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Fixing Oklahoma’s Sales and Use Tax System
by Geoffrey Long
Abstract
In an ideal world a tax system has a broad base giving the largest tax burden to those with
the greatest ability to pay. Income taxes are developed more progressively where high earners
pay a larger share of their earned income as taxes because they have the ability to pay more. This
system is designed to ease the tax burden on people who don‟t have the economic capacity to pay
a large portion of their income as tax. In reality the tax system is not entirely fair for all
taxpayers. This is especially true for most sales tax systems.
Sales taxes are inherently regressive. First, sales taxes are generally blind to the
taxpayers‟ income level. Individuals who earn the least amount of income pay the same sales tax
rate as those who make the most. Second, far fewer services are taxed than consumer products.
If we assume that high earners purchase a far greater amount of services than low earners we can
see how regressive a tax break on services is. For example, an individual earning ten thousand
dollars a year spends far less on professional services and business services than someone
earning ten thousand dollars a month.
Like all legislation, sales tax codes are also susceptible to special interest lobbying. In
many sales tax statutes you will find a section devoted to exemptions. Some of these exemptions
are admittedly legitimate; however, many make little sense in an ideal and fair tax system.
These issues are especially prevalent in the State of Oklahoma. Compared to many states
Oklahoma is quite regressive, taxing few services and adding unnecessary exemptions regularly.
This is costly for the State of Oklahoma and its residents. Oklahoma is losing potential revenue
and making all Oklahomans pay a higher sales tax rate than they should with a fairer system.
If an inherently regressive sales tax system must be implemented it should be as fair as
possible. Oklahoma could generate more revenue in a fairer way by increasing sales tax on a
broader range of services, repealing unnecessary exemptions, and further promotion of the
Streamlined Sales Tax project to collect a larger portion of use tax. These changes to the
Oklahoma sales tax system would provide a broader tax base that could be taxed at a lower
overall sales tax rate. This reform would shift the sales tax burden on low income families who
spend a large portion of their annual income on consumer products to higher earners who can
afford to pay a sales tax on services. In addition, this would spread the sales tax burden back
onto individuals who have taken advantage of unfair exemptions.
1
Sales tax reform in Oklahoma would provide a significant benefit to the state and all
Oklahomans. Low income families would have more disposable income from a lower sales tax
rate, and Oklahoma would generate more revenue from a broader tax base.
Table of Contents
INTRODUCTION ............................................................................................................................... 2
SALES AND USE TAX BASICS .......................................................................................................... 3
IMPROVEMENTS TO OKLAHOMA’S SALES AND USE TAX SYSTEM ............................................... 4
REVENUE STABILITY..................................................................................................................... 5
ECONOMIC EFFICIENCY................................................................................................................. 6
EQUITY ......................................................................................................................................... 6
INCREASE SALES TAX ON SERVICES .............................................................................................. 8
THE OPPOSING VIEW .................................................................................................................. 10
BENEFITS OF A SERVICE TAX ...................................................................................................... 12
REPEAL UNNECESSARY EXEMPTIONS ......................................................................................... 14
IMPROVE THE USE TAX SYSTEM.................................................................................................. 19
HISTORY OF THE USE TAX .......................................................................................................... 20
STATE CONSTITUTIONAL ISSUES ................................................................................................. 23
CONCLUSION................................................................................................................................. 24
INTRODUCTION
The State of Oklahoma‟s sales and use tax system is in need of modernization to promote
a multitude of state interests. Oklahoma taxes too few services and provides too many
unnecessary sales tax exemptions. Sales tax reform is necessary in the State of Oklahoma to
promote revenue stability, reduce regressivity in the current system, and allow for economic
growth.
Oklahoma can accomplish these worthy goals by broadening the range of services subject
to the sales tax, repealing unnecessary sales tax exemptions, and promoting the Streamlined
2
Sales Tax Project with other states to simplify use tax collection and increase the amount of use
tax collected. These changes are not overwhelmingly complex and could be implemented over
time to ease into the change.
Any improvement in the state‟s sales tax system could go great lengths to promoting the
overall welfare of the State of Oklahoma. Increasing revenue could allow the state to implement
and fund a greater number of state programs or lower the overall sales tax rate. Making
Oklahoma more progressive with a broad-based sales tax system should be a priority for the state
legislature; however, problems will arise with the feasibility of implementing tax reform.
Regardless of what hurdles may arise in the process to fix Oklahoma‟s sales and use tax system,
change is necessary to promote economic growth and fairness.
This paper will outline some of the benefits associated with expanding the sales tax to a
broader range of services, repealing many of the unnecessary sales tax exemptions, and further
expansion and cooperation with the Streamlined Sales Tax Project.
