Virginia currently has a tax code that is an antiquated and often complicated system of levis and credits that hinders economic development. Recently, the Chmura Economics and Analytics firm and Beacon Hill Institute in Boston conducted extensive modeling of the Commonwealth’s sales tax structure in order to describe data that can be used in public policy discussions.
On July 27, Dr. Xiaobing Shuai, Senior Economist with Chmura, gave a presentation which took members step-by-step through the Sales Tax Modeling Study. In Virginia, a business must pay taxes on gross receipts from retail sales where “retail sales” is defined as sales of tangible personal property and service made for any purpose other than resale.
The three research questions asked were:
- Under the current sales tax rate, if all purchases that are currently exempt from sales tax are subject to sales tax, how much additional sales tax will be collected?
- Can incremental sales tax offset the BPOL machinery and tool, and merchants’ capital taxes?
- If incremental sales tax revenues are more than the BPOL, machinery and tool, and merchants’ capital taxes, how much can sales tax be lowered to remain revenue neutral at the state level?
The tax rate for the sales and use tax is 5% of gross receipts. Four percent goes to the state government and 1% goes to local governments. $4.6 billion in sales tax revenue was collected in fiscal year 2010. The Virginia Code allows over 100 exemptions, with the eight major categories being commodities, government, agricultural, service, media-related, nonprofit and miscellaneous exemptions.
Currently, there is an uneven tax burden as it relates to industry. Almost all sales tax is paid by a small portion of industries. Retail makes up 11% of the sales relative to Virginia sales, but retail’s percentage of taxable sales in total receipts is 59%.
After discussing sales tax exemptions, Dr. Shuai showed the group several scenarios that reduced the sales tax rate. He followed up by explaining that removing all exemptions is unrealistic and will encounter issues such as double taxation on certain sales, fair treatment across state lines, constitutional issues in taxing interstate commerce and federal government, and long held tradition in exempting church and nonprofit groups.
Dr. Shuai explained that they met and discussed this topic with interest groups and policy groups, and hope to be able to present this study to the Virginia General Assembly. The presentation was followed by a question and answer session.