TLXAS STATL GOvLRNMLNT LFFLCT|vLNLSS AND LFF|C|LNCY 155
kLDUCL GLNLkAl kLVLNUL lO88 IkOM 8AlL8 1AX D|8COUN18 Texas allows businesses to retain a portion of state sales tax collections to compensate them for their efort in collecting and reporting sales tax. Additionally, retailers can retain an additional amount of sales tax collections for remitting estimated collections prior to their due date. Tese discounts cost the state more than $200 million each year. Many states either cap the amounts businesses can retain, ofer diferent levels of compensation to retailers based on the amount of taxable sales, or do not ofer such discounts. Increasing the timely fler discount rate and capping the amount of revenue businesses can retain for timely fling of their sales tax returns, and decreasing the rate of return they earn on taxes that they prepay would increase state sales tax revenues by $152 million in the 201213 biennium while still ofsetting certain compliance costs associated with sales tax collections. IAC18 AND I|ND|NG8 i Texas is one of 24 states that ofer a sales tax timely fler discount. Te discount is essentially a service fee meant to compensate retailers (i.e., anyone with a taxpayer permit) for the administrative costs of recording sales tax collections and remitting them to the state. i Tirteen states cap the amount of discount a retailer can retain. i In addition to the timely fler discount, Texas provides a prepayment discount of 1.25 percent to retailers who pay their estimated taxes in advance. CONCLkN8 i Texas foregoes tax revenue as a result of the timely fler and prepayment discounts. Te timely fler discount is estimated to cost $108.1 million in fscal year 2012, and the prepayment discount is estimated to cost $99.7 million in fscal year 2012. i Texas does not cap the amount a retailer can retain in the form of a timely fler or prepayment discount. As a result, there is no way to limit the amount of sales tax timely fler or prepayment discounts a retailer receives. i Texas retailers who prepay their sales taxes earn the equivalent of approximately 13.27 percent annual rate of return on their prepayments. Tis is signifcantly higher than the 1.57 percent interest rate the state earned on its treasury funds and higher than any existing interest rates available to retailers via other savings vehicles in 2009. i Studies have found that tax compliance costs for small retailers are disproportionately higher as a share of sales tax collected than for larger retailers. Texas current discount structure compensates all businesses the same for collecting and remitting sales taxes, regardless of their size or sales volume. kLCOMMLNDA1|ON8 i Recommendation 1: Amend the Texas Tax Code, Chapter 151.423, to increase the timely fler discount to 0.75 percent and limit the amount a vendor can retain in the form of the timely fler discount to $3,750 per tax year. i Recommendation 2: Amend the Texas Tax Code, Chapter 151.424, by adjusting the prepayment discount rate to the lesser of 1.25 percent or the rate that yields an annualized rate of return of 4 percent over the prime rate. D|8CU88|ON Consumers and businesses pay a state sales and use tax of 6.25 percent on the sales price for certain products and services purchased or used in Texas. Revenue generated from the sales and use tax is deposited into the General Revenue Fund and is the largest source of state revenue. According to the Comptroller the sales and use tax generated $19.6 billion in fscal year 2010. However, every year the state foregoes sales tax revenue in the form of vendor discounts; the discount is essentially a service fee meant to compensate retailers (anyone with a taxpayer permit) for the administrative costs of recording sales tax collections and remitting them to the state. Te collection process for the sales tax allows retailers who pay all or a portion of their taxes on time to retain 0.5 percent of the taxes due. In addition to the timely fler discount, retailers