What does this all mean? We take a closer look at the arguments for and against uncollected online sales taxes below.

The Argument in Favor: Lost Government Revenue

The supporters of making online retailers collect sales tax (largely politicians) make some version of the following argument. Fundamentally, they say, an online bookstore is no different than a local sellers that already collect sales tax every single day. Supporters point to the staggering amount of tax these companies generate each year, look at the even higher volume of orders from websites, and conclude that states are letting millions or even billions of dollars in revenue slip through their fingers.

This argument is exemplified by California Congresswoman Jackie Speier, who told CBS News:

“When you’re losing that sales tax revenue, that means it’s affecting your roads, it’s affecting the resources for local government, it’s affecting the resources for education.”

In short, the argument in favor amounts to making online retailers pay their fair share, leveling the playing field with competitors, and providing more revenue to state and local governments.

The Argument Against: Depressed Online Sales

The critics of this law make a starkly different argument. States, they say, have no constitutional right to levy sales taxes on out-of-state merchants. Only states in which retailers have a physical presence can do that. The other argument is that taxing an activity (such as online book-buying) causes people to engage in that activity less. Therefore, when someone claims that a tax will produce a certain amount of revenue, those calculations are wrong—they are assuming pre-tax sales levels will continue after the tax is in place, when that almost never happens.

There is some evidence for this theory. In the last two years, online retailers have terminated profitable relationships with successful resellers in states ranging from Illinois to Texas to California, all because the sales tax collection requirement was deemed too onerous and difficult to be worth complying with from a dollars-and-cents standpoint. Clearly, this is an unintended byproduct of the requirement, but deserves consideration nonetheless.

Who’s Right?

The answer is: it depends. The consequences in various states have reminded us that the intentions of a law often vary from the actual results. On the other hand, states do stand to collect at least some revenue from making web retailers charge sales tax. The full economic impact of these laws will become evident in the years a

Today, we explore the sales tax breaks different states offer to parents, and how those breaks impact the economy.

Back to school

Which Purchases Are Tax-Exempt?

In recognition of back-to-school time, several states suspend their sales taxes on commonly purchased supplies. As TaxAdmin.org shows, these supplies most typically include:

• Clothing
• Footwear
• Computers
• Notebooks
• Pencils/Pens
• Staplers
• Markers
• Binders
• Sports equipment
• Backpacks

Each state exempts a different amount of each purchase. For instance, Alabama enables shoppers to shield $100 worth of clothing, $750 worth of computer equipment, $50 of school supplies, and $30 of books from sales tax. In practical terms, this purchase would equate to a sales tax savings of $37.20 (based on Alabama’s 4% tax rate.) TaxAdmin.org’s chart lists the specific exemptions for each participating state: Alabama, Arkansas, Connecticut, Florida, Georgia, Iowa, Louisiana, Maryland, Massachusetts, Mississippi, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia.

Do Consumers Save as Much as They Think?

In an August article on potential downsides to sales tax holidays, TimeMagazine argues that consumers may not be saving as much as they think. For one thing, in a retail environment, it’s common to see 20%-30% off sales periodically throughout the year, irrespective of whether it’s back to school time or not. In light of this, taking 4% or 8% off is rarely a compelling reason to visit the store (unless, of course, a sale is currently in effect too.)

Instead, Time cautions shoppers not to get caught up in sales tax exemptions to the point of ignoring the big picture. If you were not already planning to buy school supplies or a new computer, do not let the absence of a sales tax change your buying priorities, as it may not be worth it financially. Additionally, the best promotions that coincide with sales tax holidays are on clothing. If your child objectively needs a new wardrobe, now can be an excellent time to purchase it.

Unplanned & Fully Taxed Purchases During Sales Tax Holidays

According to South Carolina’s Cheraw Chronicle, many states actually increase their overall sales tax revenues during the back-to-school tax holidays. How can this be? Simple. While shoppers are stocking up on tax exempt items like clothing and backpacks, they tend to make taxable purchases that more than make up for the sales tax they are saving: for instance, trips to mall food courts, or unplanned “impulse buys” of items not covered by the exemptions.

Additionally, increased jobs and payroll taxes (resulting from the needs for higher staffing during the tax holiday) tend to increase the state’s take, too. Thus, on net, most states end up better off than they were before the back-to-school exemptions.

Stimulus, or Shifted Timing?

