Review of FTA Sales TaxService Categories
Prepared by:Cindy Avrette, Research Division
Sabra Faires, Senate Tax CounselSandra Johnson, Fiscal Research Division
January 14, 2010
Sales Tax Overview
Mainstay of state tax collections
– North Carolina enacted 3% sales tax on tangiblepersonal property in 1933
– 23 states enacted sales tax by beginning on WWII
– 45 states have a sales and use tax today
Growth in State Sales Tax Collections
States’ Tax Structure, 2008
NC’s Tax Structure, FY 2008-09
Sales,
27.9% Personal
Income,
56.4%
Corporate,
5.0%
Other,
10.7%
NC’s Tax Structure, FY 1970-71
Sales,
31.0%
Personal
Income,
32.7%
Corporate,
12.1%
Other,
24.1%
NC’s Tax Structure
31.0%
25.9%25.1%
27.3% 27.9%
32.7%45.8%
52.8% 58.8% 56.4%
0%
20%
40%
60%
80%
100%
1970-71 1980-81 1990-91 2000-01 2008-09
Personal Income
Sales
Corporate
Other
Sales Tax Overview
Mainstay of state tax revenues
Tax on consumption
– Tax less representative of consumption todaythan 1933
Change in Consumption Patterns
Sales Tax Overview
Mainstay of state tax revenues
Tax on consumption
More stable source of revenue than incometax, but growing more volatile
– Durable goods make up a large fraction of salestax base
– Sales of durable goods more volatile than income
– Sales of services less volatile than income
Growth & Stability of Sales TaxRevenue
Sales Tax
9.4%
-7.4%
-40%
-20%
0%
20%
40%
1997-98 2000-01 2003-04 2006-07
Growth & Stability of Tax Revenue
-30.1%
25.8%
-27.0%
31.9%
-40%
-20%
0%
20%
40%
1997-98 2000-01 2003-04 2006-07
Corporate Income TaxNon-withhodling PITSales TaxWithholding PIT
Increasing Sales Tax Volatility
Sales Tax Overview
Mainstay of state tax revenues
Tax on consumption
More stable source of revenue than incometax, but growing more volatile
Tax collections shrinking due to narrower taxbase
– Legislated exemptions
– Changes in consumption patterns
– Cross border shopping
Sales Tax Collections as % of PI
NC Sales Tax Base
56.1%52.7%
46.2%
36.8%
0%
10%
20%
30%
40%
50%
60%
70%
1970s 1980s 1990s 2000s
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Sales Tax Overview
Mainstay of state tax revenues Tax on consumption More stable source of revenue than income
tax, but growing more volatile Tax collections shrinking due to narrower tax
base To maintain adequacy of tax revenue source:
– Increase the general tax rate– Expand the tax base
# of Sales Tax Rate Changes
Greater than 6%--12--
5% to 6%--21--
Less than 5%--12--
None--5--
STATE SALES TAX RATES, 200911/2/2009
19
5.75
Ways to Expand NC’s Sales Tax Base
Eliminate current sales tax exemptions– Food, prescription drugs, and durable medical
equipment < $1 billion
– Agricultural and industrial related exemptions =approximately $286 million
– Economic development related exemptions < $8million
– All other exemptions < $100 million
Ways to Expand NC’s Sales Tax Base
Eliminate current sales tax exemptions
Eliminate current sales tax refunds
– Refunds to nonprofit entities > $289 million
– Refunds to governmental entities > $187 million
– Refunds related to economic developmentincentives < $20 million
Ways to Expand NC’s Sales Tax Base
Eliminate current sales tax exemptions
Eliminate current sales tax refunds
Eliminate current preferential tax rates > $161 million– 5.75% (General State rate)
– 3% (Aircraft, boats, electricity for commercial business andresidents)
– 2.83% (Commercial laundry, dry cleaners)
– 2.5% (Modular homes)
– 2% (Manufactured homes)
– 0.8% (Electricity for manufacturers and farmers)
Ways to Expand NC’s Sales Tax Base
Eliminate current sales tax exemptions
Eliminate current sales tax refunds
Eliminate current preferential tax rates
Include additional services in the salesInclude additional services in the salestax basetax base–– Should services be included in the tax base?Should services be included in the tax base?