SALES AND USE TAX BASICS
Sales taxes are tracked and imposed by state and local administrators, of which total more
than 40,000.1 Vendors and merchants charge the customer a sales tax which combines the state
tax rate (4.5% in Oklahoma) and the sales tax rate for the locality the purchase is made in.2 In
order to be under the jurisdiction of a state for sales tax purposes the seller must have a sufficient
“nexus” with the state, basically a substantial physical presence.3
1
Sales and Use Taxes in the US, Lowtax Network, http://www.use-sales-use-tax-e-commerce.com, (2007).
2
Id.
3
Id.
3
When a purchase is made from an out-of-state vendor and the goods are shipped back into
the state, the purchaser is subject to a use tax, or a tax on the use, storage, or consumption of
goods within the state.4 Use taxes can be easily ignored by individuals, but are still subject to
reporting and taxation.5
Not all products are subject to the sales and use tax, and states have many differences on
what is taxed and what exemptions are allowed.6 In many states, sales taxes generally reach
tangible goods, exempting or excluding many services.7
Essentially, sales and use taxes are a tax based on the consumption of goods and some
services within a state‟s jurisdiction.
IMPROVEMENTS TO OKLAHOMA’S SALES AND USE TAX SYSTEM
Like many states, Oklahoma‟s sales and use tax system is less than ideal. There are many
changes that could, and should, be made to the Oklahoma tax structure to create a fairer system
with a broader tax base. Simple changes could be made that would increase the revenue for the
State of Oklahoma and lower the tax burden on individuals and families that need a break.
Looking solely at the sales and use tax system, Oklahoma is missing out on valuable sources of
income and is comparatively more regressive than other states. New revenue sources would
improve the tax system by achieving greater revenue stability, increasing economic efficiency,
and improving equity.8
4
Id.
5
Id.
6
Id.
7
Id.
8
Robert Dauffenbach et al., Revenue-Neutral Tax Reform for Oklahoma: Issues and Options, ASstudy for Governor
Frank Keating, Senate President Pro Tempore Stratton Taylor, and House Speaker Larry Adair, (June, 2001), at 18.
4
REVENUE STABILITY
Fluctuations in the business cycle directly effect tax collections.9 Changing the tax
system to increase revenue stability would alleviate stress from these cyclical variations on the
state‟s financial needs. Revenue stability facilitates predictable and consistent implementation of
government programs.10
Recessions slow economic activity and reduce state tax revenue growth, creating funding
difficulties for existing state programs.11 In addition, the demand for state expenditures tends to
increase in times of recession.12 Anybody who follows the financial media has seen many
analysts and experts discuss the potential recession that we may currently be entering. Even if a
recession is not looming it is nearly inevitable that at some point we will find ourselves in a
period of economic downturn affecting not just Oklahoma but all states.
Because of problems with revenue stability states tend to find themselves in a fiscal crisis
during every recessionary period.13 Relying on a broad selection of taxes helps protect a state
from fiscal crisis during recessions, and ensures that all sectors of the economy share the
government funding burden.14 Oklahoma hedges shortfalls in tax collections from cyclical
downturns with its Rainy Day Fund.15 This fund is essentially a savings account where the state
sets aside surplus revenue during good economic times in order to prepare for difficult fiscal
9
Id.
10
Id.
11
Russel S. Sobel & Gary A. Wagner, Cyclical Variability in State Government Revenue: Can Tax Reform Reduce
It?, State Tax Notes, August 25, 2003, at 569.
12
Id.
13
Id.
14
Clay Pope, Report to the Speaker of the Oklahoma House of Representatives on Interim Study #01-17, Reform of
the Oklahoma Tax Code, http://www.lsb.state.ok.us/HOUSE/news5354.htm.
15
Dauffenbach et al., Revenue-Neutral Tax Reform for Oklahoma, at 18.
5
times of recessions and economic downturns.16 Although this fund is helpful, it is doubtful that
we want to place the entire burden of unstable revenues during a recession on the state rainy day
fund when we have the option of creating a tax system that shares some of this burden.17
ECONOMIC EFFICIENCY
Taxes tend to reduce economic efficiency by changing some of the decisions individuals
would make if there were no tax.18 For instance, state tax systems may distort the location
choices of individuals and businesses, reduce household savings and investments, reduce work
effort, and distort household purchasing decisions.19 In addition, taxes that discourage
individuals and businesses from moving into the state will reduce growth.20 Taxes that reduce
savings or work effort will also reduce the state‟s economic growth.21
EQUITY
Equity in a tax system means a fair distribution of the tax burden.22 An ideal tax system
taxes a broad range of people at a low rate. One predominant view of fairness is distributing the
tax burden based on ability to pay.23 Ability to pay is typically measured by income – current or
permanent.24 This raises one of the prime problems with a sales tax system.
