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Broadening the Sales Tax Base Proves Entertaining

author photo of Annette Nellen

On 7/23/13, North Carolina Governor McCrory signed HB 998  (S.L. 2013-316) which he described as an "historic tax reform package [that] is a win-win for our state and the working families who live here.”  He further described the bill as "fiscally responsible" and something that "is expected to grow the state's economy and bolster the tax base."

As described by the governor, the bill reduces the personal income tax from its current maximum rate of 7.75% ro 5.8% in 2014 and 5.75% in 2015. The standard deduction is also increased.  Families with income under $40,000, will have a larger child tax credit.

In addition, HB 998 reduces the corporate income tax rate from 6.9% to 6% in 2014, then down to 5% in 2015. If specified revenue targets are met in later years, the rate goes down to 4% in 2015 and to 3% by 2017. The "death tax" is also repealed.

Governor McCrory's press release upon signing the bill highlights the above features, but no the one about broadening the sales tax base.  He does mention "broadens the base" but doesn't specify the details or the tax he is referring to.

Goals noted in earlier versions of the legislation (such as "edition 3") notes that the bill is intended to be a start towards comprehensive tax reform that will shift taxes from income to consumption. They also want to make the tax system more competitive and expand the sales tax base to include more services. (Apparently what started with HB 998 would continue with future legislation - we'll see. HB 998 does call for further study on some tax issues including further expanding the sales tax to cover more services.)

I would just like to focus on the change to the sales tax base to include admission charges to entertainment activities such as:

  • A live performance event
  • A motion picture or film
  • A "museum, a cultural site, a garden, an exhibit, a show, or a similar attraction or a guided tour at any of these attractions."

Some activities, such as performed at and sponsored by a K-12 school, would be exempt. (For specifics, see page 17 - 18 of HB 998.)

Many people might be shocked that tickets to movies, sporting events, plays, musicals, lectures, museums and the opera will be subject to sales tax. But, shouldn't we be shocked that in many states, this type of personal consumption is not subject to sales tax? Why should a book or DVD be subject to sales tax, but not the live performance? Also, higher income individuals spend more money on entertainment than do lower income individuals so an exemption for entertainment activities provides a significant benefit to higher income individuals.

In 2003, the Bureau of Labor Statistics reported an increase in dollars spent on entertainment from a few years earlier. They also reported that the top income quintile spent about 4.5 times more on entertainment than did the bottom income quintile.

BLS data for 2011 shows the following average spending on fees and admissions (in the entertainment category) within these income groups:

  • under $5,000   -----> $221
  • $5,000 to $9,999 -----> $140
  • $10,000 - $14,999 -----> $93
  • $15,000 - $19,999 -----> $152
  • $20,000 - $29,999 -----> $188
  • $30,000 - $39,999 -----> $276
  • $40,000 - $49,999 -----> $358
  • $50,000 - $69,999 -----> $468
  • $70,000 and higher -----> $1,272

Thus, for equity purposes, there is justification for taxing entertainment activities. What about other policy considerations?

Simplicity - This change is unlikely to add much complexity given the few exemptions, such as for schools and State attractions. Some entertainment providers may have already been collecting tax if they also sold tangible personal property or if NC taxed food, such as movie popcorn.

Neutrality - This change likely meets this principle in that most entertainment activities are covered. Thus, it is not singling out one type for a different type. Also, to the extend movie DVDs were already subject to sales tax, neutrality is improved.

Minimum tax gap - Providers of taxable entertainment are often large establishments and likely to be compliant. The NC Department of Revenue will need to engage in a public awareness campaign to help consumers and providers know about the tax and to help providers get ready to collect and remit.

If this is stage one of broader tax reform in NC, it seems to be a strong start. The state will need to evaluate the revenue neutrality of the reforms going forward (seems to be some expectation of economic growth that will help - they will have to gauge that in coming years). There is more to do with the sales tax to further broaden the base to include more types of personal consumption and to lower the rate.

What do you think?

Other recent “Sales Tax Policy - Tales & Trends” posts by Annette Nellen, CPA, ESQ:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.

Comments

3 Responses to Broadening the Sales Tax Base Proves Entertaining

  • Posted by Val on August 21, 2013 3:36am:

    Good point Drew. In several states you can get a taxed purchases resold credit or refund to the extent you are registered to collect tax. My guess is as an individual you would not be registered to collect tax and further, the transaction could be exempt as an occasional sale.
    Perhaps more interesting is the matter of individual entertainment services. Clowns, personal greetings, possibly keynote speakers at seminars, . . .any live event or live performance. I imagine that applies to any online event also. The real question arises on what constitutes 'entertainment'.. If the lecture is for education rather than entertainment, I suspect the true object prevails. However, what happens when an event has mixed activities such as a conference with entertaining keynote speakers. Do we now have a bundled transaction? I've seen some interesting rulings in the few states that do tax entertainment and admissions.
    Nicely written article Annette, thanks for an 'entertaining read'. Hopefully there's no tax since there is no consideration to make it a sale . . . LOLto that thought of a tax on 'free entertainment'.

  • Posted by Drew on August 15, 2013 12:04am:

    this is the worst kind of "reform." Entertainment tickets are taxable. You buy a couple of tickets to your favorite rock band and decide you can't go. You re-sell the tickets for double what you paid. Tax applies to the resale price. Maybe that's why the BLS stats show people who make more than $70k spend 3X what those who make less spend on entertainment. And now, who pays and who collects this tax? Everyone has the potential to be a scofflaw. It illustrates why tax was generally imposed on tangible personal property. Entertainment is ephemeral. Aren't cultural organizations having enough financial problems without adding this burden?

    • Posted by Author photo of Annette NellenAnnette Nellen on August 15, 2013 2:43pm:

      Thanks for the comment. If the state does require you to collect sales tax on your resold tickets, they should find an easy way to handle it. I think the reason entertainment spending is 3x higher for higher income individuals is having more disposable income and buying expensive concert and show tickets as well as season tickets.

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