can retain an additional 1.25 percent discount if they prepay their taxes. Retailers are expected to retain $207.8 million in timely and prepayment discounts in fscal year 2012. Figure 1 shows the actual cost of the fscal 156 TLXAS STATL GOvLRNMLNT LFFLCT|vLNLSS AND LFF|C|LNCY LLG|SLAT|vL 8UDGLT 8OARD STAFF [ANUARY 2011 RLDUCL GLNLRAL RLvLNUL LOSS FROM SALLS TAX D|SCOUNTS I|GUkL 1 IkO!LC1LD 8AlL8 1AX D|8COUN18 I|8CAl YLAk8 2009 1O 2014 (|N M|ll|ON8) D|8COUN1 2009 2010 2011 2012 2018 2014 Timely Filer $94.0 $99.1 $103.3 $108.1 $ 112.4 $ 116.9 Prepayment $91.4 $91.4 $95.2 $99.7 $103.7 $107.8 *Actual discount amount. 6285&( Comptroller of Public Accounts. year 2009 timely fler and prepayment discounts and estimated costs of the discounts from fscal years 2010 to 2014. In Texas, sales tax discounts have been available to retailers since the sales tax was frst enacted in 1961; a time when retailers kept paper records and manually remitted collections to the state. Te vendor discount was last adjusted in 1987 at which point the rate was reduced from 1.0 percent to the current 0.5 percent rate and the prepayment discount was reduced to 1.25 percent in 1983 from 2.0 percent. Tere are opportunities to mitigate this loss to the state and generate additional revenue by implementing diferent options that reduce the amount of sales tax a vendor retains while addressing the disproportionate administrative cost for small business. Increasing the timely fler discount to 0.75 percent of sales tax collections and instituting an annual cap of $3,750 per retailer would generate $81.2 million in General Revenue Funds for the 201213 biennium. Additionally, adjusting the prepayment by linking it to prevailing interest rates would generate $70.8 million in General Revenue Funds for the 201213 biennium bringing the total General Revenue Funds gain for these changes to $152 million for the 201213 biennium. 7,0(/<),/(5',6&2817 Section 151.423 of the Texas Tax Code authorizes sales taxpayers to retain 0.5 percent of sales tax collections to ofset the cost of collecting and remitting the tax to the state on a timely basis. As shown in Figure 2, retailers follow a monthly, quarterly, or annual payment cycle depending on the amount of the sales tax they collect per reporting period. Retailers must remit all or a portion of the sales tax to the Comptroller of Public Accounts (CPA) by the twentieth day of the month following their tax collection period to be eligible for this discount. In fscal year 2009, there were about 672,000 sales tax flers, 28.7 percent of which did not have any tax liability. Of those retailers with sales taxes due, I|GUkL 2 kLIOk1|NG ILk|OD8 IOk 8AlL8 1AX I|lLk8 8Y 8AlL8 1AX COllLC1|ON8 AMOUN18 I|8CAl YLAk 2010 ANNUAl 8AlL8 1AX ClA88 OI kL1A|lLk8 lL88 1HAN $1,000[ YLAk lL88 1HAN $1,500[ OUAk1Lk $100,000 Ok GkLA1Lk Taxes Due Yearly Quarterly Monthly 6285&(: Legislative Budget Board. 79.6 percent paid their taxes by or before their due date at least once during the fscal year. Te sales tax data from the CPA shows that 380,270 taxpayers with a total of $310.9 billion in taxable amounts received the timely fler discount in fscal year 2009. CPA reports that the timely fler discount cost the state $94 million in fscal year 2009. A retailer can remit a portion of sales taxes due for their reporting period and still earn the timely fler discount on that payment. Tis allows retailers to delay full payment without losing the beneft of the timely fler discount on the portion remitted. Any portion of the payment remitted 1 to 30 days after the due date incurs a 5 percent penalty fee; if payment is 31 to 60 days late, the penalty fee is 10 percent. Any payment made more than 60 days past the due date will incur a 10 percent penalty fee plus interest. 