Finally, there is some question about whether back-to-school sales tax holidays actually increase sales for retailers. On the surface, the question seems silly to ask. But in a Tax Foundation study referenced by Time, a fascinating conclusion emerges. Sales tax holidays, rather than driving new and higher sales volumes, simply cause consumers to shift the timing of purchases they were already going to make. Rather than buying earlier in the summer (or later in the fall), shoppers just wait for the sales tax holiday and make all their back-to-school purchases within that window.

In spite of this, retailers are said to love the tax holidays because they amount to “free advertising for what is effectively a paltry 4 to 7 percent sale.” Nevertheless, the Tax Foundation says the holiday is a gimmick, and a “poor tax policy”, stating that if lawmakers truly wanted to save us money, they would cut sales tax rates all year.

The Takeaway

Taking everything into account, shoppers are advised to utilize sales tax holidays only when they coincide with larger sales, and/or if they were already going to buy the exempt items in question. Buying simply because of the tax holiday, and in spite of a pre-existing need, could be a waste of money.

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So where will you spend the Super Bowl?

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Dollars Per Game

(source)

While no studies have specifically analyzed the economic impact of a single Christmas Day game on a given city, other data gives us an indication. LakersNation.com (citing an Oklahoma City Chamber of Commerce report) states that “every Thunder game pours $1.3 million into the local economy.” This substantial figure is offered as an average, meaning it includes spending and tax revenue for everything from low-profile Tuesday afternoon games against the New Jersey Nets to Friday night thrillers against the Los Angeles Lakers.

On Christmas Day, we can expect that fan interest, turnout, and spending would be considerably higher than average. It’s also likely that the dollars put into the local economy would be higher in a major media market like Los Angeles, Boston, or New York than in a relatively small-market area like Oklahoma City.

Arena Employment

(source)

Another angle to consider are the employees at NBA arenas themselves. Hundreds of workers are needed to serve the many thousands of fans who turn out for Christmas Day games. Per the LakersNation article, “Sacramento officials estimate that its NBA arena employs about 700 workers, including 550 part-time employees.” Many of these employees (like the fans) pay the city for parking fees on game day. They also pay sales tax on food and beverages purchased either at the arena or at nearby stores and restaurants.

On Christmas, arenas are likely to employ even more workers to deal with the expected surge in attendance and fan interest, thus increasing taxes and fees paid by said workers.

City Expenditures

(source)

Though cities undoubtedly reap economic rewards from hosting NBA games, it’s also worth noting that cities spend more money as a result of those games taking place. In a Governing.com article about the impact of NBA games on local tax revenues, Penelope Lemov reminds us that:

“If the basketball team isn’t playing, the city isn’t spending extra money on traffic control and police.”

In other words: the extra tax revenue collected by fans, employees, and teams are offset at least partially by the extra money the city spends to facilitate the games in the first place. Unfortunately most cities do not publicize the exact dollar amounts of these costs, but particularly in big-market cities, they are often substantial.

The Substitution Effect

(source)

Lemov’s interview with Economics Professor, Arthur Fleisher is also quick to remind us of a concept taught in introductory economics courses: the substitution effect. Using the Denver area and the NBA’s Denver Nuggets as an object lesson, Fleisher says:

“Let’s say Denver has 90 percent occupancy, hotels and most rental cars are rented when the Nuggets are here. If they aren’t playing, that opens up space for other visitors. There might be more hotel space and rental cars for visitors who want to ski or do other things here.”

Essentially, this means that no matter how much revenue NBA games generate for a city, those entertainment dollars would likely be spent elsewhere even if the games  were not held. Yet, if we talk about Christmas Day, this sensible argument might not apply. Many of the competing entertainment options (concert halls, ski resorts, etc.) available to consumers during non-holidays are closed on Christmas, leaving sporting events as the only or almost only option.

The Bottom Line

Reasonable estimates have NBA Christmas Day games pouring anywhere from $1 million to $2 million into local economies. These revenues encompass everything from parking fees, food and beverage purchases, to sales taxes. And while these revenues are always offset at least partially by extra city expenditures, it’s worth noting that there are very few competing alternatives for consumer entertainment dollars on holidays like Christmas.

