Missouri Voters to Decide on a Constitutional Ban on Taxing Services

November 4, 2016 Matt Walsh

Voters in Missouri are to decide on a Constitutional amendment restricting sales taxes on services.

Synopsis:

Missouri is voting on a constitutional amendment that could severely impact sales tax policy for generations.

The Election

This election season we are electing a new president, seats in the U.S. House of Representatives and Senate are up for grabs; not to mention all the state and local level elected offices that will be decided in November.

While they might not garner as much attention as the presidential race, there are a number of important ballot referendums and voter decided questions across the country which will significantly impact our day-to-day lives. A measure up for vote in Missouri offers an interesting approach to controlling sales and use tax law.

Amendment 4, also called the Taxpayer Protection Amendment, is a voter referendum that would change the state constitution by adding a prohibition against charging sales or use tax on services provided in the state.

The Ballot Question

The question is presented on the ballot as follows:

  • Shall the Missouri Constitution be amended to prohibit a new state or local sales/use or other similar tax on any service or transaction that was not subject to a sales/use or similar tax as of January 1, 2015?
  • Potential costs to state and local governmental entities are unknown, but could be significant.  The proposal’s passage would impact governmental entity’s ability to revise their tax structures.  State and local governments expect no savings from this proposal.

Fair Ballot Language:

  • YES: A “yes” vote will amend the Missouri Constitution to prohibit a new state or local sales/use or other similar tax on any service or transaction. This amendment only applies to any service or transaction that was not subject to a sales/use or similar tax as of January 1, 2015
  • NO: A “no” vote will not amend the Missouri Constitution to prohibit such state or local sales/use or other similar tax.

Currently, Missouri law states that sales tax is properly charged on the sale of all tangible personal property and to certain specifically listed services (RSMo Sec. 144.021). The list of services currently subject to tax is limited to admissions to events and amusement parks, electricity and other utilities, and telecommunication services (RSMo Sec. 144.021).

Potential costs to state and local governmental entities are unknown, but could be significant.  The proposal’s passage would impact governmental entity’s ability to revise their tax structures.  State and local governments expect no savings from this proposal.

The Argument in Support

Those in favor of the measure argue that:

“Missourians rely on all sorts of basic services every day. Haircuts, manicures, shoe repairs; the services of a family doctor, a lawyer or accountant; the lease on a family’s home. Those services are now tax-free. But politicians hungry for new revenue want to put a sales tax on basic services.

Sales taxes are already too high, and they hit hardest for those who can least afford to pay: low-and-middle-income Missourians, senior citizens on fixed incomes and the disabled.

New sales taxes on services have been proposed in the last seven sessions of the Missouri General Assembly. Just this year, Missouri’s neighboring states of Oklahoma and Illinois have discussed taxing services. Other states, such as North Carolina and Washington State, have started imposing new sales taxes on services this year. The threat is real because politicians often share bad ideas, and a sales tax on services is a bad idea for Missouri consumers.”

The Question and Issues for Voters

Since very few services are currently taxed in Missouri, there would be no immediate impact on tax revenue. However, the question becomes what could the future impact be on state and local finances?

Most sales tax laws were created at a time when transactions in goods dominated the economy. In the 20’s and 30’s, services accounted for roughly 50% of GDP. As of 2015, services accounted for nearly 80% of the US GDP. The increasing importance of service transactions to our economy has had a significant impact on sales tax revenue, as many states, like Missouri, continue to tax all goods but only certain services.

Some states, such as South Dakota, have enacted rules which tax all transactions, including services. Others, like North Carolina, have passed legislation that has expanded their tax base to include more services, essentially “broadening the tax base”. But many states, like Missouri, continue to tax very few services.

This Missouri ballot initiative would add a constitutional prohibition to applying sales tax to any services not taxed as of January 1, 2015.

The question that Missouri voters must consider: Is it wise to add a constitutional measure that will severely limit the state’s ability to adapt its tax policy to changing economic trends?

As the current law is written, adding new services to the tax base requires that a new bill be proposed, debated, enacted by the legislature, and then signed by the Governor. Essentially, voters need to decide whether this current process sufficient to ensure taxation of services is cautiously reviewed prior to being enacted, or do they prefer to outright prohibit the Government from tapping this potential stream of revenue without passing another constitutional amendment?

Of course, taxing services are not the only way to expand the tax base. Even if this avenue is blocked, the legislature may still be free to raise rates on goods that are currently taxed or they can eliminate or restrict existing product or purchaser/use based exemptions.

Missouri has a host of exemptions and special tax rules in their existing tax law, including exemptions for manufacturers, non-profit organizations, medical supplies, and reduced tax rates on food. What would be the impact on these rules if Amendment 4 were adopted? Those answers can’t be known right now but the question should at least be considered by the voting public before they cast their ballot.

A poll taken in early October showed 49% opposed the proposal, 23% were in favor; and 27% remained undecided. Will this amendment pass? We will all be watching on November 8 to see how this interesting approach to tax policy shakes out.

Take Action

  • Learn more about how Sovos automated solutions can keep your business in compliance with complex tax reporting requirements.

The post Missouri Voters to Decide on a Constitutional Ban on Taxing Services appeared first on Sovos Compliance.

About the Author

Matt Walsh

.Matt Walsh is the Principal of Indirect Tax. Matt and his department ensure that all Sovos tax and reporting solutions are compliant with global indirect tax laws. He also provides strategic direction, guidance and recommendations for product enhancements and development. Matt is also focused on fostering and managing government and industry relationships.Matt has over 17 years of experience in compliance, including starting as a tax counsel in the tax department and then advancing from Manager to Director of Tax Research and from there to Senior Director of Tax to his present position. He also was formerly a Team Manager at John Hancock Financial Services. Matt is currently a member of the Technical Advisory Group of the OECD (Working Party #9), which drafts model legislation and implementation guidelines for the taxation of cross-border services.Matt has a BS in Business Administration from the MA College of Liberal Arts as well as a JD from the New England School of Law.

More Content by Matt Walsh
Previous Article
Special Delivery: Missouri and the Taxability of Delivery Charges
Special Delivery: Missouri and the Taxability of Delivery Charges

What is the taxability of delivery charges in Missouri? As a general rule, services are exempt from sales a...

Next Article
ACA Compliance and Reporting: Broker Newsletter 11/3/16
ACA Compliance and Reporting: Broker Newsletter 11/3/16

Understandably, one of your clients’ biggest concerns related to the Affordable Care Act (ACA) is incurring...