Fix sales tax collection system now, abolish breaks later

A growing dispute over sales taxation never may have happened had the Legislature addressed the matter more decisively and rationally – not because clarity could have been provided, but because it hasn’t fixed the controversy it created in the first place.

Act 298 in 2007 created “cultural districts,” which afford sales tax breaks to “original art” sold in them. Earlier this month the state sanctioned four more of them to create 67 total that includes a pair in Shreveport and one in each of Monroe and West Monroe.

The problem comes from enforcement. The statute creates an exacting set of standards for what qualifies for exemption from state and local tax. For example, if one makes by hand beads and then strings these together, that’s undeniably considered art. But take prefabricated beads and do the same, and it’s not. Sometimes furniture, photographs, rugs, and even clothes are; most of the time, they would not be. Generally, this is left up to self-enforcement by sellers, but government has an interest in some oversight.

Worse, statute puts this in the hands of parishes because Louisiana is one of a very few states that does not have a centralized sales tax collection agency. Not only must sellers register with parishes to submit taxes, they have to fill out parish and state forms keeping track of their sales including these kinds of items, and issue certificates of authenticity of originality to buyers. Then, local government has to monitor these sales.

In Shreveport, some sellers have gotten perturbed over this because Caddo Parish has sent agents to arts and crafts fairs held in its districts. They patrol not just to ensure that sellers have registered to forward taxes collected, but recently also to enforce that non-exempt sold articles do have taxes remitted on their sales, and this had led some sellers to complain that officials do so overzealously to the point of disrupting sales. The local agency points out that such measures are needed to ensure that all taxes due, especially from those who do not reside in the parish, are collected, even if that means demanding the amounts at the scene rather than waiting/hoping proceeds are sent in at the end of every month.

It seems like a lot of enforcement effort for little return. Last spring, Lt. Gov. Jay Dardenne testified in hearings of the special Revenue Study Commission that reviewed the utility of the hundreds of tax exceptions on offer by the state that only around a half million dollars in sales taxes to the state were forgone by the law. That works out to total exempt sales of just $12.5 million and implies over half a million dollars of local taxes were lost as well.

Yet how many agents hired extra, or overtime paid, by local agencies occur because of the presence of the exemption? And how many more resources must be devoted to dealing with the paperwork? And while artists may think they’re getting a deal on this, selling incrementally more items with a price presumably 8-10 percent lower because of the break, do they really sell so much more because of this that it even offsets the additional time and money they spend on compliance?

The overall costs to the state don’t suggest that for most. Even as Dardenne claimed that the districts extant at the time of his testimony reaped $1 billion in annual revenue from all sales of any thing, obviously only a very small fraction of that came from original art sales and in and of itself that component attracted next to no extra commerce that otherwise would not have occurred without the deal in place. Considering the lost tax receipts and enforcement costs, the exemption likely is a net drain on the state and local governments and probably contributes significantly in additional revenues only to a handful or sellers.

Therefore, the best policy is to get rid of it in the first place. Its economic impact is insignificant, few sellers would really lose out, and there are wiser uses of those resources abrogated or spent on compliance by governments for far more pressing priorities. Unfortunately, that logic did not carry the day with the RSC, on this and practically every other such instance reviewed, leading the Legislature this year to make scarcely any changes to reduce the billions of dollars uncollected or paid out in special breaks.

Short of that, at least regulatory costs could have been reduced by going to a single collector system, not just on this issue but for the entire scope of sales tax administration. But under opposition from sheriffs, SB 233 last year by state Sen. Neil Riser to do that faded away.

So, slighted artists and harried collectors seem set to continue to clash while tax dollars don’t get steered to higher priority needs. Throw in the taxpayers, and it seems there are very few winners and an awfully large number of losers if policy continues in this direction. While constitutionally the Legislature must wait to eliminate tax breaks outside of this upcoming regular session, at least this spring legislators could pass a bill like Riser's of last year and start sorting out the whole inefficient collection and enforcement system.