07 February 2022 | Tax and Budget

Creating Criteria to Determine Sales Tax Exemptions

Emily Fetsch

February 7, 2022

Kansas’ current tax policy to determine which businesses and nonprofits are subject to sales tax is unnecessarily complicated and unfair, particularly to smaller nonprofits and businesses that might not have the resources to participate in the legislative process.

Sales tax exemptions are often discussed in the Kansas Legislature in two ways:

1. Exempting individual nonprofits from sales tax obligations.

2. Exempting services from the sales tax base.

Nonprofit Exemptions

Every year, at least one nonprofit requests legislation for its entity to be exempt from sales tax. These nonprofits are motivated to make the request knowing that other nonprofits have previously made the request and received sales tax exempt status. In theory, it is not inherently wrong for policymakers to exempt nonprofits from sales tax obligations.

Businesses and nonprofits have different missions. Businesses’ number one priority is to make money. Nonprofits have different missions – to serve their communities. Businesses and nonprofits might provide similar services, but their missions differentiate them and they should not be automatically equated as the same in terms of tax treatment.

However, the problem with Kansas’ current nonprofit sales tax exemption process is it is arbitrary, lacks definitive criteria, and relies on the ability of the nonprofit to have the knowledge, staffing, and connections to make the request and lobby for bill passage.

Nonprofits should have their service to their communities recognized. However, it is important that lawmakers are consistent in their application of exemptions. Policymakers should develop criteria to determine whether a nonprofit should be exempted from sales tax obligations, and, if a nonprofit can provide information demonstrating they fulfill that criteria to the relevant agency, they would be eligible to receive the exemption.

The criteria can be narrow or broad, but the broader the criteria, the more revenue will be lost with the increased exemptions. The development of uniform criteria would simplify the process for nonprofits (and save time in legislative committees!) and increase fairness as nonprofits would be evaluated on an even playing field. All Kansas nonprofits, regardless of their ability to lobby for legislation, would stand to benefit.

Service Exemptions

Similarly, sales tax exemptions for services often comes up in legislative discussions. The consumption of services is increasing significantly, as household spending is shifting from goods to services.

Untaxed household services should be the focus of any new sales tax legislation. This could include personal services like carpet cleaning, massages, or tennis lessons. It could also include financial services like investment counseling, loan broker fees, or real estate agents. In addition, services frequently sold to both households and businesses (e.g. auto repair) should be taxed.

However, in past legislative sessions, we have seen some service industries have lobbied to be excluded. If the dog walkers have the lobbyists and influence to be excluded, is that fair to the dog groomers who don’t have hired lobbyists in the Statehouse and the accompanying influence? Policy should be determined based on a set of criteria, not based on Statehouse relationships.

Lawmakers must identify which services could be subject to taxation, including estimating the potential revenue to be gained by each additional service taxation. To accomplish this, lawmakers should establish clear criteria for how sales tax on services are determined and implement those in the 2022 legislative session.

Much work remains to rebalance Kansas’ tax code, and addressing sales tax on services is a logical next step. Creating consistent and clear criteria to determine which nonprofits and businesses should be exempted from their sales tax obligations would make the process simpler and fairer to all involved

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