Sales Taxes and Sin Taxes

A sin tax is a type of sales tax intended to discourage people from buying a particular item. An extra tax on the purchase of cigarettes, soda, or alcohol may be intended to keep consumers from buying as much if these sinful items — oral least to help reimburse the state for the extra costs of taking care of the health of people who overindulge. Sometimes, however, a sales tax can act like a sin tax when that is not the goal. Kentucky’s new service taxes are an example.

Kentucky has added sales tax to services. If you sell services in Kentucky, no matter where your business is located, you will be responsible for collecting and remitting sales tax on those services. Sales taxes are supposed to influence consumers toward better behavior. Maybe in this case they will have the opposite effect.

In many states, services are taxed, but there are exemptions. Kids’ sports, for example, or gym memberships may be exempt in order to encourage the states’ residents to develop habits of regular exercise. More than 30% of Kentuckians do no physical exercise outside of their jobs, according to the most recent figures, yet the state has chosen to make exercise more expensive. In effect they’ve levied a sin tax on exercise. Kentuckians can still take a walk for free, but even the most basic community sports involvements will now cost 6% more than before.

The same can be said for the sports industry in Kentucky. Adding sales tax to sports activities such as golf courses, tennis courts, and batting cages could make those services unaffordable for many people. This could lead to a decrease in sports participation and a decrease in the overall physical activity of Kentuckians.

Beyond sports

It’s not just fitness. Marriage is another activity that governments usually encourage. Married people are statistically less likely to experience poverty and require government assistance. No state would intentionally create a sin tax for marriage. And yet, the wedding industry is also feeling the pinch of Kentucky’s sales tax change. Weddings are already expensive, even without the added cost of sales tax. Adding sales tax to wedding services such as catering, photography, and venue rental could make it even more expensive for couples to get married. This could have a negative effect on the wedding industry, as well as on the ability of people to get married in the state.

Kentucky has yet to see the long-term results of the change. Often in cases like these, the affected industries lobby for exemptions and the law morphs into something quite different from what it was when it started out. The point is, sales tax isn’t logical. You can’t rely on common sense, what your state does, or what seems reasonable. You need highly accurate automated sales tax compliance software — and really good customer service, too.

Call 479-715-4275 to learn more about how Sales Tax DataLINK can help you make sense of sales taxes for your business.