Sales-Tax Exemption Bill: Real Reform?

March 27, 2012

Investigative Reports

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TaxesThe latest S.C. House proposal to eliminate many state sales tax exemptions is a watered-down version of another House bill that has been stuck in committee, a review by The Nervehas found.

Over the years, lawmakers have caved in to special interests seeking sales tax exemptions – everyone from sweetgrass basket makers to more recently, aerospace giant Boeing Co.

Sales tax exemptions collectively cost the state $2.7 billion annually, according to a 2010 report by the legislatively created S.C. Taxation Realignment Commission (TRAC).

The group recommended repealing or amending more than 60 of the exemption categories, estimating it would increase tax revenues by than $600 million annually, in exchange for lowering the state sales tax to 5 percent from 6 percent.

A bill (H. 4271) introduced last May by Rep. Shannon Erickson, R-Beaufort, went even further, proposing to do away with 72 of 78 categories of exemptions under one law, and to lower the sales tax to 3.85 percent.

Her bill, which received little publicity outside a story by The Nerve last year, hasn’t made it out of the House Ways and Means Committee.

Meanwhile, House Republicans earlier this month introduced a package of seven bills, including a proposal to eliminate sales tax exemptions, which they contended in a press release would bring “comprehensive tax reform.”

But The Nerve’s review of the sales-tax exemption bill (H. 4995), sponsored by Rep. Tommy Stringer, R-Greenville and chairman of the House Republican Caucus Tax Reform Study Committee, found that it would eliminate only 39 of the 78 exempted categories under Section 12-36-2120 of the S.C. Code of Laws.

In contrast, the March 12 House Republican Caucus press release announcing the seven-bill package said Stringer’s bill would eliminate “two-thirds of the special interest sales tax exemptions while preserving the ones that benefit families.”

Stringer’s bill would eliminate a provision of another law exempting individuals 85 years or older from paying 1 cent of the state sales tax on any “tangible personal property.” The state in a $7.5 million, court-approved settlement about 10 years ago agreed to pay refunds to seniors who were charged the extra penny.

Contacted last week by The Nerve, Stringer said he believes his legislation would reform the sales tax structure while not hurting the state’s tax coffers.

“If there are groups that want to eliminate more exemptions, this bill will give them an opportunity to do so while being revenue neutral,” he said.

Efforts by The Nerve last week to reach Erickson, who is a co-sponsor of Stringer’s bill, were unsuccessful.

Special Interests Protected

Like Erickson’s proposal, Stringer’s bill would leave intact existing state sales tax exemptions on groceries, prescription medicine, durable medical equipment and utility bills. But Stringer’s proposed legislation also protects many exemptions given to the agriculture and manufacturing sectors.

Chicago-based Boeing, for example, which The Nerve two years ago projected would receive at least a half-billion dollars in taxpayer-backed incentives to build its North Charleston aircraft assembly plant, could continue, under Stringer’s bill, to avoid paying sales tax on the purchase of computer equipment and the “generation of motive power for test flights of aircraft.”

Against the backdrop of Stringer’s and Erickson’s bills is a pending case before the S.C. Supreme Court that calls for the elimination of the 78 exempted categories under Section 12-36-2120; and a $300 sales-tax cap under another law, 12-36-2110, on the purchase of cars, motorcycles, boats and airplanes.

The lawsuit, filed directly with the Supreme Court in March 2011, contends that the state exempts more sales taxes than it collects – $2.7 billion compared to $2.1 billion – and that the exemptions under the two laws in question “amount to an arbitrary classification of different entities for tax purposes that is unconstitutional.”

The five-member high court heard oral arguments in the case in November, though it hasn’t ruled. The justices are under no legal deadline to issue a ruling.

Flaws in Bill

Contacted last week by The Nerve, Columbia attorney Dick Harpootlian, one of the lawyers representing the plaintiff in the Supreme Court case and chairman of the state Democratic Party, blasted Stringer’s bill.

“I find it fascinating that the Republicans would use the tax structure to create winners and losers,” Harpootlian said. “If you exempt Boeing (from paying state sales taxes), why wouldn’t any industry get incentives?”

Burnie Maybank, a two-time former director of the S.C. Department of Revenue and head of the state Taxation Realignment Commission, told The Nerve last week that although the bill is a step in the right direction, he believes there are several problems with it. He pointed out, for example, that the bill doesn’t:

  • Specify how much the sales tax would be cut in exchange for eliminating exemptions;
  • Deal with the $300-sales-tax cap on vehicle purchases; or
  • Address Internet purchases

“It’s definitely a positive bill,” said Maybank, an attorney with the go-to economic development law firm of Nexsen Pruet in Columbia, which was a key player in the Boeing incentives deal. “I just don’t think it goes far enough.”

In an interview last week with The Nerve, Stringer said the exemptions that would remain intact under his bill would include “ones that affect the majority” of the manufacturing and agriculture sectors, as well others that were “broad in purpose,” such as food and medicine purchased by individuals. Other more recently enacted exemptions were kept if they had automatic review periods, he said.

“It was very difficult to come up with something hard and fast,” Stringer said about choosing what exemptions to eliminate. “I communicated extensively with (the state Board of Economic Advisors) to make sure we understood the impact.”

The BEA has not yet produced a revenue impact statement on Stringer’s bill, which was introduced March 13.

Like Erickson’s bill, Stringer’s proposal is before the Ways and Means Committee, though a hearing has not been held. Still, Stringer said he is optimistic about the bill’s chances in the House, noting, “I’m operating under the assumption that it’s going to move through the House.”

Whether, however, there is enough time for the bill to clear the Senate and get it signed into law –assuming Gov. Nikki Haley approves a final version or if her veto is overridden – before the end of this legislative session remains to be seen. Critics of the seven-bill tax package contend that is unlikely, given that legislative sessions typically end in June.

Reach Brundrett at (803) 254-4411 or rick@thenerve.org.