Sales Tax Modernization for Maryland

Last week, the Center on Budget and Policy Priorities published a new report, "Four Steps to Moving State Sales Taxes Into the 21st Century," that urges states to modernize their sales taxes in order to broaden their tax bases and increase revenues. 

The Center suggests states adopt four general tactics to achieve this goal:
     1.   Tax more services. 
When the state established a sales tax in 1947, goods made up 60 percent of household receipts. Today, goods weigh far less in the share of total consumption; households spend almost 68 percent of their budgets on services, most of which are not subject to the 6 percent state sales tax. 

Source: Center on Budget and Policy Priorities

According to an earlier report by the Center, if Maryland taxed all household purchases of services other than health care, housing, education, legal, banking, public transit, insurance, and funeral services at the same rates they tax tangible goods, the total revenue yield could amount to more than $2 billion per year. 

In the 2012 session, Delegates Hixson and Gilchrist introduced HB1051, which would have expanded the definition of "taxable service" to include personal services such as motor vehicle maintenance and repairs, parking, barber or beauty services, tanning,saunas, and shoe repair. It would have also taxed several business-to-business services, such as  tax preparation, business brokerage, and personnel supply services. MBTPI generally supported the bill's goal of recalibrating the sales tax system to cover a broader range of services but advised that the bill be amended to exempt from taxation 

services that are principally purchased by businesses. However, this legislation did not make it out of committee, so new action in future sessions would be required to broaden the tax base in this way.

     2.   Tax tangible goods purchased online.

Online purchases make up a significant portion of Maryland consumer spending, and very few of these transactions are taxed. According to a study by the state Comptroller, "In 2010, Maryland lost an estimated $198.4 million in sales and use tax revenue from the sale of tangible goods by remote sellers, which represents about 5.4 percent of gross sales tax collections." 

Federal legislation has been introduced that would enable all states to require online retailers such as Amazon and Ebay to collect sales tax on online purchases. The bill known as the "Marketplace Fairness Act" passed the Senate in May but awaits an uphill battle in the Republican-controlled House. In the meantime, several states have passed their own legislation to reach this end, most notably New York with its so-called "Amazon law." Maryland's legislature has so far yielded to Congress to address the issue at the national level. Maryland's 2013 Transportation Bill dedicates some of the increase in sales tax that would result from a federal rule change to state transportation projects, but if Congress fails to pass new law, the state will raise its gas taxes further to meet its financial needs for these projects.

     3.   Tax digital downloads.

Maryland does not currently tax online downloads. The Comptroller's sales tax study estimated the foregone tax revenue from the sale of digital goods (such as online downloads of software, music, ebooks, and movies) amounts to roughly $5 million per year if these sales were taxed at a rate of 6 percent. The Governor proposed an initiative in the 2012 session that would have created a tax on these downloads, but it was rejected by the legislature. This could be an additional source of state revenue in the future. 

     4.   Eliminate the online hotel tax loophole.

Online travel agencies often do not collect the full value of hotel taxes owed to the state. A loophole allows these websites to apply the tax on the wholesale rate the travel firms pay the hotels rather than the higher retail rate that would be charged to a consumer who booked a room directly with the hotel. This difference amounts to at least $5 million foregone state revenue. No major legislation at the state level has been proposed to amend this practice.

Sales and use taxes are second only to the income tax as Maryland's largest sources of income and accounted for 28 percent of state revenue for fiscal year 2012. While sales taxes--like most consumption taxes-- tend to be regressive in nature, they are a more robust source of revenue for state governments than income taxes, declining less in periods of recession. 

Reforms that could enlarge and strengthen this key source of state dollars and bring sales tax into the 21st Century should be considered. However, the state should be sure to accompany any substantial broadening of the tax base with a robustly progressive income tax system and/or accompanying tax credits to help aid lower-income Marylanders who might be disproportionately affected by increases to their consumption tax burdens.