases of inputs, including capital equipment, totaled $150.6 billion, or 21.3% of all state and local business taxes” for fiscal year 2015.
“Replacing that revenue would be very difficult, and the revenue is badly needed,” said Mazerov, who noted that he is a “little skeptical” of some estimates underlying claims that business-to-business transactions represent as large a share of total sales tax. But he agreed the number is significant.
Moreover, uncertainty over the combined effect of multiple sales tax measures may also have a deterrent effect for lawmakers.
Joe W. Garrett Jr., Alabama’s deputy co-commissioner of revenue, told Bloomberg BNA that the state already exempts some business inputs, and several inputs are taxed at a lower rate—such as manufacturing machinery and farm equipment.
“If you eliminated all the taxable business inputs, then you started taxing other categories of services, what would the revenue balance be there if you tried to do both of those things?” he said. “I don’t think we know. I don’t think anybody has a real good idea of that trade.”
Add changes to sales tax exemptions for other goods, and Garrett noted “there is a lot of uncertainty as to what the outcome is when you start making all those changes.”
“Which makes it difficult for people to go out on a limb and make those changes when they don’t know exactly what the outcome will be in terms of impact to revenue,” he said, adding that many economists have acknowledged a lack of information needed to provide states with precise estimates with a high level of confidence.
To contact the reporter on this story: Jennifer McLoughlin in Washington at email@example.com
To contact the editor responsible for this story: Ryan C. Tuck at firstname.lastname@example.org
Copyright © 2017 Tax Management Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)