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An Estimate of Revenue From a Tourism Tax in Montana

July 2000

Montana Department of Revenue Tax Policy and Research Process

' . he average stay for a visitor reported by the !111 . $ !" sales tax on prepared food. hus. his report examines the potential revenue from levying a tourism tax at a rate of !".&!1. concerts.5 days.( billion spent.'. !!" of the people in Montana are out-of-state visitors. there are on average !!(. and how much visitors spend.))+s estimates for !11! are 3. he .. his report is divided into four sections. he third section estimates how much of that revenue would be collected from non-residents and how much would be collected from residents.. tickets to sporting events. he state+s costs of administering such a tax would be at least !" of revenue. alcohol sold by the drink. and merchants+ costs of collecting it would be about .((( visitors to the state in !111. he .&22 billion while they were here.)) estimates the number of visitors. he second section estimates the si#e of the tax base and the revenue that would be collected by a tourism tax.)) survey was .((( out-of-state visitors in Montana at any time. 6ith 1.))/ at the 0niversity of Montana surveys visitors to the state every year.& million in fiscal year '(('... the average stay." of revenue. car rentals.!" for visitor spending. Visitors do pay excise taxes on gasoline and accommodations. but these taxes are earmarked for specific uses and do not pay for general government services.. visitors do not pay state income or property taxes which fund general government services. such as police and fire protection. and recreation goods and services would generate revenue of about %!&. 4rom !11! to !111. However.An Estimate of Revenue from a Tourism Tax in Montana ntroduction and !ummary Visitors to Montana benefit from state and local government services. and they spent %!. souvenirs. sightseeing excursion fares.(((. he final section estimates administration and compliance costs. he state+s resident population is about 22(.((( visitors and %!. the average annual rates of growth were '. "isitors to Montana and Their Purchases he -nstitute for ourism and )ecreation )esearch .1" for visitors and 5.'2. million visitors each staying an average of . on average. he first section presents estimates of the annual number of visitors and their spending in Montana. he . plays and similar events. One way to have visitors contribute to the cost of general government services in Montana would be to levy a selective sales tax on goods that are bought primarily or disproportionately by non-resident visitors.)) estimates there were 1. )esidents would pay between &(" and *(" of this tax.5 days.

and hobby supplies.1( $ !3. lift tickets.3(" &.(" %00)00$ # %&'(()*0 he retail sales and miscellaneous categories are composed of many specific types of purchases.Resident "isitor !pendin/ !ector $ccommodations $uto )ental and )epairs ransportation 4ares :asoline . sporting goods. golf fees. appliances.'(" &. -on.((" 10)'0$ # *(*)00 )ecreation includes ski e7uipment.. 9ars :roceries . 4or the purposes of estimating revenue from a tourism tax. bait.( 525.5(" 3.. able ' shows visitors+ estimated retail and miscellaneous spending reorgani#ed into four categories..))+s estimates of how visitor spending was divided between eight sectors of the Montana economy in !111.( !''..&(" ''..'(" *. outfitters.. Ta+le 2 %.!( 1(. as well as eastern Montana. household goods.(( '2*.&(" (. 8on-tourist purchases includes items such as clothing.ourist >urchases Total #million % !1.3(" '.1( '1!. 5 .&( 21. and used cars. <ervices Total # million % '35.'(" 5.*( !((.3( 2..able ! shows the .(( $ !.Resident "isitor !pendin/ Retail and Miscellaneous !ector heater and =vent ickets <ouvenirs )ecreation 8on. <nacks )etail <ales Miscellaneous =xpenses.'(" !2.(( 5&'. his category is relatively large because 9illings is a regional trade center serving northeastern 6yoming. it is useful to recategori#e these items.. Ta+le % %. -on.*(" !2.&( &&. farm supplies. Oil )estaurants .

