A bill has been passed in the New Hampshire Senate that would protect New Hampshire businesses from being forced to collect sales taxes for other states. The bill, proposed earlier in the year by Governor John Lynch, is a reaction to reports that Massachusetts revenue officials have been bullying New Hampshire small businesses in order to get the businesses to do their bidding and collect sales tax on sales to Massachusetts residents. The bill will probably pass the House without a problem.
The issue stems from the fact that New Hampshire has no state sales tax while Massachusetts has a 5% sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. . Because of this, Massachusetts residents who live close to the border have an incentive to shop in New Hampshire. Massachusetts is apparently not pleased with all this taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. avoidance, and is putting the pressure on businesses to collect sales tax. Tax Analysts (subscription required) reports:
[Nancy Kyle, president of the Retail Merchants Association of New Hampshire], testified that a number of small and midsize businesses along the Massachusetts state line are being pressured by that state’s DOR to pay the taxes. They are businesses that don’t have the money to fight back, she said.
Kyle added that a retailer in Nashua, which borders Massachusetts, told her that Bay State officials threatened to “do something with” property he owns in Massachusetts if he didn’t cooperate.
The problem with this tactic is that there is no way that Massachusetts can legally make this demand of New Hampshire businesses. The New Hampshire businesses are not within their jurisdiction and are not making sales within the state of Massachusetts. Nonetheless, Massachusetts apparently is resorting to threats and intimidation in an effort to collect the money from-out-of state businesses.
Still, there is a legal obligation to pay tax on those tax-free NH purchases, but that obligation falls on the Massachusetts residents who shop in NH, not the NH businesses. All states that collect a sales tax also collect what is called a “use tax”, which is basically a sales tax on goods that the state’s residents buy out-of-state and bring back to their home state. Use tax is usually levied at the regular sales tax rate. Most states give you some credit if you paid sales tax in the other state, but if you paid less than the rate in your home state you probably owe use tax.
If these tax-free purchases are such a problem, Massachusetts should be going after the people who are actually legally obligated to pay tax, namely the MA residents shopping in NH, instead of pressuring businesses that have no legal obligation to collect taxes for Massachusetts.
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