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LLG|SLAT|vL 8UDGLT 8OARD STAFF [ANUARY 2011

TLXAS STATL GOvLRNMLNT LFFLCT|vLNLSS AND LFF|C|LNCY 155


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Texas allows businesses to retain a portion of state sales tax
collections to compensate them for their efort in collecting
and reporting sales tax. Additionally, retailers can retain an
additional amount of sales tax collections for remitting
estimated collections prior to their due date. Tese discounts
cost the state more than $200 million each year. Many states
either cap the amounts businesses can retain, ofer diferent
levels of compensation to retailers based on the amount of
taxable sales, or do not ofer such discounts. Increasing the
timely fler discount rate and capping the amount of revenue
businesses can retain for timely fling of their sales tax returns,
and decreasing the rate of return they earn on taxes that they
prepay would increase state sales tax revenues by $152
million in the 201213 biennium while still ofsetting
certain compliance costs associated with sales tax collections.
IAC18 AND I|ND|NG8
i Texas is one of 24 states that ofer a sales tax timely
fler discount. Te discount is essentially a service
fee meant to compensate retailers (i.e., anyone with
a taxpayer permit) for the administrative costs of
recording sales tax collections and remitting them to
the state.
i Tirteen states cap the amount of discount a retailer
can retain.
i In addition to the timely fler discount, Texas provides
a prepayment discount of 1.25 percent to retailers
who pay their estimated taxes in advance.
CONCLkN8
i Texas foregoes tax revenue as a result of the timely
fler and prepayment discounts. Te timely fler
discount is estimated to cost $108.1 million in fscal
year 2012, and the prepayment discount is estimated
to cost $99.7 million in fscal year 2012.
i Texas does not cap the amount a retailer can retain in
the form of a timely fler or prepayment discount. As
a result, there is no way to limit the amount of sales
tax timely fler or prepayment discounts a retailer
receives.
i Texas retailers who prepay their sales taxes earn the
equivalent of approximately 13.27 percent annual rate
of return on their prepayments. Tis is signifcantly
higher than the 1.57 percent interest rate the state
earned on its treasury funds and higher than any
existing interest rates available to retailers via other
savings vehicles in 2009.
i Studies have found that tax compliance costs for
small retailers are disproportionately higher as a share
of sales tax collected than for larger retailers. Texas
current discount structure compensates all businesses
the same for collecting and remitting sales taxes,
regardless of their size or sales volume.
kLCOMMLNDA1|ON8
i Recommendation 1: Amend the Texas Tax Code,
Chapter 151.423, to increase the timely fler discount
to 0.75 percent and limit the amount a vendor can
retain in the form of the timely fler discount to
$3,750 per tax year.
i Recommendation 2: Amend the Texas Tax Code,
Chapter 151.424, by adjusting the prepayment
discount rate to the lesser of 1.25 percent or the rate
that yields an annualized rate of return of 4 percent
over the prime rate.
D|8CU88|ON
Consumers and businesses pay a state sales and use tax of
6.25 percent on the sales price for certain products and
services purchased or used in Texas. Revenue generated from
the sales and use tax is deposited into the General Revenue
Fund and is the largest source of state revenue. According to
the Comptroller the sales and use tax generated $19.6 billion
in fscal year 2010. However, every year the state foregoes
sales tax revenue in the form of vendor discounts; the
discount is essentially a service fee meant to compensate
retailers (anyone with a taxpayer permit) for the administrative
costs of recording sales tax collections and remitting them to
the state. Te collection process for the sales tax allows
retailers who pay all or a portion of their taxes on time to
retain 0.5 percent of the taxes due. In addition to the timely
fler discount, retailers can retain an additional 1.25 percent
discount if they prepay their taxes. Retailers are expected to
retain $207.8 million in timely and prepayment discounts in
fscal year 2012. Figure 1 shows the actual cost of the fscal
156 TLXAS STATL GOvLRNMLNT LFFLCT|vLNLSS AND LFF|C|LNCY LLG|SLAT|vL 8UDGLT 8OARD STAFF [ANUARY 2011
RLDUCL GLNLRAL RLvLNUL LOSS FROM SALLS TAX D|SCOUNTS
I|GUkL 1
IkO!LC1LD 8AlL8 1AX D|8COUN18
I|8CAl YLAk8 2009 1O 2014 (|N M|ll|ON8)
D|8COUN1 2009 2010 2011 2012 2018 2014
Timely Filer $94.0 $99.1 $103.3 $108.1 $ 112.4 $ 116.9
Prepayment $91.4 $91.4 $95.2 $99.7 $103.7 $107.8
*Actual discount amount.
