In the fight for sanity in sales tax, states are up, but Utah shows the cracks that can form when states go too far.
Facing opposition in Utah from voters and a public referendum, lawmakers and the governor repealed a December tax overhaul that cut income tax rates while expanding the sales tax base to certain groceries and services.
This begs the question, has the pendulum finally swung too far on taxing sales?
Tax revisions at the Statehouse in Utah would have majorly overhauled the state’s tax code. The legislation would have decreased the corporate franchise and income tax rate as well as the individual income tax rate while increasing the state sales and use tax rate on groceries and services. According to The Salt Lake Tribune, these changes would have increased sales tax revenue by an estimated $570 million while cutting income tax revenue by $650 million, creating a net tax cut of about $80 million.
A citizen referendum garnered enough signatures in January 2020 to force a public vote on the controversial tax reform bill, prompting lawmakers and the governor to overwhelmingly repeal the law.
Expanding Sales Tax
Utah is far from the only state to implement sweeping changes in sales tax revenue sources. In fact, West Virginia–which taxes just about everything including services–has been upheld as a model for other states who have been broadening their sales tax in recent years to include specific services.
Lawmakers in Nebraska are considering the same. LB946 would enact significant changes to tax laws by extending sales and use tax to services and retail sales of digital advertisements. If enacted, services would be taxed starting October 1, 2021, giving businesses some time to gear up for the changes.
Advertising over the internet, including political candidate messages, would also be a sales tax event under LB989 but would take effect this year, October 1, 2020. In addition to in-state advertising, out-of-state advertising would be taxed, raising questions about how this provision is enforceable.
The real concern here is how to source the revenue. It is not always clear how advertising, especially google, Facebook and other types of online ads, interface with a buyer. This could make for some fun sales tax challenges if Nebraska determines that advertising over the internet is taxable!
The Takeaway
And, more broadly, lawmakers have to ask if these types of complicated additional sales taxes on services are worth the cost in voter support and risk to the competitive landscape. In Utah, the pendulum swung too far and citizens and businesses prevailed.
But, in the fight for sanity in sales tax, each state will need to determine the breaking point. How far can lawmakers go in expanding sales tax revenues in lieu of changes i how business has evolved as they balance that with their need to provide for essentials like schools, public safety and citizen oversight.
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Judy Vorndran can be reached at jvorndran@taxops.com or 720.227.0093.
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