TEI Issues Policy Statements Regarding the Sales Taxation of Business Inputs, Trailing Nexus, and the Confidentiality of Taxpayer Information.

• Author: Gordon-Brown, Marji
• Position: Tax Executives Institute

On August 25, 2017, TEI issued policy statements regarding the Sales Taxation of Business Inputs, Sales Tax Filing Requirements After Nexus Ceases (Trailing Nexus), and the Public Disclosure of Confidential Taxpayer Information. The policy statements were prepared under the aegis of TEI's State and Local Tax Committee, whose chair is Marji Gordon-Brown. State and Local Tax Committee members Angela Pitale, Roger Sponseller, and Jamie Fenwick coordinated the drafting of the policy statements with Pilar Mata, TEI's tax counsel.

State and Local Tax Policy Statement Regarding Sales Taxation of Business Inputs

Retail sales taxes are designed to tax final consumption. Businesses are not the ultimate consumers of goods and services they purchase. Tax Executives Institute, Inc. therefore opposes the application of sales taxes to business inputs. Imposing sales taxes on business inputs increases consumer prices by imposing multiple instances of taxation as goods and services move through the supply chain. This disguises the true tax burden on goods and services and distorts consumer and business choices about which inputs to purchase, where to locate jobs and investments, and how to organize their business structures.

Sales taxes (and corresponding use taxes) were initially designed as a tax on the final consumption of goods and services by the ultimate consumer. Businesses, by their nature, are not ultimate consumers of anything; therefore, theoretically, business inputs i.e., goods and services used by businesses in production and sale of their goods and services, should not be subject to sales taxes.

TEI opposes the application of sales taxes to business inputs on the grounds it violates the tax policy principles of transparency, neutrality, simplicity, efficiency, and economic growth. Subjecting business inputs to sales taxes causes several issues, including:

Impact on Ultimate Consumers:

* Businesses are not the ultimate consumers of goods and services they purchase. The taxation of goods and services sold to businesses will either (a) be reflected in the price of property or services the business sells, resulting in higher consumer prices, or (b) result in reduced activity in the state by the business, resulting in lower wages or employment.

* Imposing sales tax on businesses' purchases of goods and services results in multiple instances of taxation as goods and services move through the supply chain. This problem is often referred to as "pyramiding" and is not fully addressed by allowing exemption certificates, as such certificates only apply to goods that businesses resell or use in further production. By embedding the sales tax paid by businesses in the final price of goods and services sold to consumers, the actual sales tax paid is a multiple of the sales tax stated on the final sale to the consumer.

* The Center on Budget and Policy Priorities (CBPP) states hidden sales taxes are even more regressive than the visible...