6285&( Comptroller of Public Accounts.
year 2009 timely fler and prepayment discounts and
estimated costs of the discounts from fscal years 2010 to
2014.
In Texas, sales tax discounts have been available to retailers
since the sales tax was frst enacted in 1961; a time when
retailers kept paper records and manually remitted collections
to the state. Te vendor discount was last adjusted in 1987 at
which point the rate was reduced from 1.0 percent to the
current 0.5 percent rate and the prepayment discount was
reduced to 1.25 percent in 1983 from 2.0 percent.
Tere are opportunities to mitigate this loss to the state and
generate additional revenue by implementing diferent
options that reduce the amount of sales tax a vendor retains
while addressing the disproportionate administrative cost for
small business. Increasing the timely fler discount to 0.75
percent of sales tax collections and instituting an annual cap
of $3,750 per retailer would generate $81.2 million in
General Revenue Funds for the 201213 biennium.
Additionally, adjusting the prepayment by linking it to
prevailing interest rates would generate $70.8 million in
General Revenue Funds for the 201213 biennium bringing
the total General Revenue Funds gain for these changes to
$152 million for the 201213 biennium.
7,0(/<),/(5',6&2817
Section 151.423 of the Texas Tax Code authorizes sales
taxpayers to retain 0.5 percent of sales tax collections to ofset
the cost of collecting and remitting the tax to the state on a
timely basis. As shown in Figure 2, retailers follow a monthly,
quarterly, or annual payment cycle depending on the amount
of the sales tax they collect per reporting period.
Retailers must remit all or a portion of the sales tax to the
Comptroller of Public Accounts (CPA) by the twentieth day
of the month following their tax collection period to be
eligible for this discount. In fscal year 2009, there were
about 672,000 sales tax flers, 28.7 percent of which did not
have any tax liability. Of those retailers with sales taxes due,
I|GUkL 2
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6285&(: Legislative Budget Board.
79.6 percent paid their taxes by or before their due date at
least once during the fscal year.
Te sales tax data from the CPA shows that 380,270 taxpayers
with a total of $310.9 billion in taxable amounts received the
timely fler discount in fscal year 2009. CPA reports that the
timely fler discount cost the state $94 million in fscal year
2009.
A retailer can remit a portion of sales taxes due for their
reporting period and still earn the timely fler discount on
that payment. Tis allows retailers to delay full payment
without losing the beneft of the timely fler discount on the
portion remitted. Any portion of the payment remitted 1 to
30 days after the due date incurs a 5 percent penalty fee; if
payment is 31 to 60 days late, the penalty fee is 10 percent.
Any payment made more than 60 days past the due date will
incur a 10 percent penalty fee plus interest.
9(1'25',6&28176,127+(567$7(6
Twenty-six states and the District of Columbia do not ofer a
vendor discount, the equivalent of Texas timely fler
discount. Twenty-four states ofer vendor discounts, ranging
from 5.0 percent in Alabama to less than 1.0 percent in six
states, including Texas. Tirteen states limit the amount of
discount that any one taxpayer may retain. Te median state
cap on a discount is between $4,000 and $5,000 per taxpayer
per year. Some states also ofer additional discounts to
encourage retailers to fle electronically or to fle early.
