Replacement Tax Rule Draft v3v4– 4/1522/09
WAR
Rule ____ - Prohibition of Replacement Taxes
1. The purpose of this rule is to provide guidance in applying the prohibition against replacement taxes in Section _____ of the Agreement. For purposes of this rule, aA “prohibited replacement[SoO1] tax” is an excise[SoO2]a tax imposed outside a state’s general sales and use tax, on or with respect to a product or products that are defined in Part II or Part IIIB of the Library of Definitions, that has the effect of avoiding the intent of the Agreement. The Governing Board shall determine whether a particular tax enacted by a member state is a prohibited replacement tax based upon an examination of all the facts and circumstances.
2. Factors that may shall[SoO3] be considered by the Governing Board in determining whether a tax is a prohibited replacement tax include:
a. Whether the tax is specifically imposed on or with respect to a product that is defined in Part II or Part IIIB of the Library of Definitions at the time of the adoption of the tax, or on products subsumed within such definition, except alcoholic beverages and tobacco;
b. Whether the tax was previously imposed by the state upon such product by statutes which are subject to the requirements of the Agreement;
c. Whether the tax contains both a sales and a use tax component;
d. Whether the tax imposes an undue administrative burden on sellers of the product which would not be imposed if such tax were subject to all of the requirements of the Agreement with regard to sales and use taxes;
e. Whether the tax was adopted in anticipation of the state petitioning to become a member state or [SoO4]after the state became a member state;and
f. Any other factor the Board considers relevant to determining whether the tax in question has the effect of avoiding the intent of the Agreement.
3. The following types of tTaxes that are deemed notto be replacement taxes include, but are not limited to[SoO5]:
a. Excise tTaxes on alcoholic beverages or tobacco;
b. Excise tTaxes based on quantity measures such as weight or volume rather[SoO6] than sales [SoO7]price;
c. Lodging or hotel occupancy taxes[SoO8];
d. Broad based business activity or privilage taxes[SoO9] that are calculated on a base different than the state’s general sales and use tax;
e. Taxes existing in state law prior to the state’s initiating action to become a member state; and
f. Local excise taxes without a use tax component.; and
f. Local restaurant or tourism taxes without a use tax component[SoO10].
4. The A finding by the Governing Board thatmay find a member state that has adopted a replacement tax is a finding of noncompliance and must be made out of compliance with the Agreement and may impose appropriate sanctionsin the manner provided in section 809A of the Agreement[SoO11].
5. Examples:
Example 1 – Prior to joining SST, a member state had a sales tax on formal wear, but exempted clothing generally. As part of its legislation to conform to the Agreement, the state made the decision to exempt all clothing. After being approved as a member state, the state imposes a tax specifically on the sale of formal clothing and wedding apparel at a different rate than the general rate of sales and use taxation. The new tax has a use tax component and requires sellers to file a separate return. This tax is a prohibited replacement taxand the member state can be found out of compliance with the Agreement.
Example 2 - A locality, prior to its state joining SST, imposedstate authorizes localities to impose[SoO12] a separate restaurant tax on "all prepared food or beverages sold by restaurants", as defined in the ordinance. The restaurant tax has no use tax component. The locality also imposed its generally applicable sales tax on prepared food. Prior to the state's admission to the Governing Board, the sales tax definition of "prepared food" was modified to conform to the SST definition. The additional tax, however, continues to be imposed just on sales by restaurants. Thus, restaurants still pay both the generally applicable sales tax and the restaurant tax on their meals. Grocery stores, however, and other non-restaurants, just pay the sales tax on any prepared food they sell. The restaurant tax is not a prohibited replacement tax and does not cause the locality and the state to be out of compliance with the Agreement.
[SoO1]Suggested by Sherry Harrell. Changed in several places.
[SoO2]Sherry Harrell indicaterd adding “excise” tax was confusing. The intent was to distinguish between an income or property type tax and clarify that such taxes would not be an issue. However, since this section is basically trying to restate the prohibition in the proposed amendment, I removed the word “excise.
[SoO3]Suggestion by Mike Eschelbach at the teleconference 4/20/09. A further comment , not reflected here, suggests having some minimum factors that the Board must find in order to determine a tax to be a replacement tax. Then other factors could be consdierted to dertermine whehter the tax violates the intent of the Agreement.
[SoO4]Added to address a concern raised by Fred Nicely
[SoO5]Revised per comment on teleconference on 4/20/09
[SoO6]Per suggestion from Sherry Harrell
[SoO7]“Sales” was deleted. Sherry Harrell noted “sales price” is defined in the SSUTA and a price based tax could have a different definition. In response to her question, I am not aware of any such quantity-based taxes on currently defined terms, but one could exist or be enacted at a later date. A new definition could also be added in the future, say for motor fuel.
[SoO8]I had suggestions to remove this since these terms are not defined. I left it in as an example of what is not a replacement tax. The reason may well be it does not meet the definition.
[SoO9]Per suggestion from Sherry Harrell.
[SoO10]Fred Nicely and Deborah Bierbaum suggested the original draft language was too broad. There may be other local taxes that would not be replacement taxes, but these should be the most obvious.
[SoO11]I received suggestions that this section be deleted. Jerry Johnson suggested amending it. There was copncern that a replacement tax finding was only a majority vote while a finding of noncompliance required three-fourths. I tried to address the concerns by cross-referencing section 809A.
[SoO12]Suggested by Sherry Harrell.