Many businesses sell several types of products. his product line sales information could be used to refine the estimates presented here. he =conomic Aensus gathers detailed information on business activity at the state level. <nack and 8onalcoholic 9everage 9ars. o estimate sales for specific types of goods and services.)) visitor spending estimates point out seven areas of significant spending by tourists? ♦ ♦ ♦ ♦ ♦ ♦ ♦ sales of prepared food@ alcoholic beverages sold by the drink@ tickets to events such as plays. concerts. he primary source of information for estimating the tourism sales tax base is the !113 =conomic Aensus. and sporting events@ car rentals@ sightseeing fares@ recreation@ and other souvenir items. but all sales by a business are reported together. he Aafeterias category includes both cafeteria-style restaurants and workplace cafeterias.The Tourism Tax 2ase and Revenue he . it is necessary to make estimates of how some industries+ sales are divided between the various categories of goods and services. . >repared 4ood <old in )estaurants 4ive census categories consist of businesses that sell prepared food and little else. hey are 4ull-<ervice )estaurants. hese items are included in the tax base for the revenue estimate provided here. which was conducted by the Aensus 9ureau of the 0< Bepartment of Aommerce. and Aafeterias. he tax base estimates presented here are based on sales of businesses grouped by types of business. Cimited-<ervice )estaurants. Mobile 4ood <ervices. he Aensus 9ureau is scheduled to begin publishing estimates of sales grouped by types of goods and services in $ugust '(((. .

the net effect of counting all revenue of drinking places and not counting any revenue of casinos should be close to #ero. =xempting sales in workplace cafeterias would reduce the tax base by an amount less than %* million.%million/ % 52*. -f we assume that the value of food and drink sales at gambling establishments is similar to the value of entertainment and gambling at bars.&( # 0(')%0 -ndustry 4ull-<ervice )estaurants Cimited-<ervice )estaurants <nack and 8onalcoholic 9everage 9ars Aafeterias Mobile 4ood <ervices Total -f all food sold in cafeterias is included. <ome bars charge for entertainment andFor gambling. & .*( '**.*( *.! million.* million.. million. 0ntil the =conomic Aensus estimates of sales by product categories are available. this will not affect the estimate of the total tax base. -f both food and drink are subEect to the tourism tax. Ta+le 1 !ales of Prepared Food %..D he !113 =conomic Aensus estimate of receipts from these establishments is %!&'. Aasinos and other gambling establishments sell food and drinks. Brinks <old in 9ars $ll establishments that are primarily in the business of selling alcoholic beverages by the drink are included in the single Aensus category DBrinking >laces.3 Economic 4ensus Estimates )eceipts . the value of taxable sales is %*2&. he !113 =conomic Aensus estimate for revenue of gambling establishments is %!&*..'( !. sales of Brinking >laces can be used as an estimate of sales of alcoholic beverages. <ome restaurants sell drinks and many bars sell food.( '3.able 5 shows estimated receipts for these establishments from the !113 Aensus.

3 million on car rentals and repairs..4ood.( # . and Other -tems <old at Hotels.5( # 11*). and excludes other charges for items such as food.)) reports that visitors to Montana in !111 spent %&&. able .D Aombined revenue for these industries for !113 was %55..3 Economic 4ensus Estimates and Accommodations Tax Receipts )eceipts . <ubtracting lodging charges from total industry receipts gives an estimate of non-lodging sales of %1(. million. which implies a tax base of %'. Aonse7uently. Ta+le * Food& Drin6s& and 7ther Revenue of 8otels& Motels and R" Par6s %. Codging facilities use tax revenues for !113 were %1.& million may represent accommodations charges for these type of rooms that would be exempt from both the accommodations tax and any tourism tax.. he lodging facilities use tax applies only to lodging charges. Brinks.& million. Most long-term leases from Montana car dealers will be to residents.0)'0 -ndustry raveler $ccommodation )V >arks and )ecreational Aamps Total less? axed Codging Aharges -on. transportation or entertainment.. which currently are taxed. a portion of the %1(. 4ood.%million/ % '12.." use tax on lodging charges. shows this calculation. he =conomic Aensus has a separate * . $uto )entals he =conomic Aensus combines income from both long-term leases and short-term rentals of vehicles.0 '... drinks and other items sold at lodging facilities could be included in the base for a tourism tax. Motels. and )V >arks Montana has a .*( 5*.3* million.1 million. he value of these other sales can be estimated by taking the difference between total revenue of lodging facilities and room charges. wo =conomic Aensus industries are subEect to the lodging facilities use tax? D raveler $ccommodationD and D)V >arks and )ecreational Aamps..5od/in/ Receipts his figure may slightly overestimate sales of other goods and services at lodging facilities because facilities with single room rates less than *(" of the state per diem rate are exempt from the accommodations tax. he . but does not track rentals and repairs separately. and should not be included in the base for a tourist tax.