LLG|SLAT|vL 8UDGLT 8OARD STAFF [ANUARY 2011 TLXAS STATL GOvLRNMLNT LFFLCT|vLNLSS AND LFF|C|LNCY 157
RLDUCL GLNLRAL RLvLNUL LOSS FROM SALLS TAX D|SCOUNTS
Figure 3 shows the vendor discounts, the discount
maximums, and sales tax rates for the ten most populous
states. California, the most populous state, ofers no vendor
discounts. Other than Texas, only Michigan has a prepayment
sales tax discount (0.25 percent).
Te current economic climate has led some states to suspend
or consider amendments to their sales tax vendor discounts.
Most recently, New York and Colorado retailers are no longer
allowed to apply a vendor discount to their sales tax
remittances. Legislation authorizing this temporary
suspension in Colorado became efective in 2009, after the
Colorado Legislature had already reduced the vendor
discount rate from 3.33 percent to 1.35 percent. Te vendor
discount is expected to be reinstated in January 2011. Nevada
temporarily reduced its vendor discount from 0.5 percent to
0.25 percent for 2009, but decided to make the reduction
permanent in the 2009 Legislative Session. Virginia, whose
fscal year ends on June 30, enacted legislation that mandates
prepayment in June from vendors with taxable sales or
purchases of $1 million or more in the previous fscal year. In
addition to this mandate, the vendor discount was reduced
to between 1.2 percent and 0.6 percent depending on the
vendors monthly taxable sales. A few other states have also
proposed legislation that would reduce or eliminate the
vendor discounts. In Texas, for example, a bill that would
have placed a limit of $10,000 on the amount of timely fler
or prepayment discount a retailer could retain per year was
I|GUkL 8
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introduced during the Eighty-frst Legislature, Regular
Session, 2009. Te bill did not pass.
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Capping the amount any one retailer can retain is a strategy
that some states use to limit the loss of sales tax revenue to
the state. Of the 24 states that ofer vendor discounts, 14 cap
the amount a retailer is allowed to retain. Few states apply the
cap to each individual retail location, making it more
benefcial for retailers in these states, but not as lucrative as in
those states with no caps at all. Of the top fve states with the
highest revenue loss due to vendor discounts, only Florida
has a ceiling on the amount of sales tax collections a retailer
can retain per outlet.
Figure 4 shows that in fscal year 2009 Texas retailers with
more than $32 million in taxable amounts combined
retained a total of $55.2 million in sales taxes as a result of
the timely fler discount and comprise less than 1 percent of
all timely sales tax flers. Tis represents 58.8 percent of the
total amount retained by all vendors for compensation. In
contrast, 76.1 percent of timely sales taxpayers had taxable
amounts that equaled $200,000 or less.
Recommendation 1 would increase the timely fler discount
from 0.5 percent to 0.75 percent and establish $3,750 as the
maximum dollar amount that any one retailer could retain
for the timely fling of sales tax based on the state portion of
81A1L VLNDOk D|8COUN1 D|8COUN1 MAX|MUM 81A1L 8AlL8 1AX kA1L
California None N/A 8.25%
Texas 0.5% (additional 1.25% for None 6.25%
prepayment)
New York None N/A 4.0%
Florida 2.5% $360 per year* 6.0%
llinois 1.75% None 6.25%
Pennsylvania 1.0% None 6.0%
Ohio 0.75% None 5.5%
Michigan 0.5% (applies to frst 4.0% of $180,000 per year; $240,000 6.0%
tax; 0.75% for prepayment) per year for prepayers
Georgia 3% to 5.0% (tiered rate based None 4.0%
on tax collection amount)
North Carolina None N/A 5.75%
*Amount is per retailer location.
6285&(: Federation of Tax Administrators.