9(1'25',6&28176,127+(567$7(6 Twenty-six states and the District of Columbia do not ofer a vendor discount, the equivalent of Texas timely fler discount. Twenty-four states ofer vendor discounts, ranging from 5.0 percent in Alabama to less than 1.0 percent in six states, including Texas. Tirteen states limit the amount of discount that any one taxpayer may retain. Te median state cap on a discount is between $4,000 and $5,000 per taxpayer per year. Some states also ofer additional discounts to encourage retailers to fle electronically or to fle early. LLG|SLAT|vL 8UDGLT 8OARD STAFF [ANUARY 2011 TLXAS STATL GOvLRNMLNT LFFLCT|vLNLSS AND LFF|C|LNCY 157 RLDUCL GLNLRAL RLvLNUL LOSS FROM SALLS TAX D|SCOUNTS Figure 3 shows the vendor discounts, the discount maximums, and sales tax rates for the ten most populous states. California, the most populous state, ofers no vendor discounts. Other than Texas, only Michigan has a prepayment sales tax discount (0.25 percent). Te current economic climate has led some states to suspend or consider amendments to their sales tax vendor discounts. Most recently, New York and Colorado retailers are no longer allowed to apply a vendor discount to their sales tax remittances. Legislation authorizing this temporary suspension in Colorado became efective in 2009, after the Colorado Legislature had already reduced the vendor discount rate from 3.33 percent to 1.35 percent. Te vendor discount is expected to be reinstated in January 2011. Nevada temporarily reduced its vendor discount from 0.5 percent to 0.25 percent for 2009, but decided to make the reduction permanent in the 2009 Legislative Session. Virginia, whose fscal year ends on June 30, enacted legislation that mandates prepayment in June from vendors with taxable sales or purchases of $1 million or more in the previous fscal year. In addition to this mandate, the vendor discount was reduced to between 1.2 percent and 0.6 percent depending on the vendors monthly taxable sales. A few other states have also proposed legislation that would reduce or eliminate the vendor discounts. In Texas, for example, a bill that would have placed a limit of $10,000 on the amount of timely fler or prepayment discount a retailer could retain per year was I|GUkL 8 8AlL8 1AX D|8COUN18 IOk 1LN MO81 IOIUlOU8 81A1L8 I|8CAl YLAk 2010 introduced during the Eighty-frst Legislature, Regular Session, 2009. Te bill did not pass. 3/$&,1*$&$3217+($02817 2)7+(7,0(/<),/(5',6&2817 Capping the amount any one retailer can retain is a strategy that some states use to limit the loss of sales tax revenue to the state. Of the 24 states that ofer vendor discounts, 14 cap the amount a retailer is allowed to retain. Few states apply the cap to each individual retail location, making it more benefcial for retailers in these states, but not as lucrative as in those states with no caps at all. Of the top fve states with the highest revenue loss due to vendor discounts, only Florida has a ceiling on the amount of sales tax collections a retailer can retain per outlet. Figure 4 shows that in fscal year 2009 Texas retailers with more than $32 million in taxable amounts combined retained a total of $55.2 million in sales taxes as a result of the timely fler discount and comprise less than 1 percent of all timely sales tax flers. Tis represents 58.8 percent of the total amount retained by all vendors for compensation. In contrast, 76.1 percent of timely sales taxpayers had taxable amounts that equaled $200,000 or less. Recommendation 1 would increase the timely fler discount from 0.5 percent to 0.75 percent and establish $3,750 as the maximum dollar amount that any one retailer could retain for the timely fling of sales tax based on the state portion of 81A1L VLNDOk D|8COUN1 D|8COUN1 MAX|MUM 81A1L 8AlL8 1AX kA1L California None N/A 8.25% Texas 0.5% (additional 1.25% for None 6.25% prepayment) New York None N/A 4.0% Florida 2.5% $360 per year* 6.0% llinois 1.75% None 6.25% Pennsylvania 1.0% None 6.0% Ohio 0.75% None 5.5% Michigan 0.5% (applies to frst 4.0% of $180,000 per year; $240,000 6.0% tax; 0.75% for prepayment) per year for prepayers Georgia 3% to 5.0% (tiered rate based None 4.0% on tax collection amount) North Carolina None N/A 5.75% *Amount is per retailer location. 