RD382 - 2007 - 2011 Virginia Retail Sales and Use Tax Expenditure Study, Volume 1, Number 2


Executive Summary:
Pursuant to Va. Code § 58.1-609.12, the Department of Taxation ("TAX") is charged with the responsibility of determining the fiscal, economic and policy impact of each of the Retail Sales and Use Tax exemptions provided for by Va. Code §§ 58.1-609.10 and 58.1-609.11 and reporting such findings to the chairmen of the House and Senate Finance Committees no later than December 1 of each year.

Subgroups of these exemptions are to be reviewed in periodic cycles and reports issued on a rotating basis in accordance with a schedule determined by the Tax Commissioner. When the reports have been completed for all of the subgroups, TAX is required to repeat the process beginning with the subgroup of exemptions for which a report was made in 2007. No exemption shall be analyzed more frequently than once every five years.

There are nineteen exemption categories scheduled to be studied during the 2007-2011 period, and every five-year period thereafter. This is the second report of the 2007-2011 series and includes a detailed analysis of exemptions that pertain to:

• Va. Code § 58.1-609.10(5) - Tangible personal property purchased with food coupons issued by the United States Department of Agriculture under the Food Stamp Program or drafts issued through the Virginia Special Supplemental Food Program for Women, Infants, and Children.

• Va. Code § 58.1-609.10(8) - School lunches sold and served to pupils and employees of schools and subsidized by government; school textbooks sold by a local board or authorized agency thereof; and school textbooks sold for use by students attending a college or other institution of learning, when sold (i) by such institution of learning or (ii) by any other dealer, when such textbooks have been certified by a department or instructor of such institution of learning as required textbooks for students attending courses at such institution.

This report includes detailed information on the policy and fiscal impacts of these two exemptions, as well as the apparent rationale for these exemptions and their legislative history. This report also includes a comparison of the Virginia exemptions with the sales tax structures of other states, with particular emphasis placed on a comparison with the exemptions provided in contiguous states.

Retail Sales and Use Tax Exemption for Food Stamps and WIC Vouchers
Under § 1505 of the Food Security Act of 1985 (P.L. 99-198), the federal government prohibits states from imposing a state and local sales tax on food stamp purchases as a condition for participation in the Food Stamp program. Congress passed the law to provide tax relief to those requiring assistance to purchase food and to preserve the purchasing power of food stamp recipients. For example, a 2.5 percent sales tax imposed on all food purchases would reduce the real buying power for recipients in the grocery store to the equivalent of 97.5 percent of the value of the coupon. Congress believed that protecting the buying power of food stamp recipients was paramount to concerns that the limitation interfered with state taxing powers. Similar provisions were included in the Special Supplemental Food Program for WIC Vouchers in the School Lunch and Child Nutrition Amendment of 1986.

Prior to this exemption, purchases with food stamps and WIC vouchers were considered taxable, as food stamps and WIC vouchers represented consideration (same as cash) paid for the purchase of tangible personal property. This exemption was passed in 1986 in response to the federal legislation.

Retail Sales and Use Tax Exemption for School Lunches and Textbooks
The exemption for school lunches and the exemption for school textbooks sold by local school boards and nonprofit institutions of learning were included in the original exemptions to the sales and use tax enacted in 1966. In 1980, the college textbook exemption was expanded to exempt certified textbook sales by private vendors because many colleges rely on private vendors to stock and sell required textbooks. In 2008, effective January 1, 2010, the General Assembly expanded the textbook exemption to exempt certified textbook sold to students of any institution of learning, not just nonprofit institutions.

Prior to July 1, 1994, Va. Code § 22.1-251 required local school boards to provide required textbooks and workbooks free of charge to children whose parents were financially unable to furnish them, but permitted the school board to rent or sell textbooks to other students. This exemption eliminated the administrative burden on the schools of maintaining separate records for sales/leases of textbooks and donations of textbooks to needy children. Effective July 1, 1994, Va. Code § 22.1-251 was amended to require that each school board provide, free of charge, textbooks and workbooks required for course instruction for all children attending public schools.

Therefore, Va. Code § 22.1-251 made the exemption for textbook sales by a school board obsolete.

Evaluation of Retail Sales and Use Tax Exemption Expenditures
Unlike expenditures under the budget process, sales tax exemptions tend to remain in effect indefinitely. These tax exemptions raise profound questions of public policy. Because these exemptions are the equivalent of a subsidy, it is vital to determine to which endeavors limited government resources should be allocated.

Expenditures are provisions such as exclusions, exemptions, preferential tax rates, deductions, deferrals or credits that are designed to provide an economic incentive for a certain activity or provide financial assistance in the form of tax relief to taxpayers in certain situations. The impact of exemption expenditures produces fiscal impacts that constitute forgone tax revenue. For purposes of this study, exemption expenditures are measured by the reduced tax collections, instead of the normal expenditure authorized through the legislative appropriation process.

