People can get emotional over sales tax exemptions, but a new study from George Mason Univeristy’s Mercatus Center in Wisconsin suggests that they should save their energy. The researchers have concluded that more exemptions lead to a higher overall sales tax rate, not just in Wisconsin but in all states. The premise of the study is that politicians want to make a certain target of revenue. The researchers found that when there are more exemptions, sales tax rates are increased to meet the revenue needs of the state. For instance, if a state decides to exempt apples, they’ll have to raise the sales tax rate slightly on taxable goods to make up for the loss in revenue on apples. If it’s just apples, the difference might be so minimal that it might not matter, especially if apples don’t make up an important part of the state’s economy.
However, if the state has enough of these minimal exemptions, they might be well under their revenue goals from sales tax. At this point, they’ll tend to raise rates elsewhere to make up the shortfall. The overall sales tax burden remains the same, but the effects may shift from one group to another. If you make airplanes, an exemption for apples might not even get your attention, while an increase in the sales tax rate for your state might give your competitors a boost. There are also philosophical differences. Some people believe in lower overall rates with very few exemptions whereas other people believe in higher overall rates with more exemptions to make the system more fair.
While both approaches have their positives and negatives, each system will affect your business in a different way. If you’re spending too much time with your sales tax filing tasks to care much about updates in sales tax laws, contact us for a free evaluation of our software—it can greatly reduce your time and increase your accuracy on sales tax, leaving you more time to take care of bigger tasks.