6285&(: Federation of Tax Administrators. 158 TLXAS STATL GOvLRNMLNT LFFLCT|vLNLSS AND LFF|C|LNCY LLG|SLAT|vL 8UDGLT 8OARD STAFF [ANUARY 2011 RLDUCL GLNLRAL RLvLNUL LOSS FROM SALLS TAX D|SCOUNTS I|GUkL 4 1LXA8 8AlL8 1AX DA1A 8Y ANNUAl 1AXA8lL 8AlL8 8kACkL18 I|8CAl YLAk 2009 DOllAk VAlUL OI D|8COUN18 NUM8Lk OI 1AXIAYLk8 1HA1 kLCL|VLD A D|8COUN1 DOllAk kANGL 1O1Al AMOUN1 8U8!LC1 1O 8AlL8 1AX 81A1L 1AX OwLD 1|MLlY I|l|NG D|8COUN1 IkLIAYMLN1 D|8COUN1 1|MLlY I|l|NG D|8COUN1 IkLIAYMLN1 D|8COUN1 1O1Al NUM8Lk OI 1AXIAYLk8 Less Than or Equals 0 ($1,225) ($77) $0 $0 $0 $0 192,905 $.01 to $200,000 11,218,824,279 701,176,517 2,816,997 5,762 289,387 124 387,343 $200,001 to $400,000 9,493,983,255 593,373,953 2,606,769 5,842 32,679 47 33,220 $400,001 to $600,000 7,943,409,410 496,463,088 2,240,132 7,705 16,003 32 16,230 $600,001 to $800,000 6,557,219,057 409,826,191 1,875,088 10,153 9,395 30 9,485 $800,001 to $1,000,000 5,538,030,540 346,126,909 1,590,740 9,901 6,156 22 6,196 $1,000,001 to $1,200,000 4,747,932,816 296,745,801 1,370,010 16,304 4,293 24 4,328 $1,200,001 to $1,400,000 4,005,662,917 250,353,932 1,160,022 10,339 3,075 14 3,090 $1,400,001 to $1,600,000 3,457,037,866 216,064,867 1,008,893 12,631 2,297 15 2,312 $1,600,001 to $1,800,000 3,242,405,082 202,650,318 945,191 12,771 1,899 14 1,911 $1,800,001 to $2,000,000 2,878,324,188 179,895,262 842,408 13,823 1,508 11 1,519 $2,000,001 to $3,000,000 11,093,044,015 693,315,251 3,263,538 87,938 4,527 55 4,558 $3,000,001 to $4,000,000 7,846,024,341 490,376,521 2,344,222 138,151 2,266 66 2,273 $4,000,001 to $8,000,000 18,403,477,125 1,150,217,320 5,521,503 344,848 3,333 102 3,337 $8,000,001 to $12,000,000 10,311,756,264 644,484,767 3,125,899 275,065 1,063 46 1,063 $12,000,001 to $16,000,000 7,464,378,008 466,523,626 2,273,389 248,767 538 32 538 $16,000,001 to $32,000,000 18,866,788,615 1,179,174,288 5,764,229 1,791,404 847 116 848 $32,000,001 or Greater 177,871,634,006 11,116,977,125 55,224,331 88,443,732 1,004 338 1,004 TOTALS $310,939,930,562 $19,433,745,660 $93,973,360 91,435,137 $380,270 $1,088 672,160 *Amount subject to sales tax. 6285&( Comptroller of Public Accounts. LLG|SLAT|vL 8UDGLT 8OARD STAFF [ANUARY 2011 TLXAS STATL GOvLRNMLNT LFFLCT|vLNLSS AND LFF|C|LNCY 159 RLDUCL GLNLRAL RLvLNUL LOSS FROM SALLS TAX D|SCOUNTS the remittance. Te cap would be $312 per month for monthly flers and $937 per quarter for quarterly flers. Tis strategy assumes that because of economies of scale, larger retailers are able to absorb compliance costs that smaller retailers cannot. Additionally, since a signifcant portion of compliance costs are fxed costs, a maximum compensation level seems justifed. Based on data shown in Figure 4, approximately 476,000 taxpayers would see an increase in their timely fler discount and 3,450 would be afected by the cap. 35(3$<0(17',6&2817 In addition to the 0.5 percent timely fler discount that retailers retain for collecting and remitting sales tax receipts to the CPA in a timely manner, they are also eligible for a 1.25 percent prepayment discount if they pay their estimated taxes in advance. As shown in Figure 5, taxpayers on a quarterly payment cycle must make prepayments no later than the ffteenth day of the second month of the current calendar quarter. For monthly payers, prepayments are due the ffteenth day of the month of tax collections if on a monthly payment cycle. Since prepayments are made before all taxable amounts have been accounted for, prepayments must be made based on a defned reasonable estimate of tax collections for the reporting period. Te prepayment discount incentivizes retailers to remit sales tax collections in advance of their due date. Prepayments are particularly advantageous to the state at the end of each fscal year, because they allow the state to certify revenue for one fscal year even though it is not yet due. For example, a retailer can prepay estimated sales taxes