STARTING FRIDAY, nonprofits will no longer have to pay the state’s 6 percent sales tax on clothing for poor children or materials to fix up homes for the needy. The items will be officially listed as sales tax exemptions No. 81 and 82 in the S.C. Code of Laws, a list that began with the institution of the state’s first 3-cent sales tax in 1951 and is added to nearly every year.
The last time the Legislature repealed a sales tax exemption was in 1990, when it voted to start taxing purchases in prison canteens. That was part of a massive recodification of the sales tax, which itself was one of 76 entirely new laws that were crammed inside the state budget bill, so it’s quite possible that no more than a handful of legislators even knew about it.
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I can’t swear that’s the only exemption that has ever been taken away, but the experts I talked to at the Revenue Department and the Senate Finance Committee couldn’t come up with any others.
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Lawmakers did allow a partial exemption of the sales tax on groceries to expire in 2001. But that was a temporary exemption they had just passed the previous year, and in any event, groceries got a complete and permanent exemption in 2007.
All of that is a long way of telling you about the most extraordinary thing the General Assembly did this year. It wasn’t retiring the Confederate flag or almost increasing the gas tax or not reforming the ethics law. The most extraordinary thing the General Assembly did this year was … nothing: It did nothing to prevent a controversial tax exemption from expiring. And so on Friday, the same day those two latest exemptions go on the books, the Amazon exemption will go away.
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Federal law says companies don’t have to collect the sales tax for states where they aren’t physically located, and Amazon demanded a state exemption from that duty in return for opening distribution centers here. This give-away was fought by local retailers, who didn’t want to essentially subsidize a business that is putting them out of business. In the end, though, the Legislature agreed to give the online retail behemoth a 4 1/2 year pass. And amazingly, the Legislature did nothing to stop the exemption from expiring on schedule.
Technically, it wasn’t a sales tax exemption, because we have always been required by law to report and pay taxes on our untaxed online purchases. But only a handful of us ever did that, and the law walks and talks and quacks like a sales tax exemption. It’s so rare for the Legislature to do anything smart on tax policy that I say we need to call the demise of the Amazon exemption a repeal of a sales tax exemption, and celebrate it.
The effect on the state’s $7 billion general fund budget will be negligible: The state expects to collect an additional $3.8 million in the six months remaining in this fiscal year and $5.4 million in the following, full fiscal year. Another $2.8 million is expected to be collected for schools and local governments this year, increasing to $4 million in 2016-17.
What is potentially significant is the breach in the “no exemptions repealed” barrier that had held for a quarter century.
Since the 1990 repeal of the prisoners’ perk, the Legislature has added 43 more exemptions. (Many of the exemptions cover multiple categories, so the actual number of categories exempt is around 120.)
The Board of Economic Advisors put the value of the exemptions in 2012 at $3 billion, nearly as much as the $3.5 billion the state collected in sales taxes. That doesn’t count the $1 billion in taxes that a now-six-year-old study said we don’t collect on services considered “feasible” to tax. It also doesn’t count the $250 million a year that a 2014 National Conference of State Legislatures report said we’re losing in all of those taxes on Internet purchases that federal law makes it nearly impossible to collect.
Those numbers mean that the total tax exemptions — $4.25 billion, very conservatively speaking — eclipse total sales taxes collected.
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Those numbers explain why we have one of the highest sales tax rates in the nation, at 6 percent statewide, at least 7 percent in 40 of our 46 counties and 9 percent in some, plus local restaurant taxes: When your tax code is more loophole than whole, you have to set the rate much higher than you otherwise would.
Those numbers explain why the Legislature needs to make the Amazon exemption the first of many it repeals.
Some exemptions are justifiable, but for context, consider: If we repealed all the product exemptions, we could slash our sales tax by nearly half and still collect the same amount of money. If we taxed a few more of the 168 categories of taxable services (we tax just 35), we could cut the tax rate even more … and still collect the same amount of money.
And that flatter and lower tax would be more sustainable and wouldn’t influence so many of our spending decisions — like whether we buy our clothes from Amazon or from the local store that employs our neighbors and pays income and property taxes and has been collecting the sales tax since 1951.
Ms. Scoppe writes editorials and columns for The State. Reach her at firstname.lastname@example.org or (803) 771-8571 or follow her on Twitter @CindiScoppe.