SD61 - Final Report of the Joint Subcommittee to Develop Criteria for Evaluating Sales and Use Tax Exemption Requests

  • Published: 1994
  • Author: Senate Finance Committee and House Finance Committee
  • Enabling Authority: Senate Joint Resolution 249 (Regular Session, 1993)

Executive Summary:
Sales tax exemptions and legislation proposed to enact even more exemptions have proliferated over the last several years despite a concerted effort in 1989 to limit such efforts. The Senate and House Finance Committees, the Department of Taxation, and the Division of Legislative Services spend a disproportionate amount of time drafting, revising, analyzing, and considering such sales tax exemption requests and do so without the benefit of any apparent objective criteria or standards. This absence of objective criteria and policy guidelines has resulted in possibly inconsistent decisions being made by the legislature and ratified by the administrative branch; that is, the Code of Virginia exempts, by description, the American Heart Association, the American Lung Association of Virginia, the American Diabetes Association, and the American Cancer Society (see clauses 20, 21, 22, and 23 of § 58.1-609.8), and yet fails to exempt certain arguably similar organizations. Such organizations would include nonprofit organizations which provide education and research for the disease lupus erythematosus, or which aid in the prevention and treatment of leukemia, or which aid in the prevention of birth defects and infant mortality through research (the March of Dimes). The United Way is subject to sales tax; however, some, if not many, of the organizations under its umbrella are apparently exempt from tax. Bills introduced to amend the Code of Virginia to end this disparate treatment failed in the 1992 and 1993 Sessions. See House Bills 42, 97, and 130 (introduced during the 1992 Session and carried over until the 1993 Session, where no action was taken).

The specificity of exemptions, while attempting to avoid one problem inadvertently creates another. For example, subdivision 15 of § 58.1-609.4 exempts only those nonprofit illiteracy councils doing their work within the Metropolitan Richmond area; subdivision 11 of § 58.1-609.9 exempts nonprofit art organizations which coordinate and promote art in the Roanoke Valley; and subdivision 26 of § 58.1-609.8 exempts certain nonprofit youth activity organizations so long as the youth are Appomattox County residents. While such "narrowing'' of the exempting language clearly works to reduce the Commonwealth's revenue loss, the ability of such narrow classifications to withstand scrutiny under an equal protection or special legislation analysis may well be suspect. In addition, exemptions of this nature also serve to encourage the proliferation of even more such narrowly drawn exemption provisions as other legislators and their constituents adopt a "me too" attitude. Such an attitude is understandable because an exemption is simply a form of a cash subsidy which all other state taxpayers support. To favor state taxpayers in one jurisdiction over those in others would seem to require, at a minimum, some compelling justification, one which is usually very difficult to articulate. (*1)

This inability to articulate the legislative policy to be applied when considering requests for exempt status is reflected in Senate Joint Resolution 249 adopted by the 1993 Session of the General Assembly (Appendix A). The resolution makes, among others, the following points:

1. The largest number of exemptions and exemption requests fall in § 58.1-609.8, nonprofit civic and community service organizations;

2. The distinctions between organizations granted exempt status and those denied it often seem to be minimal from a tax policy and public service viewpoint; and

3. The General Assembly should have in place a rational policy and procedure by which to evaluate requests for exemption from the Virginia Retail Sales and Use Tax Act.

As directed by SJR 249, the joint subcommittee considered a variety of methods for granting sales and use tax exemptions, focusing particularly on the nonprofit civic and community service organizations because they comprise the largest number of exemptions currently in the Code, and the largest number of requests each session, although the total annual revenue loss from this category of exemptions is among the lowest of all the exemption categories.

The subcommittee met four times beginning in June 1993 and ending in January 1994. They heard testimony from interested individuals, representatives from the Departments of Taxation and Agriculture and Consumer Services, and legislative staff.
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(*1) The same deficiency exists with respect to the inability to explain why certain disease education/prevention organizations are exempt from tax under § 58.1-609.8 while others remain taxable. The legalistic response is that the General Assembly has made the determination and that the General Assembly possesses all powers not otherwise denied to it by the Constitution. See Article IV, Section 14, Constitution of Virginia (1971).