The Utah Manufacturers Association has a stake in the current discussion about changes to Utah's three-legged-stool sales tax system and is trying to make sure its voice is heard
Tax reform — and especially sales tax reform — is the topic of ongoing discussion in the state of Utah and the Utah Manufacturing Association is trying to make sure the voice of our membership is part of the discourse. The genesis of the current dialogue was a bill that failed in this year’s legislative session that attempted to address the imbalance in the sales tax structure. As a result of the defeat of HB441, legislative officials are conducting a series of “tax reform listening sessions” around the state to receive input on possible taxation changes.
Most Utahns have little knowledge of the structure that exists in our state for the collection and the subsequent allocation of taxes. Let me attempt an explanation:
In Utah, the tax structure is basically a three-legged stool, made up of property tax, income tax and sales tax. Constitutionally, all income tax revenue is allocated to education funding. We are the only state in the nation with such a specific constitutional mandate. However, this poses somewhat of a challenge, resulting in the imbalance that HB441 attempted to address.
Over the years, our society has continually moved from a goods-based economy to more of a service-based economy. That means that we now purchase more goods and services on the Internet. We used to patronize the local brick-and-mortar stores and shops for our needs. As a result, sales tax collections as a portion of the three-legged stool have slowly declined and haven’t kept pace with the collection of property taxes and income taxes. Another example of decreasing sales tax revenue comes from our more efficient automobiles, which require less gasoline, resulting in a decrease in fuel taxes which fund transportation.
The problem of collection of sales taxes for online purchases was somewhat mitigated in 2018 when the Legislature, with the help of the federal government, addressed the collection of tax on Internet commerce. Although laws were in place for tax to be charged on cyber sales, no mechanism existed for their collection. Folks owed the tax; they just didn’t have a way to pay it.
Although the new laws provided a structure for the collection of sales tax on tangible goods purchased online, they didn’t address the collection of taxes on services ordered over the Internet. Currently, services like haircuts, accounting, legal services, lawn services, pest control and many others purchased from an online portal, are exempt from sale tax.
That’s what HB411 tried to resolve. As you can imagine, the attempt to require your lawn mowing service to collect and remit sales tax to the state went over like a lead balloon. The public outcry — and that of the service providers — caused the legislators to table the measure and launch the public hearing process.
The Utah Manufacturers Association has launched an effort to participate in as many of these public hearings as we can, because when it comes to sales tax reform, our member manufacturing firms have a stake in state statutes and policy. One of our board members, Steve Young of the Salt Lake City law firm of Holland & Hart, is one of the state’s foremost authorities on tax policy and is leading our efforts. Young chairs the UMA Tax Policy Committee.
The Utah Manufacturers Association is participating in many of these listening sessions because sales tax reform goes beyond addressing consumer concerns like taxable Internet purchases and services. We are listening to local businesses, our manufacturer members and citizens as they express their concern in developing a tax structure in our state that is consistent in maintaining a strong Utah economy.
During the past legislative session, UMA expressed caution in developing a tax policy that might unintentionally or inadvertently throw a wet blanket on an otherwise incredible economic engine in Utah. Broadening the base and lowering tax rate is a laudable goal and something UMA encourages as an organization — but with caution. For example, the UMA supports laws — universally accepted by tax policy experts — that would move the bulk of tax collection to the final stage of the consumer product cycle — consumption — and remove it from the various stages of production or development.
In 2018, in a special summer session, the Utah Legislature removed the three-year-life component for sales tax charged on “inputs” to production in the manufacturing industry. The three-year-life provision required that sales tax exemptions for inputs — the things described as purchases that businesses make as a part of their operations, including items such as computers, software, production equipment and office equipment — must have a useful life of three years or more to be eligible for the exemptions. The Legislature also allowed for manufacturers to receive sales tax exemptions for energy consumed during the production process.
In expanding the input tax exemptions in 2018, the Legislature specifically included manufacturing for several reasons as cited in its “Economic Report to the Governor.” The report cited the internationally competitive nature of the industry; the lack of need for manufacturers to be close to their customers, thus necessitating our state to be competitive in attracting companies; the fact that manufacturing exports goods and services and imports wealth into the state; and that Utah manufacturing wages are 21.7 percent higher than the average Utah non-agricultural wage.
The UMA has been working for the removal of this sales tax on inputs for nearly 20 years. The exemptions passed in 2018 are valued at roughly $60 million a year in savings to manufacturers which will inevitably be rolled right back into their businesses for the purchasing of more equipment, hiring of new employees and expansion of facilities.
The UMA will continue to work with the Utah Legislature and the executive branch to ensure that tax reform addresses the needs of the structural imbalance currently existing, but also helps us achieve our economic goals without unintended consequences to the business community — and especially to the manufacturing industry.
Todd R. Bingham serves as the president and CEO of the 113-year-old Utah Manufacturers Association. Prior to UMA, he was the president of the Utah Mining Association.