Sales taxes: an unfinished story

Claude Paquin's picture

It was three years ago that the citizens of Fayette County raised their sales tax to 7 percent. It stayed at that level for one year, then came back down to today’s 6 percent.

In an effort to ensure our voters were exposed to what he thought might be an informed opinion on the subject before casting an important vote, The Citizen editor, aware of my tax expertise, suggested at the time that I contribute my thoughts on what our citizens were being asked to consider.

That led me to write a series of weekly articles on sales taxes, 11 in all and surely well beyond the editor’s expectations, which started with a history of sales taxes in Fayette County and then considered various facets of how sales taxes work and compare with property tax.

The first column started with Jean-Baptiste Colbert’s famous quote that the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing. Colbert was a French economist and Minister of Finance under Louis XIV (1619-83), king of France at a time when people didn’t get to vote on taxes.

One way to reduce the hissing from the populace, to which Colbert never gave any thought, is to have the populace vote to increase its own taxes. Even when the money is misspent, how could it complain?

But it is the plucking I wish to address today.

Once a shopper has parted with the extra amount of money labeled a sales tax, that money becomes part of the gross income of the person or business that collected it. There’s no guarantee that everything that should have been collected as a tax has been charged, and no guarantee it will all find its way to the ultimate tax collector, the state.

When you think about it, the sales tax becomes income to the first collector, so thereafter it becomes a form of income tax on a merchant’s gross income. On taxable items, where the sales tax rate is 6 percent, for every $106 of income that shows up in the till, $6 of that income must be turned over to the state.

Not everyone collects the sales tax that he should, and those who collect may fail to remit it all. That’s where state auditors come in. That also explains how the state earns its commission of 1 percent on the local taxes it collects for the counties’ local sales taxes.

In an era where state and local governments are hurting for revenue, it is not surprising to hear that some states are increasing their collection efforts by hiring more staff to conduct more audits. A front-page article in the business section of the Atlanta newspaper for July 31 tells us about Georgia’s recent efforts to collect more: 95 new auditors, 40 new revenue agents.

One area of active collection effort now in Georgia involves restaurants.

When small groups of people, usually six persons or more, have a luncheon at a local restaurant, it is not uncommon for the business to impose a fixed service charge, quite often something like 18 percent of the basic price, as a substitute for a tip. An auditor would only have to read the menu to find that out.

When a customer leaves a tip on the table, that’s voluntary and not part of the price of the meal. When a service charge is added to the bill, just as when a shipping charge is added to the price of merchandise, that’s considered part of the total charge for the food or merchandise received, and Georgia considers that sales tax is due on the entire amount.

When the merchant does not collect that tax, it is still owed. By the merchant. That’s what some of these audits are all about, and after a restaurant audit the state reportedly walks away with an extra $5,000 to $20,000 from that one restaurant. A good haul for the state; a bummer for the business owner. Small amounts can add up.

Thus there can be some plucking and hissing from a sales tax. Fewer people engage in direct interaction with the state than with an income tax, but just as business is business, taxes are taxes.

Few people volunteer to pay more taxes. It’s also the surprising audit that would produce a refund. The people who are most gung-ho about certain taxes are those who think they can avoid them, and those who think they’ll benefit from them.

Many people don’t seem to realize that our sales tax is also a use tax. If a taxable item is bought outside Georgia and brought to be used in Georgia, it becomes subject to the Georgia use tax, which is the same as the sales tax.

Other states have similar laws. States have their bags of tricks as much as the taxpayers do.

What nobody talks about much in Georgia is the isolated or casual sale exception, recognized in a Georgia Supreme Court case that dates back to 1959, when the tax rate was 3 percent.

Williams v. Suwanee Longleaf Manufacturing Co., 97 Ga. App. 431 (1958), affirmed by the Georgia Supreme Court at 214 Ga. 613 (1959), recognizes an exemption from sales tax for casual sales.

That may account for the disparate treatment of used car sales. When a person sells his used car to a neighbor, it’s a casual sale; when a used car dealer sells a used car to a customer, it’s not (and thus subject to sales tax). There have been attempts in recent years to tax them all, because it’s so easy to collect the tax when the new title is applied for.

As a sales tax was undoubtedly paid when the car was purchased new, the state obviously gets a second bite at the apple.

Are purchases through the Internet, where the seller enjoys the benefit of a U.S. Supreme Court ruling that it can’t be required to collect sales tax if it has no connection to the purchaser’s state and is essentially out of the reach of the purchaser’s state government, subject to the casual sale exception? You will not hear state auditors bring up the Suwanee Longleaf case, to be sure. For them, it’s best forgotten.

As sales tax rates go up, the stakes go up.

The collection of sales tax by the state is not the simple little affair that some people think it is. With some exceptions, income tax is collected roughly 24 times a year, whenever there’s a payday. Sales tax is collectible every day, many times a day, in many venues, though a middleman. As the rate goes up, expect more aggressive action from both those who seek to avoid it and state employees charged with bringing it home. It does not come home by itself.

The next time you buy a little bit of firewood for your fireplace from a neighbor, ask yourself whether he should collect sales tax from you, or whether you yourself ought to pay a use tax to the state. After how many cords of wood do the sales stop being casual?

Far too many people have lulled themselves into believing that a sales tax is the easy way to solve all manners of government-related problems. With low sales tax rates, a lot of issues were allowed to slide. The more we ratchet up our sales tax, the more we can expect to feel the bite of enforcement. Feeding that puppy makes it bigger and hungrier.

[Claude Y. Paquin, a Fayette County resident, is a retired actuary and lawyer who upon graduation with a doctor of law with distinction degree from Emory University received its Prentice-Hall award as the graduating student demonstrating the greatest proficiency in tax law.]