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From Governing’s
While other states have spent the past decade or so poking their tax structures full of holes through exemptions and tax credits, South Dakota has preserved and even broadened its sales and use provisions. It is one of only three states in the country to collect a gross receipts or sales tax on most services, including those provided by professionals. Hire a lawyer, an accountant or a consultant in South Dakota, and there’s a tax applied.
In the late 1970s, the state added an even more unusual contractor excise tax, which covers materials and labor on improvements to real property. In 1995, it began taxing intra-state transportation. So, if a resident of Vermillion has a pine dresser shipped 350 miles across the state from Argyle Furniture in Hot Springs, he’ll pay a tax on the trucking charges. This broad revenue base explains why South Dakota has been able to keep its rates low. The 4 percent state portion of the sales tax hasn’t changed since 1969. There’s no individual income tax, and local property taxes were reduced by 30 percent in the 1990s. Gambling, in the form of a video lottery, also helps make the tax burden among the lowest in the United States. “When other people come here, they just laugh,” says one legislative staffer. “They wonder why the local people are complaining.” There is one legitimate reason why some people might choose to complain. Because the state’s money comes predominantly from the sales tax, and because the tax covers food, clothing and other necessities, the poorest 20 percent of South Dakota families pay around 10 percent of their income to the state, while the wealthiest 20 percent pay between 2.3 and 6.1 percent. This imbalance is mitigated somewhat by the levy on professional services, which are purchased mainly by the well-to-do, but the fact remains that South Dakota’s tax structure, despite its many positive features, is one of the most regressive in the country. There is also a problem of double taxation. Let’s say the owners of Argyle Furniture decide to contract with an accountant. The business pays a tax on her services, and then builds that cost into its price structure. When the fellow in Vermillion buys the dresser, he is paying a tax on top of a tax. Such pyramiding — or cascading — is generally frowned upon by policy experts. South Dakota goes to unusual lengths to make sure newcomers understand its unusual system. A new business doesn’t just get a sales tax license and a pamphlet in the mail. A tax agent calls in person or on the phone to see if everything is clear. An unusual “Licensee Review” program is also available, in which a business submits to a voluntary, abbreviated audit of its taxes. The goal is purely educational. No penalties or interest are charged. This has been an excellent way for the state to leverage its somewhat meager administrative resources. About a thousand licensee reviews were done last year — approximately equal to the number of businesses that received conventional audits. Given its limited resources, South Dakota has made a good effort to keep up with technology. Electronic filing and payment have been available to businesses since 2000, and 35 percent of sales and use tax revenues are received that way. The Revenue Department has rolled out a new system to help businesses deal with the varying sales tax rates in different parts of the state. This can get quite complicated, since localities are allowed to add up to 1 cent additional tax on groceries, up to 1 cent on alcohol, lodging and restaurants, and up to 2 cents on anything else. Businesses are able to type in an address and see immediately how much sales tax to charge in that location. The state also has made simple efforts to do data matching, but it could go a lot further in using data to optimize revenue collections. “That’s an area we’re a little weak on today,” admits Revenue Secretary Gary Viken. “For an agency like ours that wants to squeeze as much as possible out of the existing tax structure, data mining offers a lot of potential.” As in other states, that need to squeeze has become more intense. This is due not only to the falling economy but also to a badly timed repeal of the inheritance tax, which the voters mandated by referendum in 2000, and which took effect in this fiscal year. That one change carved about $35 million out of the tax base. To pay for it and balance the budget, the legislature elected to use $36.3 million of the state’s $116 million rainy day fund. “One more dip into the fund may be required, and then the new governor will have to decide how he wants to address this,” says Randy Stuefen, of the University of South Dakota’s Business Research Bureau. “The idea was that the booming economy would help the state grow its way out of the need for that revenue, but as soon as it became law, the boom was gone.” Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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verybody pays at least something in South Dakota. The federal government pays taxes to the state, as do churches, universities, schools and the Little League. “You can’t believe how much sales tax we get from the Girl Scouts,” says Scott Peterson, director of the state’s business tax division. “They must sell a lot of cookies.”