–– Which services should be included in the taxWhich services should be included in the taxbase?base?
Expand Sales Tax to Services?
Preserve principle of salestax being a tax onconsumption
Mitigate erosion of sales tax Reduce sales tax revenue
volatility Does not change relative tax
burdens Preferable to rate increases Cut sales tax rate Improve economic efficiency Eliminate administrative
issues
Brings new retailers intosystem
Likely substantialnoncompliance by individualsellers of some services
Which Services?
Primarily businessservices
Primarily householdservices
Services frequentlypurchased by bothbusinesses andhouseholds
FTA “Survey ofServices” includes168 services
NC currently taxes35 services
– Utilities
– Lease & rentals
– Computer onlineservices
Taxation of Services by State, 2007
0
20
40
60
80
100
120
140
160
180
OR
AK
NH
CO IL
MA
MT
NV
VA
CA IN
ME MI
MO
ND
KY ID RI
NC
OK
VT
SC GA
AL
MD
AZ
LA
PA
NY
UT
WY
FL
MN
TN
OH
AR
MS
KS NJ
WI
NE
CT
TX IA
WV
DE
SD
NM
WA HI
NC
Federation of Tax AdministratorsTypes of Services, 2007
Service Group Number of Taxable Services
Agricultural 5
Industrial and mining 4
Construction 4
Utilities 16
Transportation 9
Storage 6
Finance, insurance, and real estate 8
Federation of Tax AdministratorsTypes of Services, 2007
Service Group Number of Taxable Services
Personal 20
Business 34
Computer 8
Automotive 5
Admissions and amusements 15
Professional 9
Federation of Tax AdministratorsTypes of Services, 2007
Service Group Number of Taxable Services
Leases 4
Fabrication, installation and repair 19
Miscellaneous 2
Total Number of
Taxable Services 168
FTA: Admissions and Amusements
Professional Sports Events
FTA: Admissions and Amusements
School and College Sports Events
FTA: Admissions and Amusements
Cultural Events
FTA: Admissions and Amusements
3%No28Pari-mutuel racing events
3%No31Cultural events
3%No23School and college sports events
3%No37Professional sports events
NCPrivilege
Tax
NCSalesTax
OtherStatesSpectator Sports & Events
NC Amusement Privilege Tax
Pre 1900: State privilege tax imposed on variousexhibitions and performances at flat rates
1933: State 3% sales tax enacted and gross receiptstax at the rate “levied in Article V … upon retail salesof merchandise” imposed on various amusements
1990: Gross receipts amusement privilege tax rateset at “rate of three percent”
1991: State sales tax rate increased from 3% to 4%
Scope of Amusement Privilege Tax
Gross receipts tax on person who offers or managesa taxable amusement
3% on:– A dance or an athletic contest for which an admission fee of
50 cents or more is charged
– Amusement or entertainment for which an admission fee ischarged
– A performance, show, or exhibition, such as a circus or dogshow
1% on motion picture show
Exemptions to Amusement Privilege Tax
Local talent performing inevent to benefit nonprofits
North Carolina SymphonySociety, Inc.
