July 16, 2008
While taxpayers struggle to come up with the second property tax payment, a company with over $900 million in annual sales will make a windfall at taxpayers’ expense.
The company, Menasha, alleged the state had unfairly charged sales tax on a software product purchased a decade ago. The state argued the sales tax was due. The Supreme Court, in a 4-3 decision, agreed with Menasha.
The state money, an estimated $265 million, could be refunded to companies, like Menasha, impacted by the Court ruling that sales tax is not owed on customized computer software.
Department of Revenue Secretary Roger Ervin in a statement suggested the Legislature consider “changes to bring more clarity to our sales tax statutes” and “modernize Wisconsin’s tax code through initiatives such as the Streamlined Sales Tax Agreement.”
How does a Supreme Court decision related to sales taxes owed affect those of us writing checks for property taxes?
Our state depends on property taxes for nearly 40% of state and local revenue. Wisconsin ranks 9th highest in property tax. By comparison, Wisconsin ranks 33rd in sales tax. To reduce property taxes, we must consider other ways to cover the cost of services government provides or figure out how to provide less.
Part of the problem is that who pays what is not always clear. For example, at issue in the Menasha case was whether the software was customized to fit the needs of one company. For the ‘off the shelf’ package, sales tax was due; for a custom job, sales tax was not due. This job fell somewhere in between.
The problem may be solved by changing the way our laws are written.
In January, at the Senate Tax Fairness Committee hearing, Secretary Ervin testified about who is paying taxes and who is avoiding taxes.
“States are having difficulty collecting taxes from multi-state, multi-national corporations,” the Secretary said. He explained companies are structuring themselves to be competitive by finding ways to avoid paying taxes.
“There are hundreds of credits, deductions and exemptions,” Ervin said. “These practices are legal, but are they economically beneficial?” The Secretary explained some tax credits or deductions are worth more than the benefits going to the people of the state. In some cases, the effect makes similar businesses without the tax deductions uncompetitive.
“Many states have a review process to reauthorize these credits.”
Senators asked about auditing or conducting a cost benefit study of all the credits, deductions and exemptions. The Secretary encouraged such review but was realistic about staff time needed to do the work.
“We have almost no money. We have great auditors and we’d be happy to retrain them,” the Secretary shared. To conduct this type of review, Secretary Ervin said the Legislature would need to change the laws and provide funding to the Department.
The Secretary noted tools other states use may help Wisconsin. He offered suggestions that are worth pondering:
- Mandate routine studies to assess the benefits of credits, exemptions and deductions.
- Adopt the streamlined sales tax provision. Currently 1,100 major retailers volunteered to pay sales tax in Wisconsin, but our outdated laws make it difficult for these companies to pay taxes owed on internet sales.
- Set a limit on exemptions, credits and deductions. After a few years the Legislature must review and reauthorize the loopholes. How much is not being paid? How much benefit do the people gain from the company not paying taxes?
- Simplify our state taxes. Get rid most of the loopholes.
During the last budget process (including the ‘budget repair’ bill) the State Senate passed the streamlined sales tax rules. But the provision didn’t make it through the Assembly. Had this law been in place, we may have prevented the $265 million sales tax repayment resulting from the Menasha case decision.
Budgets are tight: for citizens and for the state. We need a tax system that ensures everyone pays their fair share and no one pays too much. Getting there will take work and we can begin by giving serious consideration to Secretary Ervin’s suggestions.