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Outline of retailer study

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Outline of retailer study ...

    RETAILERS’ COST OF

    COLLECTING AND REMITTING SALES TAX

    TABLE OF CONTENTS

    Volume 1

    Page

    Executive Summary 3

Chapter 1: Scope of the Study 7

Chapter 2: Overview of Washington’s Retail Sales Tax 9

Chapter 3: Costs and Benefits Involved in Collecting and Remitting Sales Tax 12

    Chapter 4: Other Studies Concerning Retailers’ Costs of Collecting Sales Tax 15

Chapter 5: Study Methodology 17

Chapter 6: Measurement of the Costs of Collecting and Remitting

     State and Local Sales Tax 21

Chapter 7: Focus Group Discussions 34

Chapter 8: Retailers’ Compensation in Other States 39

    Retailers’ Cost of

    Collecting and Remitting Sales Tax

WASHINGTON STATE DEPARTMENT OF REVENUE

    Frederick C. Kiga, Director

    Research Division

    Mary Welsh, Assistant Director

    December 1998

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    In preparing the report, the study team from the Department of Revenue relied upon the assistance and advice of a committee of retailers. The committee members played only an advisory role in the study. Their participation does not imply their endorsement of the results. The committee members are:

Dave Director

    Chief Financial Officer

    Ben Bridge Jewelers, Inc.

Pam Eaton

    Washington Retail Association

Steve Ferrill, Sr.

    President/General Manager

    Ferrill’s Auto Parts

Jan Gee

    Washington Retail Association

Arthur D. Jackson, Jr.

    Vice President, Governmental Affairs/Legal Counsel

    Bon Marché

Frank G. Julian

    Operating Vice President/Tax Counsel

    Federated Department Stores, Inc.

Madelin Kolb

    Owner

    Merle Norman Cosmetics

Greta Sedlock

    Director of Taxes

    Nordstrom

Carmel Tanner

    Excise Tax and Budget Supervisor

    Nordstrom

Bruce Thomson

    Marketing Manager

    Ferrill’s Auto Parts

    Special thanks to the nearly 1,700 retailer taxpayers who answered the survey.

     3

    EXECUTIVE SUMMARY

In fulfillment of the requirements of Engrossed Substitute Senate Bill 6108, this study identifies

    and measures the costs that retailers face in collecting and remitting Washington state and local

    sales tax. The study also estimates the costs of implementing a sales tax rate and/or base change

    and measures both direct and indirect compensation that retailers currently receive. The study

    measures these costs and benefits for large, medium, and small taxpayers. The study also

    examines regulatory procedures that impose costs and burdens on retailers. Finally, the study

    reviews how many other states provide compensation to retailers.

The total cost of collecting and remitting sales tax is 6.47 percent of total state and local sales tax

    collections for small retailers, 3.35 percent for medium retailers and 0.97 percent for large

    retailers. Small retailers are defined as retailers with gross retail sales between $150,000 and

    $400,000. Medium-sized retailers are defined as those with annual gross retail sales between

    $400,000 and $1,500,000 and large taxpayers are those with annual gross sales over $1,500,000.

For all retailers the total cost is 4.23 percent of total state and local sales tax collections when

    weighted by number of taxpayers. The estimate weighted by number of taxpayers best describes

    the cost of sales tax collection for a typical Washington retailer. The total cost is 1.42 percent

    when weighted by dollar amount. The estimate weighted by dollar amount is best to use for any

    type of fiscal analysis. These estimates are costs only; they do not include the benefits listed in

    Table 2. Note that the estimates do not take into consideration the fact that retailers can deduct

    these costs from their federal income taxes.

The average annual state and local sales tax collections for the survey respondents are $18,352 for

    small retailers, $51,662 for medium retailers and $68,765 for large retailers.

    Table 1

    Total Cost of Collecting and Remitting State and Local Sales Tax

    As a percent of total state and local sales tax collections

     Small Medium Large Total, Total,

    weighted by weighted by

    number dollars

    Total Costs 6.47% 3.35% 0.97% 4.23% 1.42%

The above costs can be offset by direct and indirect benefits that retailers derive from the

    collection of sales tax. One benefit is the float (the value of the sales tax collections for the period

    of time that the retailers retain the money; the period of time is adjusted for the lag in payment for

    credit and debit card purchases). To the degree that it is regarded as compensation to retailers for

    sales tax collection, the lower B&O tax rate is the second possible benefit. The following table

    shows these benefits for all taxpayers and for small, medium, and large taxpayers.

