A common theme during this year’s legislative session was to take a critical look at the list of sales tax exemptions that state have on their books. There is no doubt that the number of exemptions has grown slowly over the past 30 years. There is also little doubt that some exemptions may have outlived their intended purposes. I recently looked at the Georgia sales tax exemptions and notices some very odd categories of products as being exempt from sales tax. I”m sure there was a reason for them at some point, but once on the books these are mostly considered to be sacred cows. In Georgia and in other states, even these sacred cows are being examined. As I’ve looked at the Georgia exemptions, I can put them into 4 basic categories. Below is a brief overview of why certain exemptions may be needed and why some may be ready to be removed from the books.
1. Avoid duplicate taxation: Sales tax is due on each sales transaction unless the transaction is statutorily exempt. One exemption that makes this system work well is the “sale for resale” exemption. Without this exemption goods could and would be taxed at each stage throughout the sales process. This would have a tax cascading affect and would greatly increase the cost of products. To avoid this issue, every state allows products that are intended to be resold to be purchased without sales tax.
In a similar vein, the exemption for goods shipped outside of the state for use also avoids double taxation (as well as some serious US Constitutional challenges). If goods were taxed in the state of origin and then again in the destination state, there would be double taxation and in impediment on the Commerce Clause.
2. Stimulate and promote desired economic activities: Most states have exemptions form sales tax for machinery, equipment, and pollution control equipment. Many states are also exempting various types of technology purchases. The reason for having these exemptions is to promote the purchases of this equipment and to stimulate the growth of jobs in industries that use this equipment. The issue with many of these types of exemptions is that they often times outlive their essential and intended purposes. While it is certainly noble to save companies money who purchase repair parts for their manufacturing machinery, most companies are not going to uproot their manufacturing plant if a state removes this incentive. Likewise, companies that have large technology facilities are likely going to spend the same amount of money each year to upgrade and maintain these facilities with or without the existence of a sales tax exemption.
3. Avoid regressive nature of sales tax: Sales tax is an equal opportunity tax. Regardless of income level, everyone pays the same tax rate. For families with low incomes, the payment of sales tax on essentials can be very burdensome. Exemptions for sales of food, medicine, health care products, and other special items are often supported to avoid folks with lower incomes from paying tax on what could be essential items.
4. Special interests: By far the category that may have the largest number of exemptions relates to the special interest category. This includes sales to farmers, sales of church bells, sales by Girl Scouts, sales to historical associations, and the like. I’m sure each of these was provided for a special purpose but my guess is that purpose was primarily to win votes in the next election. I don’t like to pay sales tax anymore than the next guy, but at some point you can’t exempt everything.
Georgia and many other states have commissions that are focused on evaluating tax exemptions and proposing changes. Many states put sunset provisions on exemptions that force legislatures to evaluate the necessity and effectiveness of these so called “tax expenditures”. For many industry groups, their main claim to fame is the ability to keep certain sales tax exemptions on the books despite their real need.
Sales Tax Exemptions