by Brad Carlson @ Idaho Business Review
10/09/2006
On Oct. 1, most Idaho consumers and businesses began paying another penny in sales tax for every dollar spent.
The tax increase was approved by the Idaho Legislature Aug. 25 as part of Gov. Jim Risch’s proposal to ease property taxes. According to state Division of Financial Management estimates, the hike from 5 to 6 percent will generate about $219 million for the state over a full fiscal year.
However, at least half-a-billion dollars in potential revenue won’t be collected because dozens of goods, services and entities are exempt from paying sales tax.
And the list of exemptions keeps growing. The Legislature last winter approved several new areas of spending now free of sales tax, including movie production, museum admissions and a special kit used on wrecked trucks.
A 2002 interim legislative committee on sales taxes studied each exemption and its fiscal impact, Associated Taxpayers of Idaho President Randy Nelson said. However, no exemptions were removed.
Some are sacred cows.
The so-called “production exemption” means companies don’t pay sales tax on equipment and supplies used in manufacturing, farming and mining, said Jim Husted, with the Idaho State Tax Commission.
“It has a fairly large impact, and also is (an exemption) that manufacturers very much feel is necessary,” he said.”
Don Reading, an economist with Ben Johnson Associates, said it’s unlikely the Legislature would ever curtail or suspend the production exemption.
“That, to the Idaho business community, is like Social Security is to the AARP,” he said.
Division of Financial Management Administrator Brad Foltman said equipment sales that fall under the production exemption would generate $78 million in fiscal 2007 — if the sales tax were collected. Sales of supplies would generate $59.1 million, he said.
Some of the exemptions, were they removed, would have an even larger impact to Idaho’s tax revenues.
Explosive growth in recent years led to a statewide building boom. However, while builder-developers pay sales taxes on construction materials, construction services are not taxed.
A Division of Financial Management estimate puts the impact of that exemption at $123,169,000 for the current fiscal year.
Micron and media
Micron Technology, the state’s largest company, spent about $2.2 billion on capital expenditures for the fiscal year that ended Aug. 31.
Not all of the company’s capital expenditures will be on production equipment and thus exempt from sales tax. However, company spokesman Dan Francisco said that, historically, about 70 percent of the capital-expenditure total has been “fab-related” — spent on semiconductor wafer fabrication equipment, tool sets and the like.
Equipment and supply purchases for publishing and broadcasting are also exempt from sales tax.
KTVB General Manager Doug Armstrong said each television station in the Boise area installed digital broadcasting equipment a few years ago to meet a Federal Communications Commission requirement.
He wouldn’t disclose KTVB expenditures, but said each station in the Boise area probably spent more than $1 million.
“We are a regulated industry and are required to provide that service to our channels, so (the exemption) does have some foundation in common sense,” Armstrong said.
Roughly half of KTVB’s expenditures are exempt from sales tax, he said. Purchases not directly related to broadcasting and transmitting — for items such as vehicles and computers — are charged sales tax.
Armstrong said that if broadcast-specific expenditures were subject to sales tax, KTVB would make fewer taxable and non-taxable purchases overall.
The financial impact of each sales-tax exemption can be found in the General Fund Revenue Book, which the Division of Financial Management publishes each January.
Mike Ferguson, chief economist at the Division of Financial Management, said the Legislature typically grants sales-tax exemptions because it deems a particular entity or activity worthy.
“It could be hardship, promoting the economy or any number of reasons, and it’s going to vary case by case,” he said.
The line-item dollar amounts in the Revenue Book don’t represent exact totals lost to each exemption, he said. State budget estimators assume spending totals would differ without the exemptions.
Even with the exemptions, Idaho sales tax collections have grown consistently over the years, Nelson said.
“How much stronger they might have been (without the exemptions) is hard to say,” he said of sales-tax revenues. “A lot of the reason is to incent more economic activity. To put a number on that gets really difficult.”
Become exempt
Husted said the exemptions are the result of someone requesting, and receiving, approval from the Idaho Legislature.
“It does not cause a problem administratively as long as the exemption is well defined,” he said. “Sometimes if the language is not clear, then generally we will have an argument with the taxpayer, who feels the exemption is broader than the commission’s interpretation. Some of them, we almost never disagree on.”
Disagreements usually come to light through audits of taxpayers that produce Tax Commission rulings, Husted said. However, some taxpayers request a ruling before doing business. (See related story on Cabela’s on next page.) And in some cases the Legislature takes care of it.
In the 2006 session, lawmakers aimed to encourage film and media productions when they passed House Bill 497, Nelson said.
The new law gives a sales-tax rebate to film and media productions making at least $200,000 in qualifying expenditures over three years. The exemption is scheduled to end in 2013.
“You may see more and more of that — investment, then the rebate,” Nelson said. “You want the jobs to come with it.”
The 2006 Legislature also approved House Bill 475, which exempts museum admissions. Other exemptions to the sales tax approved this year included “glider kit” replacements for wrecked trucks, free dental clinics, heating pellet manufacturers, domestic violence support groups, fees at nonprofit shooting ranges and competitions, dues at nonprofit hunting and shooting organizations, and a clarification to the exemption for pollution control equipment.
Nelson said it could be hard for lawmakers to refuse a new exemption similar to one already on the books.
“They’ve got to be careful it doesn’t open up to applying to a whole bunch of unintended folks,” Nelson said. “They just have to be very careful, and narrow. The folks bringing the requests understand that and want to keep the fiscal impact as minimal as possible.”
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