State and county fairs
NC outdoor historicaldramas
Elementary and secondaryschool events
First $1000 of civicorganizations’ dances thatbenefit nonprofits
Nonprofit youth athletic eventwith ticket price of $10 or less
Events of nonprofit choral andtheatrical group
Events of nonprofit center forperforming and visual arts
Nonprofit teen center
Events on Cherokee reservation
Nonprofit arts and communityfestivals held no longer thanseven consecutive days
Farm-related events held onfarmland
Amusement Sales Tax Category
An amusement sales tax category couldinclude:
– Conversion of privilege license tax onamusements to a sales tax
– Admission to a live performance oranother live event of any kind
– Admission to a movie or anotheraudiovisual work
Considerations
Exemptions– Rationale of privilege license tax exemptions
applied to sales tax Administrative issues
– Effect on number of taxpayers– Local sales tax reporting– Effectiveness of collection
Details to clarify– Permanent seat licenses– Club level and luxury suite packages
FTA: Admissions and Amusements
Participatory Sports
FTA: Admissions and Amusements
Participatory Activities
FTA: Admissions and Amusements
NoNo17Coin operated video games
NoNo19Pinball, other mechanical games
NoNo23Private club membership fee
NoNo27Bowling alley
NoNo27Billiard parlor
NoNo34Circus & fair: admission, games
NoNo36Amusement park: admission, rides
NCPrivilege
Tax
NCSalesTax
OtherStatesParticipatory Sports & Events
Participatory Events and Tax
Amusement park– Frequently have live shows subject to privilege tax– Food taxable– Merchandise sales taxable
Fair– Frequently have live shows (exempt from privilege tax)– Food taxable– Merchandise sales taxable
Bowling alley– Shoe rental taxable– Food and merchandise sales taxable
Golf course and club– Golf cart rental taxable– Food and merchandise sales taxable
Private Club Membership Fee
Fitness and health clubs and gyms
Tennis and golf clubs
Country clubs with swimming, golf, or tennis
Considerations concerning membership fees
– Allocation of fees when fees for access toactivities mixed with other fees
– Initiation fees, social membership fees
Amusement Sales Tax Category
An amusement sales tax category could includeparticipatory sports and activities:
– Admission to a museum, cultural site, garden, amusementpark, exhibit, show, or another similar attraction or event
– Access to or use of property that enables the consumer toparticipate in a sport, game, or recreational or fitness activity
Considerations– Exemptions, administrative issues
– Membership fee details
FTA: Admissions and Amusements
No5.7544Rental of video tape for home
NoNo7Rental of film, tape by theater
No824Direct Satellite TV
No826Cable TV services
NCPrivilege
Tax
NCSalesTax
OtherStatesOther Amusements
Share of Income Expended onEntertainment, 2008
1.7%
1.1%0.9%0.7%0.7%
2.3% 2.2%2.4%
1.8%2.2%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
1st 2nd 3rd 4th 5th
Quintile
Fees andadmissions
Audio andvisualequipment andservices
Source: U.S. Bureau of Labor Statistics, Consumer Expenditure Survey, 2008
Revenue Impact: Amusements
Assumes 4.75% rate and full fiscal year
$17.2 M$40.8 MOtherEntertainment
$29.5 M$55.3 MTotal
$12.4 M$14.4 MConverting PLTfor Amusementsand Movies
Local RevenueState RevenueService
FTA: Installation
FTA: Installation
No32Sign construction and installation
No18Installation charges - other than sellerof goods
No22Installation charges by seller
NCSalesTax
OtherStatesInstallation
Installation
Sales tax law, G.S. 105-164.3(37), defines“sales price” to include installation charges
Sales tax law, G.S. 105-164.13(49), exemptsinstallation charges that are separatelystated
Exemption could be repealed
FTA: Alteration, Repair, Maintenance
FTA: Alteration, Repair, Maintenance
No26Taxidermy
No25Automotive rustproofing &undercoating
No25Auto service except repairs, incl.painting & lube
No21Automotive washing and waxing
No24Repair labor, generally
No5Labor charges on warranty repairs
No31Service contracts sold at the time ofsale of TPP
NC SalesTax
OtherStatesAlteration, Repair, Maintenance
Recent Legislative Proposals
2009 House Budget, Section 27C.3 appliedsales tax to:
– Service contracts
– Repair, maintenance, and installation services
2005 House and Senate Budgets appliedsales tax to service contracts, but not finalbudget