Since sales taxes are generally shifted forward to consumers at the ultimate point of
purchase or consumption they are often criticized as being regressive, meaning they constitute a
16
A Primer on State Rainy Day Funds, Talking Taxes, Institute on Taxation and Economic Policy, Policy Brief #25,
(2005), at 1.
17
Dauffenbach et al., Revenue-Neutral Tax Reform for Oklahoma, at 18.
18
Id. at 19.
19
Id.
20
Id. at 20.
21
Id.
22
Id.
23
Id.
6
larger proportion of the income of low-income families than of high-income families.25 A sales
tax is a tax on consumption or purchases. Therefore, those who spend a larger portion of their
income pay a larger portion of their income on sales tax. Data from the Consumer Expenditure
Survey shows that families earning under $30,000 spend nearly all of their income while families
with incomes exceeding $200,000 spend less than 40 percent of their income.26
Equity is an especially important factor when looking at expenditures for necessities such
as food, housing, and clothing. For example, a household with income in the range of $20,000 to
$30,000 spends 54% of their income on necessities and total expenditures are 104% of their
income.27 In contrast, a household with income over $200,000 spends only 16% of income on
necessities with total expenditures reaching only 37% of income.28
These factors are very important for the State of Oklahoma in considering any change to
the tax system. Consideration must be given to the effect that a change has in terms of revenue
stability, efficiency, and equity. A given tax change may increase the revenue of the state but
may cost low-income families a great deal. Additionally, economic growth in Oklahoma must be
promoted to entice new businesses and families to move to the state. This is only a fraction of
the problems associated with the incredibly difficult task of managing and fixing state and local
taxes.
24
Id.
25
Walter Hellerstein, Distribution of the Burden of Retail Sales and Use Taxes, State Taxation: Third Edition ¶
12.03 (2007), at 2.
26
Len Burman & Troy Kravitz, Lower-Income Households Spend Largest Share of Income, Tax Notes, November
8, 2004, http://www.urban.org/url.cfm?ID=1000704, at 875.
27
Id.
28
Id.
7
INCREASE SALES TAX ON SERVICES
Implementing sales taxes on services has a long and controversial history.29 Many states
have extended their sales tax to a varying number of services, but these expansions have not been
comprehensive and typically face great adversity.30 In fact, no state has attempted a broad-based
expansion of sales taxes to services since Florida in 1987 and Massachusetts in 1990, both of
which were later repealed.31
Services Subject to Sales Tax in Oklahoma by Industry
Personal Business Computer Tota
Utilities Services Services Services Admissions/Amusements Other l
8 3 4 2 10 5 32
Source: Federation of Tax Administrators, Sales Taxation of Services, 2004.
The number of services taxed from state to state varies to a great degree. Oklahoma tends
to tax fewer services than many states. Oklahoma taxes a total of 32 services.32 The services
taxed in Oklahoma include 8 utilities, 3 personal services, 4 business services, and 2 computer
services among others.33 Six states tax over 100 services, with Hawaii and Washington being
among the highest at 160 and 157 respectively.34 Many states fall into a range of 55 to 75
services taxed.35
While there are many states that tax fewer services than Oklahoma it is clear that a
broader range is available to be taxed and could provide a more stable and fair tax system. In
29
Michele E. Hendrix & George R. Zodrow, Sales Taxation of Services: An Economic Perspective, 30 FLA. ST. U.
L. REV. 411 (2003), at 411.
30
Id.
31
Are You Being Served?, Tax Administrators News, May 2005, at 34.
32
Id. at 38.
33
Id.
34
Id.
8
addition, broadening the tax base to include more services could allow the state to lower the
overall sales tax rate. Oklahoma‟s Sales and Use Taxes in fiscal year 2004-2005 totaled
$1,700,683,678.09.36 State sales tax alone accounted for over $1.5 billion, sales being taxed at a
rate of 4.5% on the state level.37 Sales taxes are an extremely important revenue source for the
State of Oklahoma making up 24% of the total tax revenue as the second largest source of
revenue behind individual income tax.38 The vast majority of this money goes towards the
General Revenue Fund; however, it is also used for the Education Reform Revenue Fund and the
Teachers Retirement Fund.39 Additionally, sales tax revenue tends to grow with the state
economy over time raising a little over $100 million in 1971-72 to over $1.5 billion in 2004-05.40
States should rely on income taxes and make them as progressive as possible, but sales taxes
should not be neglected.41 Sales taxes should be modernized to include services and goods.42
Over time, there has been a gradual increase of sales taxes on select services.43 Some
states have been much more proactive than Oklahoma in expanding the sales tax to services.
