Which States Have the Worst Sales Tax Administration?
October 30, 2015
On Wednesday, I gave testimony to the Louisiana Sales Tax Streamlining & Modernization Commission (video here, I spoke last). The Tax Foundation also has a seat on the commission, and some of the biggest challenges we’ve seen over the last four meetings involve trying to improve uniformity between the state and local collection authorities, as well as uniformity in the state and local tax bases.
Here’s the problem in Louisiana: when businesses file sales taxes in the state, they must file at least two returns, one to the state (at a rate of 4 percent), and another to each of the parishes they have business in (averaging an additional 4.91 percent). Many other states have local sales taxes, but most do not make you file to separate state and local collectors.
This alone is bad, but perhaps the worst part of the Louisiana state and local sales tax system is that the basket of transactions that are taxable varies between the state and the parishes, and then varies further from parish to parish as well. Sometimes the sales tax base is even different within special taxing districts in each parish.
For any given transaction, you might be exempt from the state sales tax, exempt from the parish sales tax, but then taxable by the city sales tax. The onus is on the taxpayer to know all the ins and outs of the sales tax base. Many just hire lawyers and accountants instead.
This spreadsheet, assembled by the commission, contains never-before-available information on the differences in the sales tax base between each of the parishes, and as you can see, there are quite a few, adding to tax complexity.
Again, the nationwide standard is to have just one collection and audit authority, and one uniform sales tax base across state and local sales taxes.
For this meeting of the commission, the Tax Foundation was asked to pull information of other states with these kinds of state-local uniformity problems. Fortunately, there are only five other than Louisiana: Alaska, Arizona, Colorado, Idaho, and New Jersey. Of those, only two, Arizona and Colorado, are really on the same level as Louisiana when it comes to sales tax complexity. The blurbs on those two, from our testimony:
Arizona Transaction Privilege (Sales) Tax
Arizona’s Transaction Privilege Tax (TPT) is assessed at the state, county, and municipal level, with different rates for each classified taxable activity (e.g., utilities, restaurants, amusements, retail, and transient lodging). Each taxing authority sets its own rates for the designated taxable activities, and some classifications (viz., commercial lease, recreational vehicle surcharge, and rental car surcharge) are not subject to tax in all jurisdictions.
Arizona cities, moreover, can be subdivided into “program” and “non-program” cities, where the Arizona Department of Revenue collects and audits taxes in program cities and local government assumes this responsibility in non-program cities. Currently, there are fifteen non-program cities, including Phoenix and Tucson. A TPT simplification effort is underway, with the Department of Revenue set to become the single point of administration and collection of the TPT at all levels beginning January 1, 2016. Counties and municipalities will, however, continue to exercise independent authority in setting rates for each of the classifications.
Colorado Sales and Use Tax
Colorado has 294 taxing jurisdictions, including the state itself, various special districts and authorities, metropolitan districts, statutory cities and towns, home rule cities, and counties. Home rule jurisdictions (of which there are 69) are entitled to set their own rates and bases; statutory jurisdictions and special jurisdictions (224) must adopt the state sales tax base, but are authorized to opt into any of eleven enumerated exemptions, such as groceries, machinery and tools, and farm equipment, among others.
Home rule jurisdictions have 89 potential exemptions from which to choose. Because many jurisdictional boundaries overlap, these jurisdictions yield a total of 756 areas with different rates and bases. Statutory jurisdictions are administered and audited by the state department of revenue, while home-rule jurisdictions run their own collection and audit operations, often relying on contract auditors.
In 2013, the legislature adopted language instructing the Department of Revenue to make recommendations for the establishment of a uniform sales tax base, but the state has yet to act on those recommendations.
So, which states have the worst sales tax administration? By our count, Louisiana, Colorado, and Arizona. Arizona is starting to phase in some improvements. While Louisiana hasn’t acted yet, the sales tax commission is starting to ask the right questions.
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