Report: Stop Retailers Pocketing over $1 Billion in Sales Tax Revenue

According to a new study by Good Jobs First, state and local governments lost over $1billion in sales tax revenue last year as a result of laws that allow retailers to retain a percentage of the sales tax they collect.

The study, Skimming the Sales Tax: How Wal-Mart and other Big Retailers (Legally) Keep a Cut of the Taxes We Pay on Everyday Purchase, finds that 26 states provide retailer compensation, and 13 of those states have no limit on the amount that individual businesses can retain.  States without caps lose significant amounts of sales tax revenue annually; Illinois loses $126 million, Texas loses $89 million, Pennsylvania loses $72 million, and Colorado loses $68 million.

Good Jobs First Executive Director Greg LeRoy highlights the problematic nature of these polices, particularly as state and local governments face severe budget shortfalls, "This legal skimming is depriving governments of desperately needed revenue."

The practice of retailer compensation, often referred to as "vendor discount" or "dealer collection allowance" was first implemented when business records were kept by hand, and it was intended to compensate business owners for the additional burden of collecting sales tax on behalf of the government.  Despite the advent of new technologies that greatly decrease this burden, outdated compensation policies remain in place in many states.  

Large retailers, such as Wal-Mart, which receives an estimated $60 million per year from retailer compensation programs, benefit disproportionately from these laws, as the major costs associated with collecting sales tax are fixed costs (such as software programs) that do not rise with increased receipts.

In addition to addressing concerns regarding the existing retailer compensation practices, Good Jobs First also notes that states that currently do not provide compensation may have to do so in the future in order to participate in a new sales tax system for interstate transactions created by the Streamlined Sales and Use Tax Agreement (SSUTA).  Proposed federal legislation (H.R. 3396 and S.34) to facilitate the collection of sales tax on interstate transactions requires states to provide "reasonable compensation" to all retailers, not only to those selling across state lines.  The legislation does not explicitly define "reasonable compensation," and thus, it will be up to state policymakers to address this issue.

Good Jobs First also continues its investigation into economic development subsidies, which include sales tax rebates and sales tax increment financing (STIF), that result in significant revenue losses for local governments.  Although national data is not available on such subsidies, the study finds that Wal-Mart projects have received a total of $130 million from sales tax-based subsidies over the past decade.

In light of the research presented, the study concludes with three main policy recommendations:

  • Put Limits on Current Retailer Compensation
  • Plan for Prudent Compensation Levels under SSUTA
  • Save Economic Development Subsidies for Truly Needy Areas

Given the current economic climate, it is critical that states make wise policy decisions regarding retailer compensation and economic development subsidies in order to reduce the amount of sales tax revenue that is lost by such practices and to protect essential public services that depend in part on this revenue.