158 TLXAS STATL GOvLRNMLNT LFFLCT|vLNLSS AND LFF|C|LNCY LLG|SLAT|vL 8UDGLT 8OARD STAFF [ANUARY 2011
RLDUCL GLNLRAL RLvLNUL LOSS FROM SALLS TAX D|SCOUNTS
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Less Than or
Equals 0
($1,225) ($77) $0 $0 $0 $0 192,905
$.01 to
$200,000
11,218,824,279 701,176,517 2,816,997 5,762 289,387 124 387,343
$200,001 to
$400,000
9,493,983,255 593,373,953 2,606,769 5,842 32,679 47 33,220
$400,001 to
$600,000
7,943,409,410 496,463,088 2,240,132 7,705 16,003 32 16,230
$600,001 to
$800,000
6,557,219,057 409,826,191 1,875,088 10,153 9,395 30 9,485
$800,001 to
$1,000,000
5,538,030,540 346,126,909 1,590,740 9,901 6,156 22 6,196
$1,000,001 to
$1,200,000
4,747,932,816 296,745,801 1,370,010 16,304 4,293 24 4,328
$1,200,001 to
$1,400,000
4,005,662,917 250,353,932 1,160,022 10,339 3,075 14 3,090
$1,400,001 to
$1,600,000
3,457,037,866 216,064,867 1,008,893 12,631 2,297 15 2,312
$1,600,001 to
$1,800,000
3,242,405,082 202,650,318 945,191 12,771 1,899 14 1,911
$1,800,001 to
$2,000,000
2,878,324,188 179,895,262 842,408 13,823 1,508 11 1,519
$2,000,001 to
$3,000,000
11,093,044,015 693,315,251 3,263,538 87,938 4,527 55 4,558
$3,000,001 to
$4,000,000
7,846,024,341 490,376,521 2,344,222 138,151 2,266 66 2,273
$4,000,001 to
$8,000,000
18,403,477,125 1,150,217,320 5,521,503 344,848 3,333 102 3,337
$8,000,001 to
$12,000,000
10,311,756,264 644,484,767 3,125,899 275,065 1,063 46 1,063
$12,000,001
to
$16,000,000
7,464,378,008 466,523,626 2,273,389 248,767 538 32 538
$16,000,001
to
$32,000,000
18,866,788,615 1,179,174,288 5,764,229 1,791,404 847 116 848
$32,000,001
or Greater
177,871,634,006 11,116,977,125 55,224,331 88,443,732 1,004 338 1,004
TOTALS $310,939,930,562 $19,433,745,660 $93,973,360 91,435,137 $380,270 $1,088 672,160
*Amount subject to sales tax.
6285&( Comptroller of Public Accounts.
LLG|SLAT|vL 8UDGLT 8OARD STAFF [ANUARY 2011 TLXAS STATL GOvLRNMLNT LFFLCT|vLNLSS AND LFF|C|LNCY 159
RLDUCL GLNLRAL RLvLNUL LOSS FROM SALLS TAX D|SCOUNTS
the remittance. Te cap would be $312 per month for
monthly flers and $937 per quarter for quarterly flers. Tis
strategy assumes that because of economies of scale, larger
retailers are able to absorb compliance costs that smaller
retailers cannot. Additionally, since a signifcant portion of
compliance costs are fxed costs, a maximum compensation
level seems justifed. Based on data shown in Figure 4,
approximately 476,000 taxpayers would see an increase in
their timely fler discount and 3,450 would be afected by the
cap.
35(3$<0(17',6&2817
In addition to the 0.5 percent timely fler discount that
retailers retain for collecting and remitting sales tax receipts
to the CPA in a timely manner, they are also eligible for a
1.25 percent prepayment discount if they pay their estimated
taxes in advance. As shown in Figure 5, taxpayers on a
quarterly payment cycle must make prepayments no later
than the ffteenth day of the second month of the current
calendar quarter. For monthly payers, prepayments are due
the ffteenth day of the month of tax collections if on a
monthly payment cycle. Since prepayments are made before
all taxable amounts have been accounted for, prepayments
must be made based on a defned reasonable estimate of tax
collections for the reporting period.
