Senate Finance Co-chairs: Senators Clodfelter, Hoyle and Jenkins
House Finance Co-chairs: Luebke, Gibson, Wainwright, and Weiss
Opening Remarks by Finance Chairs
Overview of the State of Sales Taxation from a Historical and Contemporaneous Perspective
Bill Fox, Professor, Department of Economics; Director, Center for Business & Economic Research, University of Tennessee
North Carolina sales tax revenue has declined by six percent since 2007 and is on a downward trend. Thirty-five states have imposed a local sales tax, which generates approximately $300 billion. From the total taxes collected in North Carolina, twenty-three percent represents sales tax and thirty-eight percent is collected from income tax. Changes in consumption patterns, legislated exemptions, and cross border shopping (including internet) contribute to a narrowing of the sales tax base. The tax base is changing and the purchase of services has increased since 1979 from 47 percent to 60 percent. North Carolina taxes approximately 30 services out of a possible 165. In order to broaden the base and lower the rates there should be a tax on all household purchases, all purchases regardless of how obtained, all purchases regardless of the income used, all purchases regardless of the vendor and with eliminate the tax on business-to-business purchases. All consumer goods should be taxed heavily in addition to interstate transactions. The single largest service currently exempt is health care. Increased revenues from the various states now taxing services were given as examples. Where is sales tax headed? Pressure to for rate increases, base changes (business purchases, services, consumer goods, interstate transactions) and federal efforts to tax sales. Committee member’s questions involved; what long-term benefits, if any, were in the public interest from the exemptions received from nonprofits. If you choose to provide exemptions, do the exemptions require subsides and how do you go about implementing reform.
Overview of North Carolina Sales Tax Historical
Cindy Avrette, Research Division NCGA
In 1933 the General Assembly enacted a temporary 3 percent retail sales tax known as the Emergency Revenue Act of 1933. This act was passed to levy “additional and extraordinary” taxes to meet a supreme emergency in the shrinkage of the ordinary revenues of the State and as a further relief from property taxes to provide another form of revenue for the support of the public schools of the State in substitution for the taxes levied on property for this purpose. Sales tax became permanent in 1939 and the sales and use tax article was enacted, exempting horses, mules and coffins. Beginning in 1941 an exemption on food was enacted, in 1945 prescription drugs and 1945 fuel sold to farmers. In 1951 the Sales Tax Study eliminated all exemptions with few exceptions and extended the sales tax to all forms of amusements and entertainment, lodging accommodations, automobile service and repairs, and repairs to plumbing, electrical, heating and air conditioning equipment. The 1950’s also saw a one percent, $80 cap, on vehicles, planes and a tax on funeral expenses. The 1960’s-1980’s saw the food exemption repealed, WS tax repealed and a tax on railway cars and boats added. The 1980’s also added two ½ cents local sales tax authorizations, exemptions on food purchased with food stamps and repeal of the merchant’s discount. The 2000’s saw a third ½ cent local sales tax authorization, Medicaid swap and a tax on digital products. The sales tax revenue in 1933-34 was $6,011,700 with revenues in 2008-2009 amounting to $4,677,961,056.
Trina Griffin, Research Division, NCGA
The following are subject to the preferential rates: manufactured homes, modular homes, aircraft and boats and electricity used by commercial laundries/dry cleaners, manufacturers and farmers and other business and residences. Under current law revenue collected from manufactured homes amounts to $15.9 million, modular homes $4.6 million, airplanes and boats $13.2 million. Electricity purchased for commercial laundry produce $0.5 million in revenue, manufacturers and farmers $22 million and commercial businesses and residences $105 million. In 2005 legislation was enacted a combined general rate (5.75 percent + sum of rates of local sales tax authorized for every county 2.25 percent. This was increased from 7 percent to 8 percent on September 1, 2009. Spirituous liquor, telecommunications and video programming are subject to the general rate.
Streamlined Sales Tax Project
Sabra Faires, Senate Tax Counsel, NCGA
The Streamlined Sales Tax Agreement is a voluntary written agreement developed by states and adopted in November, 2002. Forty-one states and the District of Columbia have approved the Agreement with 23 states implementing the Agreement by changing their laws to conform to the requirements of the Agreement. North Carolina became a member in October 2005. The goals of the Agreement is to simplify and modernize sales and use tax laws to reduce complexity for all retailers, promote equity between retailers and remote sellers and relieve consumers of the obligation to report sales and use tax on purchases from remote sellers.
North Carolina Sales Tax Exemptions Medical and Food Related Exemptions
Sandra Johnson Fiscal Research Division, NCGA
There are three major sales and use tax exemptions, food, prescription drugs and durable medical equipment. In 1933 food for human consumption was exempt from the sales and use tax, in 1961 this exemption was repealed. In 1998, the State sales and use tax rate was eliminated, but in 2003 legislation determined prepared food is taxable by the State. Prepared food is subject to State and local sales tax if it is sold in a heated state, it consists of two or more foods, foods mixed or combined by retailer or it is sold with eating utensils. Taxes collected in 2008-2009 on prepared foods amounted to $1.4 billion. Twenty six states exempt taxes on food, five states have no sales tax and several states levy a tax at a reduced rate. Prescription drugs and durable medical equipment recorded a similar up and down history as the history described in the food industry taxes. In 1999 the sales and use tax was repealed for prescription drugs sold to hospitals and all durable medical equipment became tax exempt in the same year. To date, 43 states exempt prescription drugs from the sales and use tax.
Agricultural, Industrial, and Business Related Exemptions
Martha Walston, Fiscal Research Division, NCGA
Agricultural and industrial related exemption fall into five categories: items sold to or produced by farmers, manufacturing items, packaging items, items sold to commercial laundries and computer software. Staff provided examples of items exempt under each category. Farmers main items include facilities, equipment and supplies for housing, raising, or feeding animals, and substance used on animals or plants. Manufactured items largest item is central office equipment, switchboard, telephone service. Packaging items major item is containers used a packaging by the owner of the container. Laundry is primarily fuels and electricity. Computer software is customer software and software needed to run an enterprise server, datacenter, cable service, telecommunications, internet access etc…
Incentive Related Exemptions
Canaan Huie, House Tax Counsel, NCGA
Incentive related exemptions include major recycling facilities, interstate air couriers, interstate air passenger carriers, interstate air businesses, data centers and railroad intermodal facilities. Questions were raised regarding the actual cost of these incentives to the State, year after year. Staff indicated the Department of Revenue considers this information confidential and does not release these figures. The question then becomes over a period of time do these incentives still benefit the public.
Dan Ettefagh, Bill Drafting Division, NCGA
These exemptions include prohibitions (constitutional or federal law, sales on Cherokee Indian Reservation or disaster relief debit card purchases), alternative tax-based exemptions (piped natural gas, motor vehicles subject to the highway tax or motor fuel subject to motor fuels tax), exemptions on products used outside of the State, entity-based (i.e., purchases of mobile classrooms by boards of education) and transaction-based exemptions (i.e., articles repossessed by vendors), media exemptions, streamlined-and final sale-based exemptions and other miscellaneous reasons (i.e., public school books, sales by blind merchants, water delivered by mains/pipes, etc.).
North Carolina Sales Tax Refunds-To be discussed at the next meeting.
Nonprofit Refunds, Rodney Bizzell, Fiscal Research Division, NCGA
Incentive Related Refunds, Canaan Huie, House Tax Counsel, NCGA