Higher Pennsylvania Local Taxes

The "City of Brotherly Love" is about to get a bit more loving as it increases is local tax by 100%. That's right, a doubling of the local Philadelphia City tax from 1% to 2%.  This change is effective December 17th, 2009. Who in their right mind has a tax increase in the middle of the month?  Make it either December 1 or January 1, NOT December 17th. 

In addition to this increase in Philadelphia taxes, the city of Pittsburgh is also getting into the act by increasing its local municipal parking tax up to 40% from the current 37.5%.  A decrease planned for this month has been canceled. 

As I've been blogging for the past 18 months, we are witnessing a paradigm shift in the administration of state and local sales tax.  Although these rate increases have sunset provisions, once they are in place and the revenue starts flowing in, it is very hard to reverse course and reduce the taxes  Since 2000, state and local tax rates have increased over 11% and we are just beginning to see some momentum to these increases.  In many larger cities, the tax rate can exceed 10%.  With rates this high, sales tax is now becoming a serious factor in large ticket purchases.  When rates were 5% or 6% you could accept sales tax and a necessary evil but not something that would necessarily keep you from purchasing an item. At 9% or 11% sales tax is a major issue and could keep folks from committing to purchasing items.  In some cases, it could even drive folks to purchase items over the Internet since there is not tax and no one ever pays the use tax due on the purchase. 

Brace yourself folks.  I'm fearful we are just at the beginning of a rash of "temporary" tax increases. 

Taxation of Internet Sales-Level 1

I was at a technology executive breakfast this morning.  As usual, I was the only sales tax person there which can make striking up a interesting discussion with the CFO or CEO of a technology business a bit challenging.  Out of curiosity, I was asked what TaxConnex is and how we work with technology companies.  To keep matters moving or just to be polite, I was then asked "when will states start taxing Internet sales?"  I was taken back a bit, but then I stated that states have always been able to tax Internet sales just as they have always had the ability to tax mail order catalog sales.  He then replies " I thought the seller had to have a physical presence before the item was taxed?"  At that point, I knew where the confusion was.  This person, as well as 90% of other people, are confusing the taxation of the property purchased over the internet with the party who has the responsibility for collecting or paying the tax.  These are totally separate and independent issues.  The taxation of the property has nothing to do with the ability or requirement of the seller to collect the tax. 

That's when I started talking about "use" tax and how each purchaser has the requirement to pay the use tax to the state if we buy something on the net that isn't taxed by the seller.  He looked astonished and asked when that rule was imposed.  I said "early 60s".  He then proceeded to tell me about all the high-tech Stern and TV systems he had purchased from various on-line retailers who didn't charge him tax. To prod him a bit, I asked if he wanted me to send him a use tax return?  He smiled, and politely declined!! 

Over the years, I've had this discussion countless times.  Mostly with businesses but often with individuals.  For the sake of repetition, the taxation of the property or service purchased on the net is independent from the responsibility of who has to pay the tax.  Given the shortage of cash by the states I think it is just a matter of time before there is some broad based requirement for remote retailers to collect and remit sales tax on sales regardless of the actual contact they have with a state.  I don't know what that will look like or whether that will have any connection with the SSTP initiative underway, but I just sense some movement will take hold within the next few years.

What was North Carolina Thinking?

If you have taxable transactions in North Carolina, you will have 3 tax rates in 3 months.  In August the rate was 4.5%, in September the rate is 5.5% and in October the rate is 5.75%.  Forget the point that this is a 27% tax rate increase in 3 months, the bigger issue is that this process seems overly confusing.  In an effort to get more consistent sales tax compliance from non-resident businesses states need to keep the compliance as consistent and easy as possible. North Carolina has done a lot of juggling to stay in compliance with the SSTP when it comes to tax rates.  A few years ago, they had to re-label the reduced tax on manufacturing items so that they would not violate the SSTP rule on only having single sales tax rate.

Increasing sales tax rates is certainly an easy way to generate some additional tax revenue.  At some point, though, sales tax rates may become so high that they actually begin influencing purchasing decisions.  When that happens, tax revenue could decline which will put further pressure on states to find other ways to increase revenue or decrease services.