Service Contracts
A warranty agreement, a maintenanceagreement, a repair contract, or a similaragreement or contract by which the selleragrees to maintain or repair tangiblepersonal property
Considerations if taxable– Application to exempt property
– Taxation of property used to make contractrepairs
Alteration, Repair, and Maintenance
This sales tax category could include:
Altering tangible personal property by tailoring,monogramming, engraving, or making similarchanges to the property
Repairing tangible personal property to restore it toproper working order
Maintaining tangible personal property to keep theproperty in working order, to avoid breakdown, or toprevent unnecessary repairs
Cleaning tangible personal property
Share of Income Expended on VehicleMaintenance and Repairs, 2008
1.4%1.5%1.4%
1.6%1.4%
0.0%
0.5%
1.0%
1.5%
2.0%
1st 2nd 3rd 4th 5th
Quintile
Source: U.S. Bureau of Labor Statistics, Consumer Expenditure Survey, 2008
FTA: Storage
FTA: Storage
No17Marina Service (docking, storage,cleaning, repair)
No12Cold storage
No13Mini -storage
No12Household goods storage
No15Fur storage
No9Food storage
No18Automotive storage
NCSalesTax
OtherStatesTangible Personal Property
FTA: Storage
No10Packing and crating
No4Travel agent services
No8Marine towing service
NCSalesTax
OtherStatesStorage-related Services
Storage
Sales tax law, G.S. 105-164.3(44), defines storageas the keeping or retention of property in this Statefor any purpose except sale in the regular course ofbusiness
This sales tax category could include rental or leaseof the following for the storage of tangible personalproperty:
– A mini-warehouse– A safe deposit box– Another secure self-storage space or another secure self-
storage space
Revenue Impact: Alterations andRepairs
$9.4 M$22.4 MStorage/Moving
$5.0 M$12.0 MInstallation
$10.2 M$24.1 MWarranty, Service
Contracts
$120.4 M$286.0 MTotal
$95.8 M$227.6 MRepair/ Maintenance
Local RevenueState RevenueService
Property Support Services
FTA: Property Support Services
Property Support Services OtherStates
NC SalesTax
Landscaping services 21 NO
Exterminating services 20 NO
Janitorial services (carpetcleaning, window cleaning)
19 NO
Security Services 18 NO
Swimming pool cleaning & maint. 17 NO
Armored car services 16 NO
Landscaping Services
This category could include the following:– Installing or maintaining a tree, shrub, plant, lawn, or
garden, either indoors or outdoors, or providing other similarlandscape care and maintenance service
– Installing or maintaining a walkway, retaining wall, deck,fence, pond, or other similar structure to enhance thelandscape of an area
Detail: Exempt landscaping services provided tomaintain a right-of-way or a utility easement
Exterminating Services
This category could include services thatexterminate and control birds, mosquitoes,rodents, termites, and other insects andpests, including termite services
Detail: Exempt exterminating servicesprovided to a farmer to control pests in cropsgrown for commercial purposes
Janitorial Services
This category could include cleaning any ofthe following:
– Interior or exterior of a building or other structure
– An item attached to a structure, such as carpet orgutter
– A driveway, a parking lot, a swimming pool, thegrounds at a building or other structure, oranother outdoor area
Security Services
This category could include any of thefollowing:– Guard or security patrol services
– Armored car services
– Remote monitoring of security alarm systems
– Locksmith services
– Telematic service that provides communication,tracking, and emergency response services to carowners
Revenue Impact: Property Support
Service State Revenue Local Revenue
Landscaping $62.3 M $26.2 M
Exterminating $16.1 M $6.8 M
Janitorial/Other $51.2 M $21.6 M
Security $44.6 M $18.8 M
Total $178.8 M $75.3 M
Share of Income Expended onHousehold Services, 2008
1.0%0.8%
0.6%0.5%
0.4%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1st 2nd 3rd 4th 5th
Quintile
Source: U.S. Bureau of Labor Statistics, Consumer Expenditure Survey, 2008
Personal and Pet Care Services
FTA: Personal & Pet Care Services
Personal Services
OtherStates
NCSalesTax
Tanning parlors, reducing salons 22 NO
Pet grooming 18 NO
Massage services 11 NO
Fishing and guide services 11 NO
