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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

     2

    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.