review of fta sales tax service categories · 1/14/2010 · ways to expand nc’s sales tax base...

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


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


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


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




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)




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



Personal 20

Business 34

Computer 8

Automotive 5

Admissions and amusements 15

Professional 9



Leases 4

Fabrication, installation and repair 19

Miscellaneous 2

Total Number of

Taxable Services 168

FTA: Admissions and Amusements

Professional Sports Events


School and College Sports Events


Cultural Events


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


Participatory Sports


Participatory Activities


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


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


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


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


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


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


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


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


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

review of fta sales tax service categories · 1/14/2010 · ways to expand nc’s sales tax base...

Documents