in August even though they are not due until September or October (the start of a new fscal year). Te pre-payer discount totaled $91.4 million in fscal year 2009. Approximately 1,100 taxpayers prepaid their taxes and earned the combined 1.75 percent timely fler and prepayment discount. Another reason taxpayers may decide to take advantage of the prepayment discount is because the 1.25 percent rate they can earn with the state may be higher than the prevailing market annual interest rate available through other savings vehicles. In other cases, the high rate of return allows retailers to borrow money to make prepayments and still earn enough to cover interest charges incurred from borrowing. Tere was an increase in prepayments from fscal years 2008 to 2009 despite a decline in total sales tax collections in 2009. Te increase in prepayments from 2008 indicates that the low average market interest rates of 2009 could not compete with the prepayment discount rate, prompting retailers to lend their money to the state in the form of sales tax prepayments. According to CPA, the state treasury was earning interest at a treasury pool rate of 2.51 percent in 2009, and 1.57 percent in 2010. Te prime rate for fscal years 2009 and 2010 was 3.25 percent. Tese rates are signifcantly lower than the average 13.27 percent annual rate of return that retailers earned when prepaying. In economic situations where market interest rates are very low, the state incurs a loss and will continue to incur such losses unless safeguards are put in place. I|GUkL 5 8AlL8 1AX IkLIAYMLN1 8CHLDUlL IOk MON1HlY AND OUAk1LklY IkLIAYLk8 MON1H 1AXL8 AkL DUL IOk MON1H 1AXL8 AkL DUL IOk MON1HlY IkLIAYLk8 MON1HlY DUL DA1L OUAk1LklY IkLIAYLk8 OUAk1LklY DUL DA1L January February Jan, Feb, and Mar First Quarter: Feb 15 March April May April, May, June Second Quarter: May 15 June Fifteenth of the month July August July, August, Sept Third Quarter: August 15 September October November Oct, Nov, Dec Fourth Quarter: Nov 15 December 6285&(: Legislative Budget Board. 160 TLXAS STATL GOvLRNMLNT LFFLCT|vLNLSS AND LFF|C|LNCY LLG|SLAT|vL 8UDGLT 8OARD STAFF [ANUARY 2011 RLDUCL GLNLRAL RLvLNUL LOSS FROM SALLS TAX D|SCOUNTS Adjusting the prepayment discount to account for such interest rate fuctuations can help mitigate the loss to the state from prepayments, yet still be advantageous to the retailer. Recommendation 2 would amend Section 151.424 of the Texas Tax Code by adjusting the prepayment discount to the lesser of 1.25 percent or the rate that produces an annualized rate of return equal to 4 percent over the prime rate. Te prepayment discount rate would vary annually based on the prime rate published in the Wall Street Journal on the frst business day of each calendar year. Limiting retailers to a prepayment discount rate, which yields returns signifcantly higher than the prime interest rate, would still allow them to earn an above market return. Capping the prepayment discount rate at 1.25 percent protects the state from incurring increased costs in the case that the rate for traditional interest bearing accounts were to exceed the current prepayment rate. 7$;&2//(&7,21&267678',(6 In 1998, the Washington Department of Revenue studied the cost to business of collecting and remitting sales taxes. Tis study compared the operational costs of retailers in Washington, where a sales tax is imposed, to those costs in Oregon, a state with no sales tax. Te study concluded that overall collection costs, excluding credit card fees, averaged 0.47 percent of sales tax collections for all retailers. Costs were 0.21 percent for large retailers (gross retail sales of more than $1.5 million). Te lower cost for large retailers was attributed to the fact that larger frms will have accounting systems and other operational costs whether required to collect a state sales tax or not. Tis evidence demonstrates that retailers in Texas would incur the same administrative costs regardless of the imposition