Businesses Should Be Allowed to Keep a Percentage of Tax Collections
The state auditor recently released an audit of sales tax collections in Missouri. Part of the audit analyzes how the Show-Me State, like many other states, allows businesses to keep a portion of the taxes they remit to the government. This is called a “compensation deduction.” Businesses that collect sales taxes and submit them by the proper deadlines can keep up to 2 percent of the taxes. Employers that withhold and submit employee income taxes by the proper deadlines can also keep 2 percent of the first $5,000 in taxes withheld, with a gradual reduction for amounts larger than that. Recently, the state auditor’s office suggested that the state consider capping the amount that can be retained for sales tax collections, and others have suggested that the compensation deductions be done away with entirely. The auditor’s office estimated that the deduction for sales tax collections alone cost Missouri state and local governments $93 million in 2008. Is it fair to allow private businesses to keep some of the tax money they collect for the government?
Absolutely. As long as the government forces private businesses to serve as tax collectors for the state, they deserve compensation for that work. When the government compels somebody to perform a service, they should be compensated at some level. For example, jurors receive a daily salary for their compulsory service (albeit a small one). Similarly, in the days of conscription, drafted soldiers always received a salary (again, a small one). It is not right for a government agency at any level to compel performance of a service without providing compensation. Allowing businesses to keep a small percentage of the tax money they collect and remit to the government is part of that right.
Tax compliance is not as quick and easy for businesses as one might think. Missouri has 10 income tax brackets, the second-highest number in the United States, although the low implementation level of the highest bracket simplifies this somewhat. Even with 10 brackets, however, every full-time worker falls into the highest one.
Sales taxes are more complicated, because Missouri has thousands of cities, counties, and special taxing districts with the authority to levy sales taxes. There are 131 sales and use tax exemptions that businesses must account for. Grocery stores have to calculate different sales tax rates for different goods. The city of Saint Louis alone has a combined rate made up of 10 different sales taxes — and it does not include sales taxes applied in specific areas of the city, such as within a transportation development district. A company with multiple retail outlets in Missouri can easily wind up with every one of them charging a different total sales tax rate. And, as any regular voter can tell you, those rates change frequently as sales tax increase proposals appear on the ballots throughout Missouri. Technology has no doubt made compliance easier for businesses during the past 20 years, but keeping up with rate changes and paying people to oversee remittances costs time and money.
It might be reasonable to consider lowering the deduction compensation rate for sales tax collections as the amounts collected rise and economies of scale increase. The state does this now with income tax remittances. But anything else — including capping the amount that can be kept by any one business — constitutes an unfair mandate. Furthermore, limiting the compensation deduction to taxes that are remitted on time provides a strong incentive for businesses to do just that. Ultimately, businesses deserve these measures of compensation for the tax collection work they are required by law to do for state and local governments in Missouri.
David Stokes is a policy analyst with the Show-Me Institute, a Missouri-based think tank.