%million/ % !'3.2 million in Montana. and <imilar =vents Aoncession Operators of $musement Bevices and )ides Museums.( (.2( (. <ports.3 million spending on rentals and repairs leaves an estimate of visitor rentals of %'2.'( 5. How the estimates are distributed between leases and rentals is unknown. Aoncerts. he Aensus 9ureau is withholding information on three of the four industry subsectors that provide 3 . Ta+le ' Tic6ets to Events or !ites %.. and <imilar -nstitutions Total <ome of these organi#ations have other sources of revenue. organi#ations probably overstate the receipts from ticket sales.. their spending on repairs would be %'3. hey are local sightseeing excursions and taxis.category of automobile repair. -f residents make &" of total car rental payments. revenues totaled %'..2 million of car lease and rental payments by residents. ourist ransportation 4ares otal receipts of these 4ares for two types of transportation are assumed to be subEect to the tourism tax. Visitors are !!" of the people in the state on the average day. >lays. -f they make !!" of expenditures on car repairs. Historical <ites.5 million. million of visitor rentals from this leaves %!(. he =conomic Aensus estimate of total car rental and lease payments is %51. ickets to <porting =vents.' million.(( '. -n !113.3 Economic 4ensus Estimates )eceipts . and <imilar =vents able & shows revenues for businesses that sell admission tickets to special events or to sites such as amusement parks or museums.5( # %*2)10 -ndustry >erforming $rts Aompanies $musement >arks and $rcades <pectator <ports >romoters of >erforming $rts..*( 2. <ubtracting this from visitors+ %&&. he Aensus 9ureau does not release information from the economic census that could be used to infer sales or other information about individual firms. million.2 million. total car rental payments are %'1. <ubtracting %'2.

as well as local sightseeing charters.' !. !. -t reports that there are !! firms in the whole sector but does not give revenue for the whole sector. -f the ten firms in the 2 . he Aharter 9us -ndustry category includes interstate and intercity charters. and personal flights as well as charter flights for sightseeing or other tourism purposes.transportation to tourists because there are so few firms in them. and Other..%million/ % 5. he Aensus 9ureau reports estimated revenue for the eight firms in the 6ater subsector.* =stimated ax 9ase F )eceipts !((.1 !. !&" of the revenue of the Aharter 9us -ndustry sector would be subEect to a tourism tax. corporate. Ta+le 0 Tourist Transportation Fares %. -t does not report either revenues or number of firms for the Cand and Other subsectors.&" of revenues in the 6ater subsector. -f revenue in the charter bus category is earned proportionally by local and long-distance charters. which would not be taxed. -t also reported that there are ten firms in the total category and seven in the interstate and interurban charter subsector.&" . -t reported that there are !( firms in the passenger subsector but did not report their revenues. it is necessary to estimate sales either as a fraction of the sales of a larger sector that contains the sector of interest or as a multiple of the sales of a smaller sector that is contained in it. Cand. he 8onscheduled $ir ransportation sector includes both freight and passenger subsectors.%million/ % 5. 4or these subsectors. he Aensus 9ureau reported revenues for the '' firms in the sector. and half of local charters are for tourism. he Aensus 9ureau reported revenues for the combined category..( 3)% # he =conomic Aensus estimate for axi <ervice does not need any adEustment.(" !&..' *. and the estimated tax base.(" !53. 6ater.&" =stimated ax 9ase . his subsector includes medical. -f the three firms in the Cand and Other subsectors have the same average revenues as the eight in the 6ater subsector. able * shows receipts for sectors that were reported by the Aensus 9ureau.3 Economic 4ensus Estimates -ndustry axi <ervice Aharter 9us -ndustry <cenic and <ightseeing ransportation.( !. 6ater 8onscheduled $ir ransportation Total )eceipts .. ''. the estimated share of those receipts that would be subEect to a tourism tax. revenues for the whole sector will be !!F2 G!53. he <cenic and <ightseeing ransportation sector includes three subsectors.