of a states sales tax since there are still local taxes or remote sales taxes to pay. Terefore, the state sales tax does not necessarily result in additional costs to Texas retailers. A more recent study on the cost of sales tax collection for retail commissioned by the Streamlined Sales Tax Project (SSTP) was published in 2006. Tis national study shows the total impact of collecting sales taxes in 45 states and 7,500 units of local government. Self-reported costs include, for example, hardware needed for accounting purposes, number of remotes sales, training for employees, credit card fees, and fling frequency. Te consideration of certain cost drivers and the inclusion of multiple states with varying tax regulations overstates the costs of collecting taxes on behalf of any one state. Tis study found that tax compliance costs for small retailers are disproportionately higher as a share of sales tax collected than costs for larger retailers. Retail businesses with annual sales of $150,000 to $1 million had sale tax compliance costs that equaled 13.47 percent of total sales taxes collected and those with annual retail sales above $10 million had compliance costs of 2.17 percent. Teir compliance costs went down as a percentage of their total annual sales. As such, a current fat discount rate is more benefcial for larger retailers than for smaller ones. Compliance costs for retailers in the smallest size category are six times higher as a share of sales tax collected than for retailers in the largest size category. Unlike the Washington study which has a control group to compare stores with compliance costs and those with none, the SSTP study accounts for varying multi-state tax rates and regulations which leads to overstated compliance costs. Te Washington studys narrow focus is a more relevant comparison to the compliance costs of Texas taxpayers. I|8CAl |MIAC1 OI 1HL kLCOMMLNDA1|ON8 Recommendation 1 would increase the timely fler discount to 0.75 percent and limit the amount a vendor can retain in the form of the timely fler discount to $3,750 per tax year. Since retailers remit local and state sales taxes at the same time, it is important to note that the cap would apply to only the state portion of the sales tax remittance. While increasing the timely fler discount for small taxpayers would slightly ofset the revenue gains that could be realized from capping large taxpayers, the net beneft to the state is positive. Te CPA is not expected to experience a signifcant administrative burden as a result of this recommendation since retailers would continue to calculate and retain the portion of sales tax collections due to them based on the new ceiling amount. Implementation of this recommendation is estimated to generate an additional net $81.2 million in General Revenue Funds for the 201213 biennium as shown in Figure 6. Adjusting the prepayment discount rate could generate revenue for the state while still providing an incentive to retailers to pay their sales taxes in advance, allowing the state to realize the most beneft from prepayments. Based on fscal year 2009 prepayment amounts, implementing Recommendation 2 could generate $70.8 million in General Revenue Funds for the 201213 biennium. Recommendation 2 assumes that retailers currently prepaying sales tax collections would continue to do so. If implemented simultaneously, the LLG|SLAT|vL 8UDGLT 8OARD STAFF [ANUARY 2011 TLXAS STATL GOvLRNMLNT LFFLCT|vLNLSS AND LFF|C|LNCY 161 RLDUCL GLNLRAL RLvLNUL LOSS FROM SALLS TAX D|SCOUNTS recommendations would yield $152 million in General Revenue Funds for the 201213 biennium. I|GUkL I|VL-YLAk I|8CAl |MIAC1 OI kLCOMMLNDA1|ON8 I|8CAl YLAk8 2012 1O 201 IkO8A8lL GA|N[(lO88) |N I|8CAl YLAk GLNLkAl kLVLNUL IUND8 2012 $74,239,722 2013 $77,736,413 2014 $81,397,798 2015 $85,231,634 2016 $89,246,044 6285&(: Legislative Budget Board. Te introduced 201213 General Appropriations Bill does not include any adjustments as a result of this recom- mendation.