What’s Wrong with Automatically
Taxing Business Inputs?
Tax & Budget Reform Commission
December 14, 2007
Gene Adams
Coalition to Protect Florida’s Economy
Coalition to Protect
Florida’s Economy
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20+ business associations in Florida
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Representing 212,000 employers in Florida
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Florida Association of Insurance Agents which represents 18,000 insurance professionals
and their employees
18,600 members of the Florida Institute of CPA’s
160,000 Realtors
30 members of the Minerals and Chemistry Council
National Federation of Independent Businesses, 12,000 small businesses in Florida
16,000 companies are manufacturers according to the Manufacturers Association of Florida.
6,200 Printing Firms in Florida according to the Printing Association of Florida
Florida Farm Bureau 32,000 full-time farmers
Representing over 3 million jobs in Florida
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Florida Chamber members with 3 million employees
75,000 printing firm employees
Florida’s Current
Business Tax Climate
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COST/ E&Y Study of State & Local Tax Burden
(March 2006)
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Florida generally perceived as low tax state—due to personal taxation
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Florida above national average in business taxes as percent of private
sector gross state product
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Florida at 5.4%
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U.S. at 4.8%
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Southeastern U.S. 3.7% (N.C.) to 4.4% (S.C.)
Florida’s Current Business
Tax Climate
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E&Y Study of Property Taxes on Business
Capital (March 2006)
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Florida above national average
(1.02 v. 1.0—2% higher than national average)
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Data based upon taxes through FY 2005
Florida’s Current Business
Tax Climate
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Non-homestead property makes up
approximately 55% of the market value of real
property in Florida
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Non-homestead property bears the burden of
approximately 66% of the property tax burden
in Florida
Florida’s Current Business
Tax Climate
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Florida’s corporations pay a 5.5% tax on
corporate income
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Florida residents pay no income tax
Florida’s Current Business
Tax Climate
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Florida’s “retail” sales tax exempts:
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Food
Drugs
Residential Rents
Residential Utilities
Residential Communications Services
$8.15 Billion in Tax Exemptions for Consumer/Household
Purchases
Florida’s Current Business
Tax Climate
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Business Tax Exemptions: $2.1 billion
Packaging materials ($35 m)
 Sales of boats/aircraft removed from Fla ($74 m)
 Newspaper/magazine advertising inserts ($41 m)
 Parts used for warranty repairs ($45 m)
 Non-retail pharmacies ($235 m)
 Fuel used by utility to generate electricity ($328 m)
 Dealer Collection Allowance ($64 m)
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The Proposals
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CP00002 (McKay)
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CP00007 (F&T Committee)
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CP00012 (F&T Committee)
CP 00002 (McKay)
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Prior to July 1, 2009
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Legislature must repeal RLE ($ 7.909 billion)
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Legislature must tax services and goods to replace lost
RLE
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Legislature cannot make up dollars by taxing food, Rx
drugs, residential rent or utilities.
CP 0007
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Prior to Jan 1, 2009
Legislature shall review each exemption from sales and use tax
Must consider principles of taxation:
Equity, facilitate compliance, pro competitiveness, neutrality, stability,
integration in federal state and local tax systems, serve public purpose
of important state interest
Exempt are groceries, health services, drugs, residential rent, electricity,
heating fuel, items for resale, intangible personal property, tangible
personal property for export, and purchases of agricultural products
for processing or resale
During 2010 session, roll call vote taken on each exemption, one at a
time
Public testimony must be taken in at least two committees of each
house
Any additional revenues are to lower overall sales tax or required local
effort
Section expires 2011, a one time review
CP 0012
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Prior to January 1, 2010
Legislature must begin a review of services not subject to the tax
on sales and use
Must include evaluation of services and identify methods of
compliance and administration
July 1, 2012, all services not subject to the tax are taxed unless
exempted
Exemptions created by law, with a single subject and a single
service identified by the 2007 NAICS code
Any new service exempted from the tax after November 4, 2008,
must advance a public purpose
Section Expires January 1, 2015
Exemption Repeal Issues
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Dollars not there for RLE replacement
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Business Exemptions from Sales Tax
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Interstate Competition
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(aircraft, boats, printing, manufacturing, agricultural
products)
Pyramiding
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(trade-ins, packaging materials, warranty repairs, fuels used
to generate electricity)
Services Tax Exemptions
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No existing statute imposes a tax on services.
How do the mechanics for imposing a new tax
on services spring into being via a “sunset” or
“repeal” process?
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1987 law consumed more than 9 pages Fla. Statutes
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1988 FDOR emergency rules were 215 pages
Services Tax Issues
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Competitive Issues Across States
Very few states tax business services.
 Services are intangible—many can be provided from
any location. Data processing, accounting, legal,
financial services can be provided remotely.
 Where is a service sold? Unlike goods, no title
transfer to track.
 Where is a service used? Where does a multi-state
business use a service?
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Services Tax Issues
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Consider example of Southeast Toyota
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Roughly 5600+ employees in Florida
Services provided on vehicles at Port of Jacksonville
taxable.
Services provided at Port of Brunswick not taxable.
What is Florida’s competitive position?
Printing industry is highly competitive
All copy and artwork can be transmitted digitally—Mail
centers
Printing can be shipped
7 percent cost of inputs would be an extreme competitive
disadvantage in information economy
Services Tax Issues
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Definitional Issues—what constitutes a service?
Do services performed by employees constitute
taxable services?
 If not, large integrated firms enjoy advantage over
smaller firms that out-source printing, legal,
accounting and similar services.
 Same is true for large integrated homebuilding
companies versus smaller firms that utilize subs.
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Services Tax Issues
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Pyramiding Issues
Business services are inputs to final consumer goods
or services
 Much of $23 billion in estimated tax on services is
from taxing business inputs
 Exempting consumer services is politically attractive
(witness 1987 exemption for haircuts)
 But taxing business inputs turns retail sales tax into a
tax on business
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Review Exemptions & Exclusions
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Review of exemptions and exclusions can and
has occurred twice within last 20 years
Legislature can review again at any time
Business community does not oppose a review
Business community opposes automatic taxation
without affirmative act of elected officials