Buffalo is my hometown. Over the years we’ve grown accustomed to the snow and cold of winter, heart-breaking defeats for our beloved sports teams, the downtrodden economy, population decline and general decay of a once-thriving rust-belt city. However, the fortunes of the Queen City are starting to rise again. Buffalo is in the midst of an unprecedented resurgence, and businesses are returning to this city with significant private investments and new jobs in hand. Hotels, restaurants and bars are springing up all over downtown to serve the influx of people working and moving back to the city.
One impediment to this development is the lack of significant retail shopping in downtown Buffalo. Presently, there are very few stores to meet the shopping needs of workers and residents. These people need to find their way back to suburban malls, shopping centers and supermarkets for their shopping needs.
One prominent local developer wants to change that by encouraging retailers to open stores in downtown Buffalo. This week, he has proposed creating a “sales-tax-free zone” for retailers in Buffalo.
This is an intriguing idea that has been discussed in the past but never really gained enough traction to be taken seriously. People are enthralled by the idea of tax-free shopping; and this concept will not only cater to city dwellers, but it will also draw shoppers from the suburbs to downtown Buffalo where they will likely spend money at entertainment venues, restaurants and bars as well. But this is easier said than done. How would a sales-tax-free zone work? Where will the physical boundaries be drawn? Who might be considered a retailer? What items are nontaxable?
First though, consider that Erie County received $733,365,974 in sales and use tax distributions from New York State in 2014-15, according to an August 2015 publication from the New York State Department of Taxation and Finance. A sales-tax-free zone in downtown Buffalo would likely impact these collections and result in less tax revenue not only for the county, but also the cities, towns, villages and school districts that the county shares this revenue with. How will these potential shortfalls be made up? The City of Buffalo may have other sources of revenue as more businesses and shoppers converge on downtown; but it may leave surrounding communities with a loss, which may create opposition to this plan.
A sales-tax-free zone could also create significant compliance issues for businesses and the Department of Taxation and Finance. Under the current concept, sales made to customers within the zone would be tax-free. Sounds easy enough. However, it soon becomes complex if a retailer delivers goods to locations outside the zone. Sales tax is a destination tax; and the point of delivery or the point at which possession is transferred by the vendor to the purchaser determines the rate of tax to be collected. Additionally, if retailers are exempt from paying sales or use tax on purchases, there will need to be some mechanism created to credit or refund tax paid in error, and/or a new exemption certificate may need to be created.
Establishing the physical boundaries of such a zone could also be complicated and likely elicit challenges from established retailers and other businesses located just outside the zone’s boundaries. Also, suburban retailers who pay higher property taxes and other fees will likely urge their elected officials to fight any tax-breaks designed to lure potential business to downtown Buffalo. If this initiative were to catch on in Buffalo, it could set a precedent for other struggling cities in the state, which would affect sales tax revenue on a much larger scale.
Who would be considered a retailer? There are many businesses that sell goods other than traditional retail establishments – bars and restaurants may sell t-shirts or mugs; hotels sell toiletries and other goods; entertainment venues sell souvenirs and other merchandise – are they retailers, too? What about the tax currently charged on downtown hotel rooms, food, beverages, etc.? Eliminating sales tax on these items could have an adverse effect on tax revenue for the county and city. Clearly defining “retailer” for purposes of the sales-tax-free zone will be critical.
The combined state and local sales tax rate in Buffalo (Erie County) is 8.75%, which is the highest in the state behind the 8.875% tax rate charged in New York City and Yonkers. Eliminating the tax could provide significant saving to shoppers depending on what they’re purchasing. Clothing and footwear sold for less than $110 per item or pair is already exempt from the 4.0% state portion of the sales tax, so shoppers would receive savings from only the 4.75% local sale tax. How might more expensive items be treated (i.e., electronics, vehicles, jewelry or other luxury items)…would there be a high-dollar cap or ceiling on tax-exempt purchases?
Proponents of this plan and State and local legislators must consider these issues before implementing a sales-tax-free zone. Unbeknown to most, tax free holidays the public enjoys in some other states are a nightmare for retailers. The potential rules and regulations necessitated by a sales-tax-free zone in New York State’s second-largest city could be very complicated, requiring significant planning and evaluation. Unfortunately, it’s not as easy as simply flipping a switch to make the sales tax disappear. But this concept deserves careful thought and planning prior to implementation in order to prevent more harm than good from being done.
Your comments and questions are invited (and greatly appreciated).
Other recent “New York (NY)” posts by Tom Mazurek, CPA:
- New York Sales Tax: Drop Shipments & Resale Certificates
- New York: Taxing Computer Software
- Sales Tax Free Zone in Buffalo
- Sales Tax Provisions Included in 2015-16 New York Budget
- New York: Capital Improvements v. Repairs to Real Property