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Justice, legislators revisiting sales tax exemptions

CHARLESTON, W.Va. — With the state facing a $500 million shortfall in its 2017-18 budget, some legislators are revisiting the extensive list of goods and services exempted from state consumer sales taxes as a way to raise additional revenue.

Also, in his budget plan unveiled Wednesday, Gov. Jim Justice proposed repealing a small portion of sales tax exemptions to raise $87.6 million a year. Although the details aren’t available yet, Justice is proposing repealing exemptions for some professional services and on advertising services.

Why does West Virginia have so many sales tax exemptions? It’s a long story, an 82-year-old story, in fact.

West Virginia is one of four states that tax all goods and services by default. However, from the time the sales tax was enacted in 1934, and over the years, the Legislature has carved out a wide and extensive variety of exemptions, resulting in a list of exempted goods and services that currently fills four pages.

A 2016 study by the Department of Revenue concluded that the total “lost” revenue from the various exemptions exceeds $2.74 billion a year — or more than double the $1.27 billion that will actually be collected in sales taxes this year.

Some of the exemptions may have stemmed from a sense of goodwill: Goods and services sold to churches, nonprofit charitable organizations and youth groups are not taxed, saving those organizations an estimated $14.2 million, according to the 2016 Tax Expenditure Study.

Likewise, lawmakers repealed the sales tax on groceries, effective in 2013, eliminating $167 million of tax revenue annually, because proponents regarded the tax as being fundamentally unfair to low-income families and senior citizens on fixed incomes.

Similarly, services provided by public utilities, i.e., gas, water, electric and telephone, were one of the original exemptions in state law, the tax study noted, because legislators of the era realized those taxes would be an undue burden on low-income households. Currently, the public utilities exemption costs $320 million a year in lost revenue.

Sales tax exemptions for professional services, those provided by doctors, lawyers, accountants and the like, have long been a given since only three states tax those services.

Consumers in those states — New Mexico, South Dakota and Hawaii — tend to be isolated, requiring significant travel to avoid sales taxes on professional services.

The other assumption is taxes on professional services — which according to the 2016 study total about $895 million a year, including $750 million for medical services — would simply be passed on to consumers.

While most states don’t tax professional services, West Virginia also exempts personal services, so visits to the barber or beautician, nail salon, or tattoo parlor, and memberships at health and fitness clubs are tax-free.

Those exemptions amount to about $93 million a year in lost revenue.

According to the state Department of Revenue, exemptions from sales taxes date back to the Legislature’s passage of a consumer sales tax in 1934, including exemptions for professional and personal services, for public utilities, and for public transportation.

Over the years, a lengthy variety of exemptions were added, some for sound reasons, such as textbooks, as well as prescription drugs and durable medical goods.

Exemptions for prescription drugs and medical goods total nearly $250 million a year and were granted on the assumption the tax would unfairly burden the elderly and the infirm.

Reasons for many of the other exemptions are more obscure and include exemptions for:

Lottery tickets, propane used to heat poultry houses, tickets to elementary and secondary school activities, room and board at fraternity and sorority houses, openings and closings of burial lots, coin-operated video arcade machines, repair or maintenance of aircraft, babysitting services, primary opinion research, musical instruction, artistic performances when payment does not exceed $3,000, subscriptions to “Wild Wonderful West Virginia” and “Goldenseal” magazines, soap used at car washes, sales of regulation-size U.S. and state flags, sales to nationally chartered fraternal or social organizations, wine and liquor sales to private clubs, and homeowners’ associations dues and fees, to name a few.

Similarly, while the state phased out the sales tax on food in 2013, that exemption applies to groceries, with the sales tax still collected on prepared food served at restaurants or for take-out.

Again, legislators have carved out a number of exemptions for taxing prepared food, including meals served by school-sponsored organizations, colleges and universities and their student organizations, charitable groups and nonprofit organizations, religious organizations, youth sports and athletic booster organizations, among others.

Reach Phil Kabler at [email protected], 304 348-1220.

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