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What’s Wrong with Automatically Taxing Business Inputs?

What’s Wrong with Automatically Taxing Business Inputs?. Tax & Budget Reform Commission December 14, 2007 Gene Adams Coalition to Protect Florida’s Economy. Coalition to Protect Florida’s Economy. 20+ business associations in Florida Representing 212,000 employers in Florida

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What’s Wrong with Automatically Taxing Business Inputs?

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  1. What’s Wrong with Automatically Taxing Business Inputs? Tax & Budget Reform Commission December 14, 2007 Gene Adams Coalition to Protect Florida’s Economy

  2. Coalition to Protect Florida’s 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 CPA’s • 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. Florida’s Current Business Tax Climate • COST/ E&Y Study of State & Local Tax Burden (March 2006) • Florida generally perceived as low tax state—due 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. Florida’s Current Business Tax Climate • E&Y Study of Property Taxes on Business Capital (March 2006) • Florida above national average (1.02 v. 1.0—2% higher than national average) • Data based upon taxes through FY 2005

  5. Florida’s 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. Florida’s Current Business Tax Climate • Florida’s corporations pay a 5.5% tax on corporate income • Florida residents pay no income tax

  7. Florida’s Current Business Tax Climate • Florida’s “retail” sales tax exempts: • Food • Drugs • Residential Rents • Residential Utilities • Residential Communications Services • $8.15 Billion in Tax Exemptions for Consumer/Household Purchases

  8. Florida’s 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 (F&T Committee) • CP00012 (F&T 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 intangible—many 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 Florida’s competitive position? • Printing industry is highly competitive • All copy and artwork can be transmitted digitally—Mail centers • Printing can be shipped • 7 percent cost of inputs would be an extreme competitive disadvantage in information economy

  17. Services Tax Issues • Definitional Issues—what 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

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