This expansion has covered services such as repair of personal and real property, data processing
and information services, and cleaning services in addition to utilities, entertainment, and hotel
35
Id.
36
Annual Report of the Oklahoma Tax Commission, Fiscal Year Ended June 30, 2005, Oklahoma Tax Commission
(2005), http://www.tax.ok.gov/annrpts.html, at 5.
37
Id.
38
Id. at 39.
39
Id. at 31.
40
Id. at 44.
41
Alice M. Rivlin, Another State Fiscal Crisis: Is There a Better Way?, The Brookings Institute, Policy Brief No.
23, December 2002, at 6.
42
Id.
43
Walter Hellerstein, Taxation of Services, State Taxation: Third Edition ¶ 12.05 (2007), at 1.
9
services.44 Taxing these services offers a great opportunity to increase and stabilize revenue.
Generally, states have not implemented the sales tax on services that could generate the highest
amount of revenues such as construction, professional services, and health care.45
THE OPPOSING VIEW
The idea of increased revenue and lower sales tax rates is appealing; however, taxing
services does have a series of issues and problems. Including certain services in the sales tax
could make the tax less regressive; however, including other services consumed by low- to
middle-income families is likely to have the opposite effect.46
The distributional effect of a sales tax on services depends entirely on which services are
included in the tax base.47 For example, a tax on advertising and professional services is likely to
be progressive, putting a higher tax burden on higher income families.48 In contrast, a tax on
residential repair services may be more regressive and put a larger burden on the lowest income
households.49 Essentially, the argument is that while taxing services sounds progressive, the
overall effect would not be very helpful since some services would put a larger tax burden on
lower income households.50
There is another issue with how business inputs would be taxed with a tax on services.
The retail sales tax, as it is actually implemented in many states, is criticized for the failure to
44
Id.
45
Id.
46
Kirk J. Stark, Forum: Florida Services Tax: The Uneasy Case for Extending the Sales Tax to Services, 30 FLA.
ST. U. L. REV. 435, (2003) at 455.
47
Id. at 455.
48
Id.
49
Id.
50
Id.
10
allow a complete “sale for resale” exemption.51 “The inclusion of business inputs in the sales tax
base creates a „cascading‟ or „pyramiding‟ of the tax burden, with the result that household sales
tax burdens will vary depending upon how many stages of production their particular
consumption bundle went through.”52 For example, assume a company buys some product that it
plans to later resale in a retail setting. If that company has to pay a sales tax of five dollars on
that product, that cost will be passed down to the end consumer. Taxing the intermediate
business input will ultimately raise the cost to the end consumer and require them to pay tax on
that higher cost.
Taxing business inputs is especially problematic when considering taxing services.53
Service industries with high revenue potential such as railroad and motor freight, utilities,
communication, banking, insurance, real estate, advertising, business services, and professions
services produce most of their output for intermediate use.54 Additionally, legislators are
pressured to include services that represent intermediate purchases for business use when
extending the sales tax to services.55 Extending the sales tax to services increases the chance of
including intermediate, business use services that would otherwise be properly excluded under a
sale for resale exemption.56
51
Id. at 456.
52
Id. at 456-457.
53
Id. at 457.
54
Id. at 457-458.
55
Id. at 458.
56
Id.
11
BENEFITS OF A SERVICE TAX
According to economic theory, there is no difference between goods and services
that would justify a tax on one and not the other.57 A sales tax on services is desirable because
service inclusion reduces regressivity and increases neutrality, makes the sales tax more elastic,
raises substantial revenue, and is administratively feasible.58 Although economic and tax policy
suggests that both services and goods purchased for personal consumption should be subject to
an ideal retail sales tax base, most agree that some services, such as medical and dental services,
education, and local transportation, should not be within the scope of the sales tax.59 Because of
these benefits, the State of Oklahoma should increase its sales tax base to include a broader range
of services.
Broadening the sales tax base to cover a greater range of services would be consistent
with patterns in other states and could have a positive effect on economic efficiency.60 In
addition to achieving economic efficiency, a sales tax on services would grow positively with a
predominately service-based economy. Sales tax revenue would be more responsive to economic
growth. As the wealth of society increases over time, there is a trend for the ratio of services
consumed relative to the amount of goods consumed to rise.61 Additionally, a services tax would
have great impact on revenue stability.
57
Walter Hellerstein, Economic and Tax Policy Issues Raised by Exclusion of Services From the Sales-Tax Base,
State Taxation: Third Edition ¶ 12.05[1], (2007), at 3.
58
Id.
59
Id. at 4.
60
Dauffenbach et al., Revenue-Neutral Tax Reform for Oklahoma, at 48.