and buy recreational e7uipment.)) estimates that visitors spent %1(. 1 . and !(" of their revenue is from flights for tourism purposes. it seems reasonable to use the . play golf. sell souvenir items.D D<ports and )ecreation -nstruction. <ales reported by the !113 =conomic Aensus for the related sectors of D<kiing 4acilities. he !113 =conomic Aensus estimates sales of :ift.passenger subsector have the same average revenue as firms in the sector as a whole..D and D<porting :oods <toresD total %!5!. <ince other businesses. his included purchases and rentals of e7uipment. the =conomic Aensus is a better estimate of taxable sales in this sector.)) figure as an estimate of taxable souvenir sales.&" of the revenue of the 8onscheduled $ir ransportation sector would be subEect to a tourism tax.& million on souvenirs and similar items in !111. lift tickets. <ince residents ski. and <ouvenir <tores at %&1. and bait. 8ovelty. he total is relatively close to the . visitors to the state spent %1( million on recreation goods and services in !111. such as convenience stores and supermarkets. guides and outfitters. golf course fees. then . <ouvenirs he .)) survey.D D:olf Aourses and Aountry Alubs.)) estimate of visitors+ spending on transportation fares. )ecreation :oods and <ervices 9ased on the .2 million.2 million.

%million/ % 2.5 3. grew from !11! to !111.5 !. he fourth column shows the revenue that would be generated in fiscal '((' with a tax rate of !".& !5!. !( .Tourism Tax.* 1(.!" from !113 to '(('.3 (. as estimated by .! !.2 '((' <ales . !(&. but two-thirds of sales in these sectors are to residents rather than non-residents. but sales to residents probably are significant.'.%million/ % *2&.2 !.2 !.>otential )evenue able 3 shows the calculation of potential revenue from a selective sales tax on tourist items..! 1(. and Other <old at Codging >laces Aar )entals =vent ickets <ightseeing 4ares <ouvenirs )ecreation :oods and <ervices Total !113 <ales .3 !*&.)). -t is not known how ticket and recreation services sales are divided between residents and non-residents. !&5. and souvenirs sectors are to non-residents. Brinks.& %')' ax 9ase -tem 4ood <old in )estaurants Brinks <old in 9ars 4ood.! !.. his is the rate at which spending by non-resident visitors.2 2.& # %&111)3 # %&''1)0 # he first column shows the items included in the tax base.5 !(&. Ta+le 3 Potential Revenue from a . Most sales in the car rental. 5. he fraction will depend on exactly which goods and services are taxed.! (. sightseeing fares. he second column shows estimated sales of those items in !113.%million/ % 312...( !.! !&*.& '1.! !2'. he third column shows estimated sales in '((' assuming an average annual rate of growth of 5. 9ho 9ould Pay: 4ood and drinks account for two-thirds of the revenue from a tourism tax. ax )evenue 4H'((' .

