Thursday, March 20, 2014

What's With All The Sales Tax Exemptions In South Dakota? These Need To Be Examined.

     Are sales tax exemptions ever analyzed, item by item, in South Dakota?  If not, they should be, because we've got 'em up up to our collective eyebrows in this state.  I was reviewing a list of exemptions put out last year by the South Dakota Department of Revenue and couldn't believe how much potential revenue to the state is given up by this 15 page list of goods and services that are exempted from collecting the state's 4% sales tax.  The amount, $582 million a year, is actually pretty staggering in its own right, but when you consider that total revenues raised by the state last year were about $2.4 billion (another $1.6 billion comes from D.C.), that figure represents a enormous chunk of potential income.  Cory Heidelberger over at Madville Times notes that just 17% of it would create the $100 million it would take to bring South Dakota teacher salaries up to competitive snuff with those of our surrounding states.  Just scan that list and see if there isn't a lot of potential to do just that. 
     The best comment in the entire document I linked comes from the DOR  itself.  It notes that "on a case by case basis, the estimates [of potential revenue] provide a valuable benchmark for discussion of whether policy justifications warrant the loss of revenue."   Sounds to me like the tax collectors  themselves see some room for lifting some of these exemptions.  This is a list that must be reviewed--you'll see why when you get a load of some of the exemptions, too numerous to list here--and put under some scope of analysis by our elected officials, whose constant refrain when it comes  to many budget requests is that there's not enough money to fund them.
     Fair enough, but I think we could scare up some more revenues in this state by collecting sales taxes on goods and services whose exemptions may have made sense at one time, but are really outdated and unnecessary now.  For example, South Dakota's ag sector accounts for about $220 million of exempted sales taxes, no doubt a tradition held over from the days when ma and pa farming and ranching was the norm and people in an industry with so much weather and price volatility needed some help from the state to get through the lean years.  Those days are long since gone, as risk management techniques via crop insurance, subsidies and marketing strategies have led to an industry sector in South Dakota that is doing very well, collectively, and can afford to cough up 4% sales taxes on goods and services related to ag production.
     Fact is, I believe the ag sector of this state is the envy of the business community at large, considering that just about every other business I can think of has to pay sales taxes on the most, if not all, the goods and services required for their operations.  I know I do with mine, which I certainly don't begrudge, but do so wondering about the fairness of the overall schemata.  There's no doubt that many of the exemptions listed by DOR have a reasonable basis, but everything considered, I go along with the State's tax collectors and think it's time to re-evaluate whether the "policy justifications warrant the loss of revenue" from some of these exemptions.  Now that the legislative session is over, Governor Daugaard should consider creating a commission to do just that.  We've got almost a year to go over this stuff before our elected officials come back into session.  A good explanation as to the justification for every one of these exemptions needs to be forthcoming. 

9 comments:

  1. I have to agree, but whose ox are you going to gore? There was talk a few years ago of sales tax on grain sales and livestock sales. Pretty hard to push through. Even taxing livestock feed would be a hard one to push through. I would like to see food exempted , but tax them tourists. Just kidding.

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  2. These 15 pages of exemptions could stand a good review. I've both fed cattle and run a retail business, and I can't see why one business was exempted from paying sales taxes on raw materials and operating supplies and services while the other one wasn't. Fuel that's used for ag purposes is tax exempt, but when I'm driving a vehicle in connection with my retail business I pay full boat on the taxes. And why should comissions to stock and commodity brokers be tax exempt. When I was brokering commodities I'm certain I wouldn't have lost a bit of business because I had to tack on a 4% sales tax to my commissions. When you get a minute, scan that 15 page list I linked. It begs to be examined and many of the items could stand reconsideration. Appreciate the comment, Dallis, and the note on tourists. :-)

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  3. John, I think the biggest break Ag gets in SD is in the annual property tax bill from the county treasurer's office. As for sales tax, last time I checked with SD Revenue, the 4% use tax on sale and resale of agricultural and irrigation equipment is the single largest line item contributor to the state sales tax ledger.

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    1. Thanks for the info, Jim. As I note in the piece, there is probably a reasonable basis for some of these items, but the "justification" (using DOR's word) for every exemption needs to be examined. I don't know that there has ever been a commission (I'm eminently correctable on this) that studied this list, line by line, but as taxpayers and residents, I think it's reasonable for us to expect a comprehensive look at this.

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  4. I notice that livestock sales are exempt, but grain sales are not exempted so why are grain sales not taxed? Another tax that has been quietly kicked around is sales tax on real estate sales. the only way I see these exemptions going away is if they all go away at the same time. Everybody's ox gets gored. The problem I have is agriculture is reported to generate a 3% profit then tax sales at 4%. It don't compute. In ag I take what is given for a product, in retail you can adjust the price you charge to show a profit. Since ag is like manufacturing how bout a Value Added. Probably a nightmare to keep track of.
    What I think we really need is a corporate income tax on business over a certain size. They come into this state with this tax built into their business model and get a free ride in south Dakota. I try to buy local every time I can, but local is getting harder and harder to find.

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    1. That list is so full of exemptions that make no sense to me that it seems pretty obvious a lot of special interest politics went into its make-up. The ag component is a big one but represents way less than half of the missed opportunities this state is willing to tolerate. Probably some across the board adjustments would seem fair, but I'd still like to see an item-by-item examination.

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  5. The one that jumps out to me on this issue is the "non-profit" hospitals get purchases tax-free. Sanford is considered to be a non-profit, so does that mean everything they buy is tax free? Even the stuff they charge you for like gowns and aspirin? I know as a school with tax-free status on some items being used, we must pay taxes on goods that are going to be used for re-sale in a fund-raiser. I don't have a problem with that.

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    1. Thanks for the Q and the comment, M Larson. I really don't know the answer to the question, but given the salaries of administrators at Sanford, somebody's making money over there. Nothing against Sanford, but this is why line items like this should be reviewed and analyzed. I hope somebody in the Governor's office or the legislature makes note and brings this up for consideration. 15 pages of line-after-line exemptions seems excessive to me, and I suspect it's been many years that this list has been exhaustively examined and some modifications considered. I'm with you on schools and probably many other public sector entities, but I see so many private ventures on this list that I begin to question its fairness, considering I'm a private sector business owner who pays sales taxes on virtually everything I buy for the biz. Appreciate the comment, maybe you and some other readers can forward this to the Governor's office and get some reaction.

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