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[sample company newsletter article; edited for size (not content by MBP) – the original article can be found here:
http://www.minnpost.com/politics-policy/2013/02/tax-experts-economists-say-dayton-s-business-sales-tax-badidea]
Tax experts, economists say business-to-business sales tax is a bad idea
By Steven Dornfeld, MinnPost.com, February 18, 2013
Most tax policy experts would endorse — at least in concept — Governor Mark Dayton’s proposal to expand
Minnesota’s sales tax to clothing and consumer services. Broadening the sales tax base would modernize the tax
code to reflect our service-oriented economy, stabilize the sales tax as a source of revenue and reduce the
inequities that result from the current law.
But economists and tax policy experts strongly question the wisdom of Dayton’s plan to extend the sales tax to
business-to-business services, including accounting, advertising, architecture, computer, design, employment,
engineering, legal, management consulting and business support services. They object to the idea of taxing
business-to-business services for multiple reasons, chief among them that it results in “tax pyramiding.”
“If there’s a product or service that has multiple stages of production, when taxes are applied in stages, then you
are applying a tax on top of a tax,” explains Laura Kalambokidis, a University of Minnesota economics professor
and tax expert.
Kalambokidis says the classic example is “the baker who buys the flour, pays a tax on it, and then sells the bread
to the consumer. Then you apply the tax on the sale to the consumer, so it ‘pyramids.’ It’s building so that you
have 5.5 percent or whatever on the inputs. That then gets baked into the price of the good. The more stages of
production, the more time it happens if every input is taxed.”
As a result, critics say, such proposals unfairly tax some products and services more than others by imposing
varying levels of taxes on business inputs as well as the general sales tax on the final product.
A related problem is that the tax is not transparent to the taxpayer, one of the key principles of sound tax policy
espoused by groups such as the Tax Foundation, nonpartisan tax research group based in Washington, D.C.
“It’s a bad tax — it’s a hidden tax,” says Arthur Rolnick, an economist and former senior vice president of research
for the Federal Reserve Bank of Minneapolis. “It’s going to end up distorting business decisions.”
Tax, not business, decisions
Kalambokidis echoed these criticisms, saying the tax could result in businesses making decisions for purely tax
reasons and not sound business reasons.
The business-to-business tax could be particularly hard on small businesses, which may have no option other than
to contract for accounting, legal, payroll and other services.
The state also could have problems administering and enforcing the tax, particularly when it comes to collecting it
on the purchase of services by Minnesota businesses from firms located out of state. In cases where the supplier
of the service does not have a Minnesota presence, the Minnesota buyer would be required to report the
transaction and pay a “use” tax equal to the state sales tax.
Large Minnesota businesses with offices in other states could respond by relocating certain functions to other
states or contracting for services out of offices located elsewhere.
Finally, studies suggest that the business-to-business sales tax would fall most heavily on lower income residents,
making the state’s tax system more regressive. That’s the opposite of the goal being pursued by the governor,
who is proposing to raise income taxes on the top 2 percent of wage earners and make the tax system more
progressive.