Sales Tax Discount Costs State $20 Million-Plus Per Year

October 11, 2011

Investigative Reports

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The NerveHow would you feel if the great state of South Carolina compensated you for filing and paying your taxes on time – and gave you a little extra for doing so electronically?

Sounds like something out of the Twilight Zone?

Well, while Amazon.com has drawn much attention for wrangling a sales tax collection waiver out of the General Assembly, brick-and-mortar retailers of all sizes across the state are benefitting from an obscure tax perk known as “vendor discount.”

Under state law, businesses that file and pay their sales taxes on time receive a discount of up to $3,000 per year – plus another $100 if they E-file. That’s a total potential vendor discount of $3,100 annually per company.

Relatively speaking, it’s not a lot of money for the Wal-Marts of the world, and it might not even be a difference maker for small mom-and-pop shops.

In the aggregate, however, vendor discount adds up to big dollars.

State coffers lose an estimated $22 million per year to vendor discount, according to the S.C. Taxation Realignment Commission.

Dubbed TRAC, the commission was a special panel the Legislature created to study and recommend ways to reform most of the state tax code. TRAC issued its final report in December 2010.

Good Jobs First, a nonprofit policy group headquartered in Washington, D.C., puts South Carolina’s annual losses to vendor discount even higher – at more than $24.6 million, according to a November 2008 report by the organization.

On its website, Good Jobs First says it is dedicated to “promoting corporate and government accountability in economic development and smart growth for working families.”

The money rebated to businesses under vendor discount would otherwise go into the state’s general fund, which provides a mainstay of revenue for basic services such as education and law enforcement. The sales tax is a chief source of general fund money.

In both TRAC’s estimate and that of Good Jobs First, the total annual vendor discount exceeds the yearly budgets of several state agencies.

The state attorney general’s office, for example, is budgeted at about $17.1 million this fiscal year.

South Carolina is not alone when it comes to vendor discount. At the time Good Jobs First published its report, the group said 26 states had such laws.

“We estimate that the 26 states together lose just over $1 billion a year in (vendor discount) revenue,” the report says. It notes that, unlike South Carolina,  some states do not cap their vendor discounts.

The report is titled “Skimming the Sales Tax: How Wal-Mart and Other Big Retailers (Legally) Keep a Cut of the Taxes We Pay on Everyday Purchases.”

Philip Mattera, research director for Good Jobs First and author of the report, says the group has not systematically analyzed vendor discount laws since issuing its report nearly three years ago.

“We do know that a few states have made adjustments to their vendor discount policies,” Mattera says. “But there are still a lot of states out there that are giving away all this money.”

Generally, vendor discount laws were enacted in the beginning decades of the 20th century to compensate merchants for collecting and remitting sales tax. Back then, it was a laborious, manual process. Today, it’s computerized.

“And yet the discount has not gone down,” says Burnie Maybank, a Columbia attorney who was chairman of the TRAC panel.

Indeed, many states have not kept up with the times in their vendor discount laws.

The TRAC report describes South Carolina’s statute, passed more recently in 1990, as an incentive that no longer makes sense.

“When accounting and funds tracking were done manually as opposed to electronically, this incentive made greater sense so as to encourage and ensure the timely collection of funds,” the report says.

“However, due (to) the highly automated nature of data processing available today as compared to even 1990, this tax incentive no longer serves as necessary a purpose.”

So, in the modern era, isn’t vendor discount analogous to the state compensating “Joe Six Pack” for not breaking the rules by simply filing and paying his taxes on time?

“It’s a little bit different,” says Maybank, who served two stints as director of the S.C. Department of Revenue.

Unlike corporate, income and property taxes, which taxpayers owe, businesses collect sales taxes on behalf of the state, Maybank notes.

That might be why, rather than repeal vendor discount, TRAC recommended reducing the maximum amount allowed from $3,100 to $1,500 for E-filers, and $1,000 for paper filers. Doing so would boost state sales tax revenue by $16 million per year, the commission estimated.

TRAC’s legislative mandate was to suggest ways to make South Carolina’s tax system more equitable by broadening the base and lowering rates. The panel made many recommendations in its report, but lawmakers summarily ignored the commission’s findings.

Good Jobs First goes farther than the TRAC panel. The group calls for states to nix vendor discount entirely, allowing small businesses time to transition off of it. “But big business should be cut off immediately,” says Mattera, the group’s research director. “There really is no justification for it.”

He says the public is largely unaware of vendor discount. “It’s kind of under the radar often, and the retailers like it that way,” Mattera says.

Some retailer groups certainly seem loath to talk about it.

Robert Adams is a Columbia attorney who was a registered lobbyist for the South Carolina Retail Association during this year’s legislative session. Reached Monday for comment on vendor discount, Adams said, “As a lobbyist I don’t do interviews.”

He referred the inquiry to Fran Preston, another registered lobbyist for the association and president of the North Carolina Retail Merchants Association. Preston did not return two messages left at her office Monday.

Based conveniently near Capitol Hill in Arlington, Va., the Retail Industry Leaders Association also employs two registered lobbyists at the State House.

Jason Brewer, a spokesman for that association, would not comment on vendor discount except to say, “Our position is we think vendor (compensation) has always been a state issue, and we think it should remain a state issue.”

Brewer suggested contacting Adams, describing him as “head” of the South Carolina Retail Association.

Meanwhile, although vendor discount is antiquated and frequently overlooked, a controversy over taxing E-commerce is bringing more attention to the matter.

In 1992, the U.S. Supreme Court ruled that state and local governments cannot force businesses to collect sales tax unless companies have a substantial physical presence in the governments’ jurisdictions.

As a result, South Carolina since 2007 likely has been losing more than $100 million per year in local and state sales tax revenue on untaxed Internet purchases, according to the TRAC report.

Amazon is the most high-profile example of that situation.

Earlier this year, Amazon halted construction of a large distribution center in Lexington County until the Legislature agreed to give the online retailing giant a five-year exemption from collecting sales tax on purchases by South Carolinians.

At first, the House resisted. But, with more than 1,200 jobs on the line, the chamber eventually gave in, Amazon got its tax favor, and the Lexington County distribution center is expected to open soon.

In Congress, pending legislation called the “Main Street Fairness Act” essentially would overturn the U.S. Supreme Court’s ruling and allow states to tax online sales by joining an interstate compact.

If passed, the proposed law actually could lead to bigger and more widespread vendor discounts, because tracking online sales across multiple jurisdictions can be difficult.

But at the same time, such a voluntary measure could modernize vendor discounts and broaden the sales tax base of states that sign onto it.

Reach Ward at (803) 254-4411 or eric@thenerve.org.