South Carolina Tax Study Group: Broaden Sales Tax Base and Lower the Rate

July 22, 2010

South Carolina’s tax study panel has proposed eliminating various tax exemptions and lowering the sales tax rate. This would, on its face, appear to be a positive move in terms of moving towards a broad-based low tax rate and moving away from a “Swiss-cheese” system with a higher rate and lots of holes.

However, with the formal report of the Commission not being released until September these current early indications of their findings is tantamount to firing a warning shot in the direction of those who may be affected. We can now expect a period of lobbying by the special interest groups attached to the industries who may lose their preferential status.

The proposed sales tax rate under this new system will be set at 4.96 percent; the current rate is 6 percent. Would it be cynical to suggest that this rate has been chosen instead of the more rounded 5 percent because the extra 0.04 percent decrease disguises the fact that this a mere 1 percentage point drop?

Dozens of existing sales tax exemptions will be eliminated, including those for poultry feed, wrapping paper, and Internet music downloads. These producers will see their goods rise in cost to their consumers. However, items considered to be necessities, such as electricity, water and groceries, will still not incur the full weight of the sales tax but rather be taxed at the lower rate of 2.5 percent.

The commission also recommends an “Amazon” law, which would require out-of-state Internet retailers that have commission-based relationships with in-state marketing affiliates to collect sales tax. As we have seen in Colorado and elsewhere, this is likely to be met with a legal challenge, delaying any implementation.

Of course, following the formal report in September, lawmakers will still have to vote on whether to accept any of the proposals. Furthermore, judging from the scale of the proposed tax reforms lawmakers may need the full two-year session to pass it piece by piece, pushing any big changes until 2012 or even beyond. This provides plenty of time for those seeking carveouts for their products or entities.

Read the South Carolina Tax Study Group preliminary report here (PDF).

More on South Carolina here.

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