6ith these estimates of resident and non-resident purchases in each sector. $lmost all car rentals are assumed to be made by non-residents because non-resident rentals account for almost three-fourths of total rental and lease payments. Administration and 4ompliance ssues $ tourism tax would re7uire state resources for administration and would impose costs on merchants who collect the tax.! (. and by Ioel <lemrod. he fractions of sales assumed to be made to nonresidents in the other sectors are very rough guesses based on the fact that residents make significant purchases in the recreation and tickets sectors. in a chapter titled !! . sightseeing fares. he remainder of revenue in the car rental and lease sector would account for fewer than 5((( leased cars in Montana.1 (. and recreation goods and services. =ven if the fraction of sales to nonresidents were 1(" for tickets.1 (. Cimiting the tax to the three categories where non-residents are estimated to account for at least three-fourths of the sales would limit tax receipts to %!. here have been several studies of the administration and compliance costs of state sales taxes. souvenirs.5 (. Ta+le ( -on. he results of these studies have been summari#ed by Iohn Bue and Iohn Mikesell. but not in sightseeing fares and souvenirs.able 2 shows an estimate of taxes that would be paid by nonresidents in each of the sectors.& %')' =stimated 8on)esident >ercentage 55" 1&" &(" 1(" 1(" &(" *2$ =stimated ax )evenue from 8on)esidents % 5.%million/ % !(. nonresidents would pay .'" of the tourism tax.& million.* (.2 0)' Aategory of <ales 4ood and Brinks Aar )entals =vent ickets <ightseeing 4ares <ouvenirs )ecreation :oods and <ervices Total # # he estimate for food and drinks is the ratio of the .! !.Resident Tourism Tax Payments =stimated 4H'((' ax )evenue .2 (.5 !.! !. in their book <ales axation? <tate and Cocal <tructure and $dministration.3 (. residents would still pay &(" of the tourism tax.))+s estimate of non-resident visitor spending on these items to the =conomic Aensus estimate of total spending.

he administration and compliance costs for a selective sales tax aimed at tourists is likely to be a larger fraction of revenue collected than is typical for a general sales tax. track.& million. -n most states. and pay a tourism tax together with the lodging tax." to !. or costs may actually be lower if they are allowed to collect. 0sing the upper end of the range of reported sales tax administration and compliance costs as estimates of the costs of a tourism tax gives estimated administration costs of !" of %!&.(((. such as food and prescription drugs.(" to 5. he other problem is that merchants who have a very small fraction of sales subEect to the tax may not comply at all. >eriodically.J6hich -s the <implest ax <ystem of them $llKL in =conomic =ffects of 4undamental ax )eform edited by Henry $aron and 6illiam :ale. hey must track which of their sales are taxable and must charge customers tax based on the taxable portion of their purchases. 4or merchants who already collect the lodging tax. well-defined categories of sales. merchant+s costs are likely to be comparable to their costs with a general sales tax. One is that merchants are likely to make more errors in deciding whether sales are taxable. there are two compliance problems that are likely to be worse with a tourism tax than with a general sales tax. he estimate of revenue from a tourism tax presented above assumes perfect compliance with the law. the general sales tax exempts a few. complete a tax return. !' . However. or %!&&.. =stimates of merchants+ compliance costs range from '. either intentionally or out of ignorance. or %&21. they must calculate their tax liability. merchants+ costs of collecting the tax and accounting for collections and payments would be comparable to their costs with a general sales tax. and submit payment. -n sectors where all or most products were taxed. =stimates of state administration costs range from (. Merchants who collect a sales tax incur several kinds of costs.2" of %!&. <ouvenirs. recreation services.(" of revenue collected. there may be no additional costs. but would collect much less revenue. he Bepartment of )evenue would have to process tax returns for and audit almost as many merchants as it would with a general sales tax.2" of revenue collected.(((.& million. -n sectors where few products are taxed. and tickets are not as clear-cut. hey must keep records of taxable sales as well as total sales. but they would collect much less tax revenue. and estimated compliance costs of 5.