61
Id.
12
A broader sales tax base tends to create more stable sales tax revenues.62 Finally, a sales
tax on services tends to be more progressive, providing more benefit to lower-income
households. The only drawback for sales taxes on services appears to be the potential for higher
costs of tax administration and enforcement.63
Many economists argue that consumption-based taxation is preferable to income-based
taxation.64 Consumption taxes encourage savings and investment over income taxes. Income-
based taxes discourage individual saving and create tax disincentives to investment.65 In
addition, increasing sales taxes on consumer services should create more revenue stability in the
tax system.66 Broadening the sales tax bases to include all consumer goods and services serves
equity functions as well, reducing the regressivity of the sales tax.67 Finally, taxing all
consumption products and services simplifies the tax system by eliminating arbitrary distinctions
between taxable and non-taxable products.68
Increasing the tax base to include a sales tax on services will encourage savings and
investment, improve revenue stability, increase equity, reduce regressivity, and simplify the tax
system. These factors provide great strength for the proposition that an ideal sales tax would tax
all consumer goods and services at a uniform rate and exempt all business inputs, including
business purchases of services.69
62
Id.
63
Id. at 48-49.
64
Michele E. Hendrix & George R. Zodrow, Sales Taxation of Services: An Economic Perspective, 30 FLA. ST. U.
L. REV. 411, (2003), at 415.
65
Id.
66
Id. at 418.
67
Id. at 419.
68
Id. at 420.
69
Id.
13
REPEAL UNNECESSARY EXEMPTIONS
Created by legislatures, state tax codes are subject to special interest lobbying. This rule
is equally applicable in Oklahoma where, like many states, sales taxes have been eroded by
exemptions that are entirely unnecessary. While many exemptions are completely legitimate
there are some that should be repealed to increase tax revenue and broaden the tax base.
Repealing these unnecessary exemptions would help fulfill the three important goals of revenue
stability, economic efficiency, and equity.
40
30
20 1998
10 2007
0
Sales Tax Exemptions Under
Okla. Stat. 68, Sec. 1357
Two popular exemptions in many states are food and drug exemptions. Some states tax
food at a lower rate, some states tax food but provide an income tax credit, some states do not tax
food at all, and some tax food at the same rate as all sales tax transactions.70 Approximately 30
states provide a complete exemption from state sales tax for food purchases (a few are still
subject to local sales tax).71 Seven more states tax food purchases at a lower rate than the
standard state sales tax rate.72
70
State Sales Tax Rates and Food & Drug Exemptions, Federation of Tax Administrators, January 1, 2007,
http://www.taxadmin.org/fta/rate/sales.pdf.
71
Id.
72
Id.
14
Oklahoma taxes food at the standard state sales tax rate.73 Providing an exemption or
favorable rate for food purchases serves a very important goal for many states. Households with
income between $10,000 and $20,000 are reported to spend 25% of their income on food.74
Households with incomes over $200,000 spend only 5% of their income on food.75
If we assume sales taxes are regressive, giving an exemption or break to food lessens the
regressivity of the tax. Since lower income families spend a much larger portion of their income
on food than high income families, any benefit to food purchases will increase the equity of a
sales tax system.
Drug exemptions are also popular in many states. Prescription drugs are subject to the
standard sales tax rate in only five states.76 Oklahoma is included among the states that provide
for a prescription drug exemption. Nonprescription drugs are a little different among the states.
Eleven states and the District of Columbia provide a complete exemption from sales tax for
nonprescription drugs.77 Not surprisingly, Oklahoma provides no exemption or favorable rate for
nonprescription drugs. Like food purchases, exemptions and favorable rates for prescription and
nonprescription drugs provides a proportionally large benefit to low-income households.
Households with an income of $20,000 to $30,000 spend 54% of their income on
“necessities.”78 “Necessities are defined as food, housing, and clothing.”79 This does not include
73
Id.
74
Len Burman & Troy Kravitz, Lower-Income Households Spend Largest Share of Income, Tax Notes, November
8, 2004, http://www.urban.org/url.cfm?ID=1000704, at 875.
75
Id.
76
State Sales Tax Rates and Food & Drug Exemptions, Federation of Tax Administrators, January 1, 2007. (Alaska,
Delaware, Montana, New Hampshire, Oregon, Illinois only have a 1% tax on drugs)
77
Id. (Again, Illinois only taxes nonprescription drugs at 1%)
78
Len Burman & Troy Kravitz, Lower-Income Households Spend Larges Share of Income, Tax Notes, November 8,
2004, http://www.urban.org/url.cfm?ID=1000704, at 875.
15
prescription and nonprescription drugs. This problem worsens with even lower income.
