Monday, May 14, 2012

Sales Tax Kickbacks

Nobody likes to see a big chunk of change - 6 or 7 or 8 percent - get added to the bill at the cash register, but many states and localities need sales taxes to make ends meet. As I swipe my card, I tell myself that at least the money is doing some public good.
Well, maybe not.
Even as they struggle with falling sales tax receipts in a weak economy, a growing number of localities are "sharing" sales taxes with the retailers who collect them. Sharing has a nice, friendly sound to it. In kindergarten, our teachers complimented us for being good at sharing. But these deals, which are never reflected on the cash register receipts that consumers receive, are more like kickbacks.
Many of these incentives are arranged on a case-by-case basis. Oklahoma City, for example, recently agreed to return up to $5.5 million to occupants of a new shopping center called The Outlet Shoppes at Oklahoma City.
The city of Aurora, Colo., together with the state, offered Nashville, Tenn.-based Gaylord Entertainment Co. an incentive package that could average about $5.6 million a year for up to 30 years. All they ask is that the company proceed with its plans to build a 1,500-room hotel and entertainment complex near Denver International Airport. Under the plan, 100 percent of the sales and lodging tax collected by the city of Aurora from the hotel over the 30-year period would be returned to Gaylord. The company would get a break on its property taxes as well.
Last year, Huntsville, Ala., considered a plan that would have gone even farther than simply awarding sales-tax rebates for certain projects. Under a resolution proposed to the city council there, any retailer that spent more than $30 million on construction costs would have been entitled to keep up to half of the sales tax it generated, up to a $2 million-a-year cap. City Council President Mark Russell, who proposed the revenue-sharing system, said the incentive policy was necessary to meet retailer demands and compete with surrounding municipalities. The plan seems to have fizzled out, but it is nevertheless a sign that cities are beginning to rethink what sales tax means and what's appropriate in trying to get it.
The city of Fillmore, Calif., has developed one of the most convoluted systems of sharing sales tax with retailers. In California, municipalities receive an incentive from the state equal to 1 percent of the taxable sales generated within their borders. To increase its share, Fillmore has hired consultants to bring in business, paying them with 85 percent of the rebated state tax revenue from the stores they lure to Fillmore. The consultants, in turn, have taken to passing some of their earnings on to companies. The result is a triple kickback, with sales-tax revenue moving from retailers to the state to the city to the consultants and then back to the retailers.
In addition to outright incentives, 26 states allow retailers to keep a portion of the sales tax they generate as compensation for the administrative expenses associated with collecting the tax. A study by Good Jobs First found that, overall, states spend around $1 billion on sales-tax-processing rebates to retailers. (1) Thirteen states have no cap on how much retailers can receive, which can allow large vendors to receive far more than they actually spend on administrative expenses. A 2006 survey by PricewaterhouseCoopers LLP found that, while small retailers spend an average of 13.5 percent of the amount they collect in sales tax processing that money, large retailers spend only 2.2 percent. The extra rebates act as a hidden gift to these big-name companies.
As more sales go online, the tactic of sales-tax kickbacks is likely to follow. States have been battling for years to get online retailers to collect sales tax on their behalf. However, they have been blocked by Supreme Court precedent that requires companies to collect sales tax only in states where they have a physical presence, or nexus. In response, states have generated all sorts of creative methods of determining nexus, including means that don't seem to have anything to do with physical presence.
A proposed federal law, however, would allow states to abandon their quixotic fight against the nexus requirement by allowing them to demand that online retailers collect sales tax, regardless of where their operations are located. To participate in this new sales tax collection scheme, states would be required to join the Streamlined Sales Tax Project, which already counts 24 states as members.
In order to make the new law palatable to online retailers, the states plan to give 0.75 percent of the sales tax collected from online sales back to vendors for processing costs. The rebate would be distributed disproportionately, with small vendors receiving more to offset their relatively higher administrative costs. But, despite the small percentage amount, if there is no cap, large retailers could bring in a sizable reward.
There is nothing new about states and municipalities competing to attract businesses. Major developers have long been offered packages including property tax abatements, income tax holidays, cut-rate municipal bond financing and publicly financed infrastructure such as freeway entrances, traffic signals and utility services. But in those cases, citizens are generally aware of how their money is being spent.
Sales tax rebates, on the other hand, are hidden from citizens and consumers. Because of the rebates, retailers are allowed to label items with prices that don't reflect the true amount they will get from sales. This gives them an unfair advantage over other businesses that have not negotiated such attractive revenue-sharing agreements. Rebates may also make retailers too enthusiastic about sales tax collection, leading them to collect tax on items which are, in fact, non-taxable. Either ways, customers are done a disservice.
The main problem with the rebate programs, however, is that one city's program can only be effective if the next city over has a less generous approach. The result is likely to be a constant escalation, with citizens, consumers and pre-existing businesses losing as states and municipalities race to hand over the most cash for new development.
But while cities and developers can team up to produce more shopping centers, they can't produce more shoppers. A surplus of retail development will simply lead to more vacancies.
If sales tax "sharing" is a good thing, let's give it the credit it deserves: Let's require that merchants and malls that receive these bonuses label the "government share" and "private share" of sales tax collections on every sales receipt.
If that feels like a little too much "sharing," then let's call these payments what they are - kickbacks of consumer dollars that are mislabeled as a tax - and outlaw them. They produce no net benefit to the public, and they reinforce our all-too-great cynicism about where our tax dollars are going.

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