     4

    Table 2

    Benefits of Retaining Sales Tax

    As a percent of total state and local sales tax collections

     Small Medium Large Total, Total,

    weighted by weighted by

    number dollars

    Float 0.51% 0.40% 0.40% 0.45% 0.40%

    Lower B&O 0.18% 0.20% 0.23% 0.20% 0.22%

Table 3 on the next page breaks down the costs by type. For most retailers, the greatest costs

    related to sales tax collection and remittance are the costs associated with filing the Washington

    State combined excise tax return. For large retailers the greatest cost is the fee on credit card

    sales.

The results show that the cost of collecting and remitting sales tax is not equal across the three

    size groups of retailers. Small taxpayers face the largest burden, 6.47 percent of sales tax

    collections, large taxpayers the smallest, 0.97 percent of sales tax collections. The average sales

    tax cost as a percentage of sales tax collections is over six and one-half times greater for small

    retailers than for large retailers. To the extent that small Washington retailers compete with large

    Washington retailers, the cost of collecting and remitting sales tax puts small retailers at a

    competitive disadvantage.

Not only are there differences in cost between the size categories, there is also considerable cost

    variation among individual taxpayers within a size category. Individual retailers who are either

    audited, appeal an audit assessment or make honest mistakes in collecting and remitting sales tax

    can face a much larger cost. Similarly, retailers who are not audited or do not make honest

    mistakes face a somewhat smaller cost.

Data on the costs were collected via a detailed survey which was combined with Department of

    Revenue data. The survey was sent to 3,000 Washington retailers. A survey was also sent to 400

    Oregon retailers. The Oregon retailers served as a control group for some of the costs. The

    response rate was 51 percent for the Washington survey and 36 percent for the Oregon survey.

    Industry data and Employment Security data were also used.

In addition to estimating the costs, focus groups were conducted to examine particular problem

    areas that retailers have with collecting and remitting sales tax and to look for administrative

    solutions to those problems.

As of January 1, 1998, 26 of the 45 states that have a retail sales tax allow vendors to keep a

    portion of the sales tax collections.

     5

    Table 3

    Summary of All Costs

    As a percent of total state and local sales tax collections

     Small Medium Large Total, Total,

    weighted by weighted by

    number dollars Additional -- -- -- -- -- clerk/cashier

    hours

    Additional/ 1.59% -- -- 0.69% 0.06% more

    complex

    POS

    equipment

    Additional 0.15% 0.18% 0.006% 0.13% 0.03% customer

    service

    Additional -- -- -- -- -- training

    POS rate 0.32% 0.72% 0.07% 0.42% 0.14% and base

    changes

    Credit and 0.89% 0.74% 0.76% 0.81% 0.76% debit card

    fees

    Total audit 0.012% 0.041% 0.001% 0.021% 0.006% costs

    Storage cost 0.03% 0.02% 0.003% 0.02% 0.006% Appeals cost -- 0.001% 0.0001% 0.0004% 0.0002% Total cost of 3.27% 1.35% 0.08% 1.94% 0.34% filing tax

    return

    Cost of 0.17% 0.30% 0.05% 0.20% 0.08% mistakes

    Total Costs 6.47% 3.35% 0.97% 4.23% 1.42% Float 0.51% 0.40% 0.40% 0.45% 0.40% Lower B&O 0.18% 0.20% 0.23% 0.20% 0.22% Total 0.69% 0.60% 0.63% 0.65% 0.62% Benefits thTable entries with no cost indicate that costs are less than 1/1,000 of a percent.

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    Table 4

    Summary of All Costs

    Average annual cost per size group and total for retailers (SIC 52-59) with incomes over $150,000

     Average Average Average Total dollars

    Small Medium Large (all retailers

    $150 K and

    over)* Additional -- -- -- -- clerk/cashier

    hours

    Additional/ $291 -- -- $2,256,000 more

    complex

    POS

    equipment

    Additional $27 $93 $41 $980,000 customer

    service

    Additional -- -- -- -- training

    POS rate $59 $372 $478 $4,579,000 and base

    changes

    Credit and $163 $382 $5,189 $21,299,000 debit card

    fees

    Total audit $2 $21 $1 $163,000 costs

    Storage cost $6 $10 $21 $181,000 Appeals cost -- $1 $1 $10,000 Total cost of $600 $697 $546 $11,206,000 filing tax

    return

    Cost of $31 $155 $341 $2,438,000 mistakes

    Total Costs $1,187 $1,731 $6,623 $43,178,000 Float $94 $207 $2,731 $11,306,000 Lower B&O $33 $103 $1,570 $6,235,000

    Total dollar amounts represent only retailers classified under SIC 52-59 with over 50 percent of

    B&O activity classified as retailing and with at least $150,000 annual Washington sales.