Households with income between $10,000 and $20,000 spend 75% of their income on these
necessities, not including prescription and nonprescription drugs.80 According to this study, all
medication purchases would have to come out of any discretionary income for low-income
families. Providing a sales tax break for drug purchases could go a long ways in giving low-
income households a little easier time in staying healthy.
Providing exemptions or favorable sales tax rates for food and drugs would provide a
great benefit for low-income households trying to make ends meet. The question then arises:
how do we offset the revenue loss of providing an exemption for food and drugs? This is where
repealing unnecessary exemptions becomes important. A comparison of Oklahoma‟s general
sales tax exemption statute reveals the outlined problems in this state. In 1998 the exemption
statute contained 19 enumerated exemptions.81 The newest 2007 exemption statute has 40
enumerated exemptions.82 Without examining the contents of these exemptions it is clear that
legislatures are passing exemptions at a surprising rate.
Examples of Oklahoma‟s many exemptions include sales of programs relating to sporting
and entertainment events, sales of various telecommunications services, sales of aircraft and
aircraft parts at qualified aircraft maintenance facilities, sales of tangible personal property or
services to a motion picture or television production company to be used in making a music
video or commercial, sales of prewritten computer software that is delivered electronically, sales
79
Id.
80
Id.
81
Okla. Stat. 68, § 1357(1998).
82
Okla. Stat. 68, § 1357(2007).
16
of intrastate charter and tour bus transportation, sales of vitamins and dietary supplements by a
licensed chiropractor, and many others.83
Sales Tax Cost of Particular Exemptions
Water, Sewage, Refuse $12,061,000
Tuition and Educational Fees $18,511,000
Certain Types of Advertising $44,194,000
Aircraft and Aircraft Parts $2,078,000
Sales of Horses $1,390,000
Worthless or Uncollectable Accounts
Credit $25,071,000
Source: State of Oklahoma - Tax Expenditure Report
2005-2006
Oklahoma Tax Commission, Tax Policy Division,
2005-2006
Further examination can be made of the impact exemptions have on state revenue
sources. For example, an exemption on sales of water, sewage, and refuse services has an
estimated sales tax loss of $12,061,000.84 Tuition and educational fees to private institutions
costs an estimated $18,511,000 in sales tax.85 Sales of certain types of advertising exempted
results in a sales tax loss of $44,194,000.86 Approximately $2,078,000 is lost by not taxing the
sale of aircraft and aircraft parts.87 Quite surprisingly, $1,390,000 is lost from not taxing the sale
of horses.88 Finally, the credit allowed for taxes paid on gross receipts subsequently found to be
worthless or uncollectible accounts for a sales tax loss of $25,071,000.89 Regardless of whether
these tax exemptions are fair or not, they illustrate the point that continually providing
83
Id.
84
State of Oklahoma – Tax Expenditure Report 2005-2006, Oklahoma Tax Commission, Tax Policy Division,
2005-2006, at 30.
85
Id. at 34.
86
Id. at 46.
87
Id. at 48-49.
88
Id. at 53.
17
exemptions makes the sales tax system complex and detracts from valuable sources of state
income.
A review of these exemptions should be implemented in Oklahoma to see what is really
necessary and in the state‟s best interest. A Florida proposal required the state legislature to
reduce the state sales tax rate and maintain revenue neutrality by taxing services that were
excluded or exempt if they failed to advance a state public purpose.90 This proposal is interesting
because it required the state legislature to actively review the exemptions and determine the state
purpose they fulfilled. The proposal was designed to broaden the general sales tax base by
forcing the legislature to make a review of the public purpose advanced by current exemptions or
exclusions.91
Any new exemptions or exclusions were also required to state their public purpose. The
legislature was required to state in a single bill the public purpose advanced by any proposed
enactment of new exemptions or exclusions.92 In Florida, the plan was to reduce the sales tax
rate by 1%. To maintain revenue neutrality, existing exemptions and exclusions were to be
taxed. Florida was estimated to lose $2,137.3 million in sales tax revenue in fiscal year 1997-98
by a one-percent rate- reduction; however, there would be an estimated $2,466.9 million increase
in sales tax revenue by taxing the 148 currently exempted sales of goods.93
Unfortunately, tax reform was not a priority in Florida in the good economic times of
1997 and 1998 since the proposal created no new revenue and was not the product of any
89
Id. at 54.
90
Robert L. Nabors, Forum: Florida Services Tax: An Opportunity Lost: Tax Reform and the 1997-1998
Constitution Revision Commission, 30 FLA. ST. U. L. REV. 477, 2003, at 477.
91
Id. at 480.
92
Id.
