Whats Wrong with Automatically Taxing Business Inputs

1
Whats Wrong with Automatically Taxing Business
Inputs?

• Tax Budget Reform Commission
• December 14, 2007
• Gene Adams
• Coalition to Protect Floridas Economy

2
Coalition to Protect Floridas Economy

• 20 business associations in Florida
• Representing 212,000 employers in Florida
• Florida Association of Insurance Agents which
  represents 18,000 insurance professionals and
  their employees
• 18,600 members of the Florida Institute of CPAs
• 160,000 Realtors
• 30 members of the Minerals and Chemistry Council
• National Federation of Independent Businesses,
  12,000 small businesses in Florida
• 16,000 companies are manufacturers according to
  the Manufacturers Association of Florida.
• 6,200 Printing Firms in Florida according to the
  Printing Association of Florida
• Florida Farm Bureau 32,000 full-time farmers
• Representing over 3 million jobs in Florida
• Florida Chamber members with 3 million employees
• 75,000 printing firm employees

3
Floridas Current Business Tax Climate

• COST/ EY Study of State Local Tax Burden
• (March
  2006)
• Florida generally perceived as low tax statedue
  to personal taxation
• Florida above national average in business taxes
  as percent of private sector gross state product
• Florida at 5.4
• U.S. at 4.8
• Southeastern U.S. 3.7 (N.C.) to 4.4 (S.C.)

4
Floridas Current Business Tax Climate

• EY Study of Property Taxes on Business Capital
  (March 2006)
• Florida above national average
• (1.02 v. 1.02 higher than national average)
• Data based upon taxes through FY 2005

5
Floridas Current Business Tax Climate

• Non-homestead property makes up approximately 55
  of the market value of real property in Florida
• Non-homestead property bears the burden of
  approximately 66 of the property tax burden in
  Florida

6
Floridas Current Business Tax Climate

• Floridas corporations pay a 5.5 tax on
  corporate income
• Florida residents pay no income tax

7
Floridas Current Business Tax Climate

• Floridas retail sales tax exempts
• Food
• Drugs
• Residential Rents
• Residential Utilities
• Residential Communications Services
• 8.15 Billion in Tax Exemptions for
  Consumer/Household Purchases

8
Floridas Current BusinessTax Climate

• Business Tax Exemptions 2.1 billion
• Packaging materials (35 m)
• Sales of boats/aircraft removed from Fla (74 m)
• Newspaper/magazine advertising inserts (41 m)
• Parts used for warranty repairs (45 m)
• Non-retail pharmacies (235 m)
• Fuel used by utility to generate electricity
  (328 m)
• Dealer Collection Allowance (64 m)

9
The Proposals

• CP00002 (McKay)
• CP00007 (FT Committee)
• CP00012 (FT Committee)

10
CP 00002 (McKay)

• Prior to July 1, 2009
• Legislature must repeal RLE ( 7.909 billion)
• Legislature must tax services and goods to
  replace lost RLE
• Legislature cannot make up dollars by taxing
  food, Rx drugs, residential rent or utilities.

11
CP 0007

• Prior to Jan 1, 2009
• Legislature shall review each exemption from
  sales and use tax
• Must consider principles of taxation
• Equity, facilitate compliance, pro
  competitiveness, neutrality, stability,
  integration in federal state and local tax
  systems, serve public purpose of important state
  interest
• Exempt are groceries, health services, drugs,
  residential rent, electricity, heating fuel,
  items for resale, intangible personal property,
  tangible personal property for export, and
  purchases of agricultural products for processing
  or resale
• During 2010 session, roll call vote taken on each
  exemption, one at a time
• Public testimony must be taken in at least two
  committees of each house
• Any additional revenues are to lower overall
  sales tax or required local effort
• Section expires 2011, a one time review

12
CP 0012

• Prior to January 1, 2010
• Legislature must begin a review of services not
  subject to the tax on sales and use
• Must include evaluation of services and identify
  methods of compliance and administration
• July 1, 2012, all services not subject to the tax
  are taxed unless exempted
• Exemptions created by law, with a single subject
  and a single service identified by the 2007 NAICS
  code
• Any new service exempted from the tax after
  November 4, 2008, must advance a public purpose
• Section Expires January 1, 2015

13
Exemption Repeal Issues

• Dollars not there for RLE replacement
• Business Exemptions from Sales Tax
• Interstate Competition
• (aircraft, boats, printing, manufacturing,
  agricultural products)
• Pyramiding
• (trade-ins, packaging materials, warranty
  repairs, fuels used to generate electricity)

14
Services Tax Exemptions

• No existing statute imposes a tax on services.
  How do the mechanics for imposing a new tax on
  services spring into being via a sunset or
  repeal process?
• 1987 law consumed more than 9 pages Fla. Statutes
• 1988 FDOR emergency rules were 215 pages

15
Services Tax Issues

• Competitive Issues Across States
• Very few states tax business services.
• Services are intangiblemany can be provided from
  any location. Data processing, accounting,
  legal, financial services can be provided
  remotely.
• Where is a service sold? Unlike goods, no title
  transfer to track.
• Where is a service used? Where does a
  multi-state business use a service?

16
Services Tax Issues

• Consider example of Southeast Toyota
• Roughly 5600 employees in Florida
• Services provided on vehicles at Port of
  Jacksonville taxable.
• Services provided at Port of Brunswick not
  taxable.
• What is Floridas competitive position?
• Printing industry is highly competitive
• All copy and artwork can be transmitted
  digitallyMail centers
• Printing can be shipped
• 7 percent cost of inputs would be an extreme
  competitive disadvantage in information economy

17
Services Tax Issues

• Definitional Issueswhat constitutes a service?
• Do services performed by employees constitute
  taxable services?
• If not, large integrated firms enjoy advantage
  over smaller firms that out-source printing,
  legal, accounting and similar services.
• Same is true for large integrated homebuilding
  companies versus smaller firms that utilize subs.

18
Services Tax Issues

• Pyramiding Issues
• Business services are inputs to final consumer
  goods or services
• Much of 23 billion in estimated tax on services
  is from taxing business inputs
• Exempting consumer services is politically
  attractive (witness 1987 exemption for haircuts)
• But taxing business inputs turns retail sales tax
  into a tax on business

19
Review Exemptions Exclusions

• Review of exemptions and exclusions can and has
  occurred twice within last 20 years
• Legislature can review again at any time
• Business community does not oppose a review
• Business community opposes automatic taxation
  without affirmative act of elected officials