     7

    Chapter 1

    SCOPE OF THE STUDY

In the 1998 legislative session, the supplemental operating budget bill (Engrossed Substitute

    Senate Bill 6108) required the Department of Revenue to conduct a study to measure the costs to

    retailers of collecting and remitting state and local retail sales tax. The legislation states that:

    “…the department shall, a) identify and estimate the costs for small, medium, and

    large retailers, b) estimate the cost to retailers of implementing changes in tax rates

    and/or the tax base, c) identify current statutory and regulatory procedures that

    impose costs and burdens on retailers, as well as alternatives that would lessen

    these costs and burdens, d) estimate any direct or indirect compensation retailers

    currently receive, if any, and e) review how many other states provide

    compensation to retailers and the nature of the compensation…”

This study is fact-finding in nature and addresses the question posed by the Legislature without

    making recommendations regarding compensation for retailers.

The legislation refers to “retailing.” Retail sales tax in this state is also collected on activities such

    as construction, repair, maintenance, installation, lodging, and some personal services. In

    discussions with the bill sponsor and drafter, their intent was to focus on sales made by traditional

    retail firms, i.e. those assigned to retail categories with Standard Industrial Classification (SIC)

    codes of 52-59. Therefore the analysis is limited to taxpayers classified under SIC codes 52-59

    with more than 50 percent of their B&O activity in retailing.

There are benefits to limiting the focus of the study to retail trade activities. Although the other

    activities incur costs of collecting sales tax, their costs are not as considerable as those of other

    retailers. The sales tax issues for these other retail activities are diverse; their inclusion in the

    study could cloud the results of the main focus of the study. Therefore, this study is limited to the

    costs that retailers in the retail trade sector and restaurants incur in collecting and remitting the

    retail sales tax.

Members of the study team are:

Mary Welsh, Study sponsor, Research Division

    Lorrie Jo Brown, Ph.D., Study lead, Research Division

    Nicole Stewart, Legislation and Policy Division

    John Pittman, Audit Division

    Sue Graham, Legislation and Policy Division

    Steve Smith, Ph.D., Research Division

    Diane Mielke, Research Division

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    The team had considerable assistance and advice from the following Department of Revenue employees:

Dianne Fisher, Research Division

    Nonnie Phan, Taxpayer Account Administration

    Janetta Taylor, Taxpayer Account Administration

    Don Taylor, Research Division

    Stan Woodwell, Research Division

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    Chapter 2

    OVERVIEW OF WASHINGTON’S RETAIL SALES TAX

    Importance and Incidence of Retail Sales Tax

Retail trade is the third largest industrial sector in the state (after wholesaling and manufacturing)

    as measured by gross business income. The retail sales tax is the largest revenue source for the

    state of Washington. In Fiscal Year 1998 retail sales tax collections were $4.7 billion for the state,

    plus $1.3 billion for local governments.

Washington retail sales tax is levied on the sales price of any tangible personal property (unless

    exempted) and certain services purchased at retail. When the sale occurs in Washington State, the

    tax is paid by the consumer and is collected by the seller. (When the sale occurs outside

    Washington State, use tax is paid by a Washington consumer directly to the state.) The basic

    definition of items and transactions subject to retail sales tax is in Revised Code of Washington

    (RCW) 82.04.050. The retailer’s obligation to collect and remit the tax is in RCW 82.08.050.

The tax consists of both a state rate of 6.5 percent and a local rate generally ranging from 0.5

    percent to 2.1 percent (2.6 percent in King County restaurants). Currently, there are eleven

    different types of local sales taxes. These are: a 0.5 percent “basic” tax for cities and counties; an “optional” tax for cities and counties up to 0.5 percent, a tax that ranges from 0.1 to the

    maximum 0.6 percent for transit purposes, a tax of up to 1 percent to fund high capacity

    transportation, and taxes of 0.1 percent for criminal justice, public facilities, and county

    correctional facilities. In addition, there is a unique sales tax of 0.5 percent which only applies to

    prepared food and beverages in King County and three types of local sales taxes which are

    credited against the state sales tax.

Retailers collect the appropriate local rate based on where the transaction occurs. The sale occurs

    at the retail outlet at which or from which delivery is made to the consumer (unless installation is

    involved). Retailers must keep track of their sales in each jurisdiction where they do business and

    report the sales tax collected from each jurisdiction. After the retailers remit the sales tax to the

    state, the state distributes the local tax to jurisdictions based on the information on sales locations

    that is provided by the retailers. The state retains 1 percent of the local collections as a fee for

    administering their distributions. Administration of local sales tax includes other activities, for

    example, supplying information and returns, auditing and enforcing collections. (Note: the law

    allows the state to retain 2 percent of collections. All of the administration fee revenues are

    deposited into the state general fund. None of these funds are retained by the Department of

    Revenue.)

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