18
apparent crisis.94 The intent was simply to stabilize Florida‟s revenue streams.95 It is important
that Oklahoma recognize how tax reform now may be valuable in preventing a future fiscal
crisis.
Changes now that act to stabilize tax revenue could stop a fiscal crisis down the road. In
addition, few would argue that Oklahoma is currently enjoying “good economic times.” The
need for any new tax revenue in Florida was left to future legislative debate on increasing the
sales tax rate.96 The time to act is now in working towards a better tax structure. Florida‟s
opportunity for tax reform was lost; however, the need to stabilize the tax base still exists and
must wait for future political action.97 Oklahoma should learn from Florida and act immediately.
Creating a more stable and equitable sales tax system now could prevent a future economic
crisis in the State of Oklahoma.
IMPROVE THE USE TAX SYSTEM
Continuing expansion of the internet and the ability to purchase goods over the internet
creates a new set of problems for state use tax collection. Use taxes create an array of statutory
and constitutional questions when the taxpayer purchased the goods outside the state. Requiring
a vendor from another state to collect and remit taxes to the taxpayer‟s state is highly
problematic. In addition, it is easy for a taxpayer to make a purchase over the internet and the
state never find out.
93
Id. at 483.
94
Id. at 486.
95
Id.
96
Id.
97
Id.
19
Problems with taxing and tracking transactions across state lines are a new breed of
problems for state use tax statutes that were likely not imagined at the creation of these statutes.
Despite these setbacks, advances in cooperation between states, modernization of use tax
statutes, and backing from the federal government could go a long ways to help all states increase
revenue lost through not collecting use tax.
HISTORY OF THE USE TAX
When states initially utilized sales taxes during the 1930s, they found a gap in the tax
structure attributable to the Constitution‟s prohibition from taxing transactions outside of their
borders or in interstate commerce.98 Two concerns were created: (1) states feared the loss of
business to local merchants when people made purchases out-of-state to avoid local sales tax,
and (2) states feared revenue losses resulting from the diversion of sales tax to non-tax states.99
These factors are still relevant today, especially in Oklahoma.
It is easy for someone to find a vendor on the internet from another state for a particular
item that may be difficult or impossible to find in Oklahoma, or perhaps out of the convenience
of not leaving their home. Therefore, when someone does go beyond Oklahoma‟s borders to
purchase an item they should, in theory, pay a use tax in this state. The use tax is levied in an
equal amount to the sales tax that would have been imposed on the transaction if the sale had
happened within the state‟s jurisdiction.100
Constitutional issues are raised when the state tries to tax the vendor or other subject in
another state. States bypass the constitutional obstacle of taxing interstate sales by imposing the
98
Walter Hellerstein, Introduction, State Taxation: Third Edition ¶ 16.01[2], at 2.
99
Id.
100
Id.
20
tax on the use, storage, or consumption of property within the state, which is within its taxing
power.101 Every state imposing use taxes allows a credit for sales or use tax paid to other states
in order to avoid a double taxation problem.102
So what‟s the problem? Simply put, collection. Use taxes are functionally equivalent to
sales tax; the vendor collects the tax from the purchaser then remits the tax to the state tax
agency.103 Because use taxes involve transactions with out-of-state merchants, the question
arises as to whether the vendor has sufficient contact with the state in order to compel collection
and remittance of the state‟s use tax.104
Federal Commerce Clause Doctrine typically will prohibit a state from requiring the
vendor to collect use tax if the vendor has no physical presence in the state.105 The United States
Constitution Commerce Clause states that Congress has authority to regulate trade between states
preempting any state action to tax other states or out-of-state entities.106 The basic problem with
use tax collection is that a state cannot require an out-of-state vendor to collect the tax. This
leaves the purchaser the responsibility of reporting to their state any purchases made out of state
that would be subject to use tax. The reality is that many of these purchases go unreported and
untaxed. This is where technology and cooperation between states comes in.
101
Id. at 4.
102
Id.
103
Id.
104
Id.
105
Id.
106
U.S. Const. art. I, § 8.
21
States have launched a cooperative effort with the goal of simplifying and harmonizing
sales and use tax systems.107 This program, titled the Streamlined Sales Tax Project, began in
March 2000 to create a simple sales and use tax system to lower the burden of compliance for all
types of vendors, specifically those operating on a multistate level.108
There were a number of motivating factors that led this project. First, states were
intimately familiar with the complexity of the present system and the burden it imposed on
merchants and tax administrators.109 A unified system would decrease compliance costs and
time for all states involved. Second, the states were aware of the potential threat that interstate
and remote commerce posed to the future of the sales tax, specifically if the system was not
changed to permit or require remote merchants to collect and remit use taxes on interstate
transactions.110
The standard system would essentially allow interstate purchases to be made tax free
causing both the purchaser‟s state and the vendor‟s state to miss much needed tax revenue. “The
states believed that the increased availability of modern technology would permit them to assist
or cooperate with retail merchants in administering a simplified sales tax, leading to expanded
voluntary compliance and, perhaps, to congressional or judicial relaxation of the constitutional
rules that now prohibit them from enforcing remote sellers to collect use taxes on interstate
sales.”111 The same internet that makes interstate purchases so easy can be used to communicate
107
Walter Hellerstein, Fundamental Sales Tax Reform and the Streamlined Sales Tax Project, State Taxation: Third
Edition ¶ 19.01[1], at 2.