Te prepayment discount incentivizes retailers to remit sales
tax collections in advance of their due date. Prepayments are
particularly advantageous to the state at the end of each fscal
year, because they allow the state to certify revenue for one
fscal year even though it is not yet due. For example, a
retailer can prepay estimated sales taxes in August even
though they are not due until September or October (the
start of a new fscal year).
Te pre-payer discount totaled $91.4 million in fscal year
2009. Approximately 1,100 taxpayers prepaid their taxes and
earned the combined 1.75 percent timely fler and
prepayment discount. Another reason taxpayers may decide
to take advantage of the prepayment discount is because the
1.25 percent rate they can earn with the state may be higher
than the prevailing market annual interest rate available
through other savings vehicles. In other cases, the high rate of
return allows retailers to borrow money to make prepayments
and still earn enough to cover interest charges incurred from
borrowing. Tere was an increase in prepayments from fscal
years 2008 to 2009 despite a decline in total sales tax
collections in 2009. Te increase in prepayments from 2008
indicates that the low average market interest rates of 2009
could not compete with the prepayment discount rate,
prompting retailers to lend their money to the state in the
form of sales tax prepayments. According to CPA, the state
treasury was earning interest at a treasury pool rate of 2.51
percent in 2009, and 1.57 percent in 2010. Te prime rate
for fscal years 2009 and 2010 was 3.25 percent. Tese rates
are signifcantly lower than the average 13.27 percent annual
rate of return that retailers earned when prepaying. In
economic situations where market interest rates are very low,
the state incurs a loss and will continue to incur such losses
unless safeguards are put in place.
I|GUkL 5
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January
February Jan, Feb, and Mar First Quarter: Feb 15
March
April
May April, May, June Second Quarter: May 15
June
Fifteenth of the month
July
August July, August, Sept Third Quarter: August 15
September
October
November Oct, Nov, Dec Fourth Quarter: Nov 15
December
6285&(: Legislative Budget Board.
160 TLXAS STATL GOvLRNMLNT LFFLCT|vLNLSS AND LFF|C|LNCY LLG|SLAT|vL 8UDGLT 8OARD STAFF [ANUARY 2011
RLDUCL GLNLRAL RLvLNUL LOSS FROM SALLS TAX D|SCOUNTS
Adjusting the prepayment discount to account for such
interest rate fuctuations can help mitigate the loss to the
state from prepayments, yet still be advantageous to the
retailer. Recommendation 2 would amend Section 151.424
of the Texas Tax Code by adjusting the prepayment discount
to the lesser of 1.25 percent or the rate that produces an
annualized rate of return equal to 4 percent over the prime
rate. Te prepayment discount rate would vary annually
based on the prime rate published in the Wall Street Journal
on the frst business day of each calendar year. Limiting
retailers to a prepayment discount rate, which yields returns
signifcantly higher than the prime interest rate, would still
allow them to earn an above market return. Capping the
prepayment discount rate at 1.25 percent protects the state
from incurring increased costs in the case that the rate for
traditional interest bearing accounts were to exceed the
current prepayment rate.
7$;&2//(&7,21&267678',(6
In 1998, the Washington Department of Revenue studied
the cost to business of collecting and remitting sales taxes.
Tis study compared the operational costs of retailers in
Washington, where a sales tax is imposed, to those costs in
Oregon, a state with no sales tax. Te study concluded that
overall collection costs, excluding credit card fees, averaged
0.47 percent of sales tax collections for all retailers. Costs
were 0.21 percent for large retailers (gross retail sales of more
than $1.5 million). Te lower cost for large retailers was
attributed to the fact that larger frms will have accounting
systems and other operational costs whether required to
collect a state sales tax or not. Tis evidence demonstrates
that retailers in Texas would incur the same administrative
costs regardless of the imposition of a states sales tax since
there are still local taxes or remote sales taxes to pay. Terefore,
the state sales tax does not necessarily result in additional
costs to Texas retailers.