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Infographic by Column Five

]]> http://blog.turbotax.intuit.com/2011/10/24/boo-halloween-stores-pop-up-out-of-nowhere/feed/ 0 Halloween Pop-Up joshritchie http://blog.turbotax.intuit.com/2011/08/16/taxes-on-americas-favorite-beverage-soda/ http://blog.turbotax.intuit.com/2011/08/16/taxes-on-americas-favorite-beverage-soda/#comments Tue, 16 Aug 2011 16:56:19 +0000 joshritchie http://blog.turbotax.intuit.com/?p=7165 Full story]]> 35 states have an additional sales tax on soda, a rate added to the general food tax rates on food and beverage products. A soda tax can be compared to a sin tax, however how high are soda tax rates and do they have the same effect sin taxes do on preventing unhealthy behavior? Will adding a soda tax potentially help raise enough revenue to put a significant dent in our nations deficit? These are some of the questions we want to answer, so let’s dive in.

Cigarette consumption in the U.S. is on a decline.

The U.S. generates over $32 billion in cigarette tax collections annually.

Since 2001 the average state cigarette tax rate has jumped from 43 cents per pack to 145 cents per pack.

China consumes more cigarettes than Japan, U.S. and Indonesia combined.

Greece consumes three times the amount of cigarettes than the U.S. in a given year.

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The major forms of consumption taxation are explored below.

Sales Taxes

(Kecko)

The simplest and most readily understood forms of consumption taxes are sales taxes. These are taxes added to the purchase prices of goods and services, and each state (and local jurisdiction) decides what percentage its sales tax will be applied. TaxAdmin.org offers an updated list of the sales tax percentages being charged by each state as of 2010. Food and inexpensive clothing are sometimes exempted from state sales taxes in order to make it less costly on the less affluent. Other states, including Hawaii, Idaho, Kansas, Oklahoma, South Dakota and Wyoming, do tax food at the state level but offer rebates or income tax credits to poor households.  Alaska, Delaware, Montana, New Hampshire, Oregon are notable exceptions in that they do not charge any sales taxes at all.

Sales taxes (like other consumption taxes) are often described as being “regressive” in nature. Since poorer individuals tend to spend higher portions of their yearly income on taxable consumption items, sales taxes fall harder on them than on more affluent segments of society. The above mentioned exemptions of food and clothing from sales taxes are attempts to make the tax less regressive.

Cigarette Taxes

(Valentin.Ottone)

Some products are singled out for unique consumption taxes of their own. Cigarettes, fuel and alcohol are examples of such products. USA Today maintains a helpful chart of the cigarette taxes per pack charged in each state. As of December 2009, the lowest tax per pack was $0.07 in South Carolina, while Rhode Island levied the highest tax at $3.46 per pack. USA Today went on to note that cigarette taxes are “gold rushes” for the states, many of which have raised taxes on smokers since 2008 in order to plug budget holes. There is also a federal cigarette tax of $1.01 on top of normal state sales taxes.

Fuel Taxes

(blmurch)

Fuel taxes operate in a similar manner. In addition to the $0.24 federal fuel tax, each state levies its own taxes on the sale of fuel. The Tax Foundation tracks each state’s fuel taxes as of February 2010. These range from as little as $0.08 per gallon in Alaska to as much as $0.46 in California. Some states (though not all) also impose normal state sales taxes in addition to federal and state fuel taxes on each gallon purchased. The American Petroleum Institute found that the mean state fuel tax was 27.2 cents per gallon in the first quarter of 2009.

Alcohol Taxes

(brosner)

Alcohol, too, is singled out for unique consumption taxes. As the Tax Foundation shows, states actually levy different taxes per gallon on spirits, wine and beer. Taxes on spirits tend to be higher than taxes on wine, which tend to be higher than taxes on beer. What cigarettes, fuel and alcohol have in common is that they are all demand inelastic. There are few substitutes and people tend to buy them in equal amounts regardless of price changes. This makes them prime candidates for their own consumption taxes.

Value Added Taxes

(smith)

Value added taxes (or VAT) do not yet exist in the United States, but are frequently collected in Europe. In essence, a VAT functions as a more comprehensive sales tax. Rather than being assessed on the finished product (as American sales taxes presently are) a VAT is assessed at each stage of an item’s production. A common example is how a VAT would apply to a simple loaf of bread.

Assuming a 10% VAT rate, the wheat farmer sells $0.20 of wheat to a baker for $0.22. The $0.02 (which is 10% of $0.20) is tax and gets paid by the farmer to the government. The baker, in turn, sells the loaf of bread to a grocery store for $0.60 plus an extra six cents of tax, which gets paid by the baker to the government. Finally, the grocery store sells the bread to customers for $1.10, with the $0.10 being the VAT. The baker and grocery store receive credits of $0.02 and $0.04, respectively, for the VAT they already paid at earlier stages.