108
Id.
109
Id.
110
Id.
111
Id.
22
use tax rates, interstate purchases, and registration for compliance between states, vendors, and
purchasers.
The solution is well under way. The Streamlined Sales Tax Project would go great
lengths to maximize revenue collections for all states. With a higher rate of collections the states
would have better funding for government programs or be able to lower the overall sales and use
tax rate. If the federal government begins to cooperate, states could have one or more common
taxes and share revenues based on a formula.112
Federal legislation could help further state tax goals and assist with implementation of
interstate communication and cooperation. Through the support of Congress, courts can be
convinced that use tax simplification and advances in technology have made it possible for out-
of-state sellers to collect state sales taxes.113 Past hindrances to interstate collection of taxes are
easily remedied with today‟s technology. If this fails, a federal tax or common state tax could be
enacted on all electronic, catalogue, and other interstate or cross-border transactions, and
proceeds would be shared among the states based on a formula.114
STATE CONSTITUTIONAL ISSUES
On significant obstacle in the way of repealing exemptions and expanding the sales tax to
services is Oklahoma‟s constitutional tax limitation amendment. Both changes increase taxes on
an area that was not previously taxed or increases the rate on an industry that was taxed
favorably. Article 5, Section 33 of the Oklahoma constitution requires a three-fourths affirmative
112
Alice M. Rivlin, Another State Fiscal Crisis: Is There a Better Way?, The Brookings Institute, Policy Brief No.
23, December 2002, at 6.
113
Id.
114
Id.
23
vote of both the House of Representatives and the Senate.115 Once the legislature has approved
the bill it must be submitted to the governor for his signature.116 It is clear that getting three-
fourths of the entire legislature on the same page to pass tax reform is quite difficult, especially
tax reform as controversial as sales taxes on services.
An alternative to the legislature is the referendum process. The House of Representatives
may originate a tax reform bill and submit it to the people for a majority vote.117 While this is a
potential option, most voters tend to reject any change that looks or feels like an increase in
taxes.
Despite the numerous benefits associated with these changes in the sales tax system, it
would be highly difficult to actually implement any change due to Oklahoma‟s constitutional tax
limitation amendment.
CONCLUSION
There is a compelling argument for the taxation of consumer services as part of a state
sales tax reform that would create a comprehensive tax on personal consumption with no
unnecessary exemptions.118 The State of Oklahoma is in a position where tax reform would
provide great benefits to the state and residents of the state. Currently, the sales tax base is
narrow, consisting almost entirely of sales of tangible goods and excluding or exempting sales of
most services.119 By increasing the sales tax to cover a broader range of services, repealing
unnecessary and unfair exemptions, and promoting the Streamlined Sales Tax Project to collect
115
Okla. Const. art. 5, § 33.
116
Id.
117
Id.
118
Michele E. Hendrix & George R. Zodrow, Sales Taxation of Services: An Economic Perspective, 30 FLA. ST. U.
L. REV. 411 (2003), at 432.
24
more use tax the State of Oklahoma could increase revenue stability, encourage equity, reduce
regressivity, and promote economic growth.
The biggest obstacle to tax reform in Oklahoma is the state constitution‟s tax limitation
amendment. Since some taxes would be increase by a rate change or an expansion of the base
the Oklahoma constitution requires a three-quarters affirmative vote in both legislative houses
and the governor‟s signature before becoming law.120 The referendum process is also available
for reform. Taking the vote to the people has potential for changing the tax system; however, the
process would require a great deal of positive marketing. Anything that sounds like a tax
increase is generally unpopular.
Despite the problem with this sort of tax reform being potentially unfeasible it is still
important for the State of Oklahoma to improve the sales and use tax system. Oklahoma is far
too regressive and is missing out on potential improvements in revenue stability and fairness for
lower-income families. Even if a total reform is not feasible or possible, small improvements
could, and should, be made to help the citizens of the State of Oklahoma.
119
Dauffenbach et al., Revenue-Neutral Tax Reform for Oklahoma, at 57.
120
Id. at 75.
25
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