A more recent study on the cost of sales tax collection for
retail commissioned by the Streamlined Sales Tax Project
(SSTP) was published in 2006. Tis national study shows the
total impact of collecting sales taxes in 45 states and 7,500
units of local government. Self-reported costs include, for
example, hardware needed for accounting purposes, number
of remotes sales, training for employees, credit card fees, and
fling frequency. Te consideration of certain cost drivers and
the inclusion of multiple states with varying tax regulations
overstates the costs of collecting taxes on behalf of any one
state.
Tis study found that tax compliance costs for small retailers
are disproportionately higher as a share of sales tax collected
than costs for larger retailers. Retail businesses with annual
sales of $150,000 to $1 million had sale tax compliance costs
that equaled 13.47 percent of total sales taxes collected and
those with annual retail sales above $10 million had
compliance costs of 2.17 percent. Teir compliance costs
went down as a percentage of their total annual sales.
As such, a current fat discount rate is more benefcial for
larger retailers than for smaller ones. Compliance costs for
retailers in the smallest size category are six times higher as a
share of sales tax collected than for retailers in the largest size
category.
Unlike the Washington study which has a control group to
compare stores with compliance costs and those with none,
the SSTP study accounts for varying multi-state tax rates and
regulations which leads to overstated compliance costs. Te
Washington studys narrow focus is a more relevant
comparison to the compliance costs of Texas taxpayers.
I|8CAl |MIAC1 OI 1HL kLCOMMLNDA1|ON8
Recommendation 1 would increase the timely fler discount
to 0.75 percent and limit the amount a vendor can retain in
the form of the timely fler discount to $3,750 per tax year.
Since retailers remit local and state sales taxes at the same
time, it is important to note that the cap would apply to only
the state portion of the sales tax remittance. While increasing
the timely fler discount for small taxpayers would slightly
ofset the revenue gains that could be realized from capping
large taxpayers, the net beneft to the state is positive. Te
CPA is not expected to experience a signifcant administrative
burden as a result of this recommendation since retailers
would continue to calculate and retain the portion of sales
tax collections due to them based on the new ceiling amount.
Implementation of this recommendation is estimated to
generate an additional net $81.2 million in General Revenue
Funds for the 201213 biennium as shown in Figure 6.
Adjusting the prepayment discount rate could generate
revenue for the state while still providing an incentive to
retailers to pay their sales taxes in advance, allowing the state to
realize the most beneft from prepayments. Based on fscal year
2009 prepayment amounts, implementing Recommendation
2 could generate $70.8 million in General Revenue Funds for
the 201213 biennium. Recommendation 2 assumes that
retailers currently prepaying sales tax collections would
continue to do so. If implemented simultaneously, the
LLG|SLAT|vL 8UDGLT 8OARD STAFF [ANUARY 2011 TLXAS STATL GOvLRNMLNT LFFLCT|vLNLSS AND LFF|C|LNCY 161
RLDUCL GLNLRAL RLvLNUL LOSS FROM SALLS TAX D|SCOUNTS
recommendations would yield $152 million in General
Revenue Funds for the 201213 biennium.
I|GUkL
I|VL-YLAk I|8CAl |MIAC1 OI kLCOMMLNDA1|ON8
I|8CAl YLAk8 2012 1O 201
IkO8A8lL GA|N[(lO88) |N
I|8CAl YLAk GLNLkAl kLVLNUL IUND8
2012 $74,239,722
2013 $77,736,413
2014 $81,397,798
2015 $85,231,634
2016 $89,246,044
6285&(: Legislative Budget Board.
Te introduced 201213 General Appropriations Bill does
not include any adjustments as a result of this recom-
mendation.