Horse boarding and training 9 NO
Barber shops and beauty parlors 7 NO
Personal Services
This category could include any of the following:– Hair care
– Nail care
– Nonmedical skin care (facials, hair removal or replacement;non-therapeutic massage)
– Nonmedical body modification (tatooing, tanning, piercing)
– Nonmedical services to assist customers in attaining andmaintaining a desired weight
– Cosmetic surgery that is not deductible as a medicalexpense under the IRC
Personal Services, continued
This category could include any of the following:– Dating, social escort, and other social introduction services
– Discount buying, house sitting, fashion consulting, andpersonal shopping services
– Party planning, wedding planning, and message deliveryservices
– Fishing and guide services
– Astrology, fortune-telling, palm reading, psychic, and otherservices that may provide useful information about aperson’s personality or may aid in the interpretation of pastand present events
Pet Care Services
This category could include grooming,training, boarding, or providing other care foran animal that is not held for a commercialpurpose
Detail: Exempt veterinary services
Revenue Impact: Personal and PetCare
Service State Revenue Local Revenue
Pet
(non- veterinary)
$2.4 M $1.0 M
Personal $22.8 M $9.6 M
Total $ 25.1 M $ 10.6 M
Share of Income Expended onPersonal Care Services, 2008
1.2%1.2%1.2%1.3%1.4%
0.0%
0.2%0.4%0.6%0.8%
1.0%1.2%1.4%
1.6%
1st 2nd 3rd 4th 5th
Quintile
Source: U.S. Bureau of Labor Statistics, Consumer Expenditure Survey, 2008
Real Property Repair & Remodeling
FTA: Real Property Repair &Remodeling Services
Real Property Repair andRemodeling Services
OtherStates
NCSalesTax
Real property repair or remodeling 15 NO
Carpentry, painting, plumbing, andsimilar trades
13 NO
Real Property Repair & Remodeling
This category could include labor charges for any ofthe following:
– Carpentry -- Electrical
– Plumbing -- Painting
– Heating, cooling -- Flooring
Detail: Exempt new construction
Consideration: Difference between remodeling andnew construction
– Expands dimensions of existing structure
– Increases the heated square space in an existing structure
Revenue Impact: Building Repairs
Service State Revenue Local Revenue
Building repairs& alterations, notincluding newconstruction
$ 74.6 M $ 23.7 M
Share of Income Expended onHousehold Maint. and Repair, 2008
2.4%2.3%2.3%2.3%
2.1%
1.9%
2.0%
2.1%
2.2%
2.3%
2.4%
2.5%
1st 2nd 3rd 4th 5th
Quintile
Source: U.S. Bureau of Labor Statistics, Consumer Expenditure Survey, 2008
Professional Services
FTA: Professional Services
Professional Services
OtherStates
NC SalesTax
Land surveying 7 NO
Accounting, bookkeeping,attorneys
5 NO
Architects, engineers 5 NO
Dentists, doctors, medical testlabs, out-of-hospital nursingservices
4 NO
Professional Services PrimarilyPurchased by Businesses
Inconsistent with the purpose of the sales tax
– Sales tax is a tax on consumption
– Tax on inputs leads to tax pyramiding
Artificial incentive for vertical integration
– May create unlevel playing field for smallbusinesses
– Small businesses often supplier of these services
Professional Services PrimarilyPurchased by Businesses
Multiple points of use
– Services purchased for company-wide use
– Sourcing issues
More interstate transactions
– Corporation more likely to have an out-of-statearchitect design a new HQ building than ahomeowner is to design an addition to her home
– Creates competitive disadvantage for in-statebusiness
Revenue Impact: Professionals
Service State Revenue Local Revenue
Architectural andEngineering
$62.3 M $26.2 M
Computer $326.9 M $137.6M
Legal $359.6 M $151.4 M
Accounting $173.4 M $73.0 M
Medical/Dentist $700.7 M $295.0 M
Revenue Neutrality
Entertainment, Repair of TPP, Personal Services,and Real Property Support represents expanding thesales tax base by 9.7%
– Repair, maintenance, and remodeling of real property
– Professional services
– Elimination of current exemption or credits
– Elimination of current preferential tax rates
The State sales tax rate could be cut from 4.75% to4.3%
Summation
Long-term viability of the sales tax base as akey source of revenue depends onmodernization of the sales tax base
Preservation of the sales tax as a tax onconsumption depends on modernization ofthe sales tax base