The touted benefit of value added taxes versus traditional sales taxes is higher compliance. While merchants can attempt to conceal sales (and thus avoid sales taxes), it is considerably harder to do this when the parties before you have already paid and reported taxes on the items sold. Like sales taxes, the full amount of VAT is ultimately paid by consumers.

Summary

The common ground shared by all consumption taxes is that they are paid at points of sale. Unlike income and other taxes, consumption taxes can be avoided simply by not purchasing goods or services on which they are assessed.

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Below are some of the more well-known value added taxes from other countries.

France

(Eustaquio Santimano)

Critics of a VAT in the United States have pointed out the correlation between VATs and higher overall taxes in foreign countries. They also lament the higher prices that tend to be created by VATs. Both of these are present in France, which levies a 19% VAT on all products and services other than those which qualify for the “reduced” VAT of 5%. A May 20 BusinessWeek article implied a link between France’s high VAT and the abnormally high rate of bankruptcy among restaurants in that country.

The French government evidently reduced the VAT on dining to 5.5% (down from 19.6%) in July of 2009, in exchange for the restaurants vowing to lower their prices by 3%. Unfortunately, BusinessWeek points out, “the typical restaurant tab has declined only 1.17% since the cut took effect.” The reason does not appear to be restaurant greed, but rather, the unavoidable systemic effects of the VAT. Gérard Guy, head of a consortium of independent restaurateurs, remarked that “it’s very difficult…to lower prices when the cost of ingredients keeps going up.” The ingredients, of course, are also subject to VATs independently of those that the restaurant owners pay.

Great Britain

(TJ Morris)

In recent years, England has been somewhat of an exception to the rule of high European VATs. Unfortunately, reports have surfaced that their value added tax rate could be on the rise, too. The UK’s Times Online reported in February that England’s 17.5% VAT rate could be hiked as high as 20% (the EU average.) While it remains to be seen whether England’s VAT rate does in fact rise, there has been growing suspicion of VAT fraud in that country during the last several months.

On May 23, GovMonitor broke the story of an alleged £38MM VAT fraud in which an organized crime syndicate is said to have traded a substantial number of high-value carbon credits. As GovMonitor explains, the crime syndicate operated a number of fraudulent companies which allegedly bought the carbon credits from overseas sources. While no value added taxes were collected on the overseas purchase of these credits, the credits were subsequently sold to “businesses in the UK at a VAT inclusive price.” Naturally, the VAT charged by these bogus businesses was never paid to any government entity – it was simply pocketed.

Italy

(travellingtamas)

Italy is often used as an example of a country whose VAT rate has steadily crept higher since being instituted. In an April blog post, the Heritage Foundation revealed that Italy’s VAT rate began at 12% and now sits at 20%. Perhaps not coincidentally, Italy is also known as one of most tax-evading nations of Europe. EUBusiness.com reported in February that Italy was launching a new and more aggressive probe into tax evasion, spanning 2,000 Italians who are “allegedly evading more than 2.0 billion euros in taxes” by way of various foreign tax shelters.

The bulk of the alleged tax cheats are said to reside in Italy’s wealthy northern regions and near the capitol city of Rome. BlogFromItaly.com claims that owners of “flashy cars” are routinely pulled over and probed about tax questions by Italian tax authorities. Interestingly, both the Heritage Foundation and EUBusiness.com point out that Italy has long had one of the world’s heaviest debt burdens (1.76 trillion euros, or about 115% of 2009′s GNP) despite the VAT being touted early on as a spending reducer.

Common Effects

(55Laney69)

Value added taxes by their nature have similar effects in almost every country where they are collected. In a separate blog post, the Heritage Foundation touched upon three things that VATs have brought into being, whether the country is in Europe, Asia or South America. First, while the VAT is frequently touted as a replacement of or offset to the income tax, this has rarely (if ever) occurred. In reality, VATs are usually implemented as a supplement to income taxes and thereby result in a heavier overall tax burden than before.

Although Europe once had a tax burden minimally larger than America’s, Europe’s “aggregate tax burden has increased by about 50%” since VATs came into being in the late 1960′s. The U.S. tax burden, conversely, has “remained relatively constant” since then. Furthermore, VATs have not only failed to replace income taxes, but have actually coincided with higher income taxes in many nations. Countries like Italy and Greece also demonstrate that the presence of a VAT alone does little to discouraging government spending or debt.

Of course, different countries levy different VAT rates, and the rates charged can diminish or amplify these effects. A comprehensive breakdown of different VAT rates around the world can be found at VATCalculator.com, for those interested.