Below is a summary of the revenue impact of the sales and use tax exemptions for the two exemptions that are the subject of Volume 2 of the Virginia Retail Sales and Use Tax Expenditure Study.

Purchases Made with Food Stamps and WIC Vouchers

Table 1 reflects the total state and local Retail Sales and Use Tax expenditure resulting from the exemption for purchases made with Food Stamps and Table 2 reflects the total state and local Retail Sales and Use Tax expenditure resulting from the exemption for purchases made with WIC Vouchers.

Table 1: Total State and Local Sales Tax Expenditure Resulting from Purchases Made with Food Stamps

Fiscal Year: 2005, Revenue Impact: $12,013,138
Fiscal Year: 2006, Revenue Impact: $12,918,998
Fiscal Year: 2007, Revenue Impact: $13,501,513
Fiscal Year: 2008, Revenue Impact: $14,641,811
Fiscal Year: 2009, Revenue Impact: $15,695,613*
Fiscal Year: 2010, Revenue Impact: $16,666,745*

*Projected using the Damped Trend Exponential Smoothing (from SAS Time Series Forecasting System).

Table 2: Total State and Local Sales Tax Expenditure Resulting from Purchases Made with WIC Vouchers

Fiscal Year Revenue Impact
Fiscal Year: 2005, Revenue Impact: $1,992,849
Fiscal Year: 2006, Revenue Impact: $2,021,857
Fiscal Year: 2007, Revenue Impact: $2,211,040
Fiscal Year: 2008, Revenue Impact: $2,431,586
Fiscal Year: 2009, Revenue Impact: $2,474,588*
Fiscal Year: 2010, Revenue Impact: $2,615,800*

*Projected using the Log Linear Trend (from SAS Time Series Forecasting System).

School Lunches and Textbooks

Table 3 reflects the total state and local Retail Sales and Use Tax expenditure resulting from exempting the sale of school lunches and Table 4 reflects the total state and local Retail Sales and Use Tax expenditure resulting from exempting the sale of textbooks.

Table 3: Total State and Local Retail Sales and Use Tax Expenditure Resulting from Exempting the Sale of School Lunches

Fiscal Year: 2005, Revenue Impact: $9,755,995
Fiscal Year: 2006, Revenue Impact: $10,478,460
Fiscal Year: 2007, Revenue Impact: $10,888,397
Fiscal Year: 2008, Revenue Impact: $11,506,476*
Fiscal Year: 2009, Revenue Impact: $12,072,339*
Fiscal Year: 2010, Revenue Impact: $12,638,063*

* Projected using the Logarithmic Regression Model and the Exponential Regression Model (from Excel Forecasting System).

Table 4: Total State and Local Retail Sales and Use Tax Expenditure Resulting from Exempting the Sale of Textbooks

Fiscal Year: 2005, Revenue Impact: $8,600,104
Fiscal Year: 2006, Revenue Impact: $9,044,529
Fiscal Year: 2007, Revenue Impact: $9,231,055
Fiscal Year: 2008, Revenue Impact: $9,589,273*
Fiscal Year: 2009, Revenue Impact: $9,904,366*
Fiscal Year: 2010, Revenue Impact: $10,219,303*

* Projected using the Logarithmic Regression Model (from Excel Forecasting System).

Nonprofit Entities

Under the authority requiring this study, TAX is restricted from studying any exemption provided by Va. Code § 58.1-609.10 or Va. Code § 58.1-609.11 more frequently than once every five year. However, Va. Code § 58.1-609.11 requires an annual report on entities seeking a nonprofit exemption. Given the importance of this exemption for nonprofit entities provided by Va. Code § 58.1-609.11, TAX will include in each volume of the Sales and Use Tax Expenditure Study an estimate of the forgone revenue attributable to the nonprofit entity exemption. This estimate is based on information reported to TAX by nonprofit entities seeking to obtain a new or renewed exemption under Va. Code § 58.1-609.11. No nonprofit entities were surveyed to obtain this data. The revenue analysis below is derived from estimates prepared by TAX's Nonprofit Exemption Unit for their annual fiscal impact analysis of nonprofit organizations. Each report examines the foregone revenue from purchases made by nonprofit organizations that renewed their exemption and nonprofit organizations that applied for a new exemption during the prior fiscal year. See Appendix 4 for the full report.

Table 5 sets forth TAX's estimate of the total annual state and local Retail Sales and Use Tax revenue impact of the Nonprofit Entity Exemption.

Table 5: State and Local Retail Sales and Use Tax Expenditure Resulting from Purchases Made by Nonprofit Organizations.

Fiscal Year: 2008, Revenue Impact: $ 213,829,116
Fiscal Year: 2009, Revenue Impact: $ 224,097,191*
Fiscal Year: 2010, Revenue Impact: $ 227,684,987*

* Projected using the Consumer Pricing Index for All Urban Consumers (CPI-U).