Self-taxation costs the state millions of dollars

The battle cry during this time of budget crisis is for the elimination of waste, fraud and abuse in government spending. While many in government may deny that any fraud and abuse exists, some at the state Board of Equalization believe they’ve identified a clear instance of “waste”–and that they even have a solution.

Staffers from the board–the powerful agency responsible for assessing sales and use taxes, as well as taxes on tobacco, fuel, alcohol–say that the state has a clear-cut case of wasteful government bureaucracy in the sales and use taxes paid by government agencies.

The problem is that the act of paying the taxes actually costs the paying agencies time and money.

“State agencies paying the sales and use tax have to file unnecessary paperwork, when the only purpose is to move money from their agency to the general fund, to another state agency,” says John Hrabe, an aide to board member Michelle Steel.

Some staffers, proposing an exemption to the tax for all government entities, contend that the taxes shift money needlessly within the government, while the filing and auditing related to those taxes costs the government upwards of millions of dollars per year. Eliminating the taxes for state agencies would cut costs, earn additional interest, and free up government auditors to draw more revenue for the state.

Currently, all government agencies are taxpaying entities subject to state taxes. All individual, business, and government consumers pay the approximately seven per cent sales tax automatically to vendors when they purchase of any item within the state of California. Sellers track the amounts of sales tax received and submit the money to the Board of Equalization when they file tax returns.

California taxpayers are also required to pay a similar tax, the “use” tax, on purchases made outside the state or over the internet. Since out-of-state vendors don’t know to collect sales tax on a purchased item, it’s up to the buyer to track, report, and pay these taxes on their tax returns. Despite popular lore, the use tax isn’t optional, and all taxpaying agencies, including governmental ones, are required to report and pay it to the Board of Equalization.

The majority of the revenue the Board of Equalization collects goes directly to the state’s general fund. Revenues from the general fund are then redistributed to government agencies and programs, resulting in a fiscal wash for the government. The California government as whole neither gains nor loses any money directly by taxing itself.

Filing taxes can take hours of accounting and sometimes require outside consultants. If an agency miscalculates its use tax, they could have to commit hundreds more hours to correcting the error, re-filing, and paying penalties and interest.

The Board of Equalization also spends time and money on conducting audits of government agencies, since it is required by law to conduct audits on all tax-paying entities. Audits of government agencies can be massive. Though the tax records of state agencies are sealed by law, Hrabe was able to give Capitol Weekly some general examples of the work required when a state agency makes an error on its sales tax filing and has to be audited.

“For one state university, we had to dedicate about 2,200 hours to an audit,” says Hrabe. “We could be spending that time auditing businesses to try to get more revenue for the state.”

To illustrate the wastefulness of bureaucracy involved with the government paying itself sales taxes, Hrabe sent Capitol Weekly documentation of the government doing precisely that; a check for $6,939 both paid to, and drawn from, the Board of Equalization itself.

While the use tax costs the state money in the form of bureaucracy, the sales tax also impacts the state’s revenue. Sales tax paid to businesses requires no filing by the government, but doesn’t immediately return to the general fund. Depending on the vendor’s accounting period, the sales taxes paid by government agencies can be held by the businesses they purchase from for a month, a quarter, or even a year. During this time, the government doesn’t have access to these funds, and cannot earn any interest on them
“State government is estimated to pay $330 [million] to $360 million in sales tax annually. We’re not making any interest on that money [while businesses hold it].” says Hrabe.

These are the sort of costs that have activists for fiscal tightening fuming, but it is not currently known how much the sales and use tax truly costs the government The Board of Equalization has not yet conducted a broad analysis of the overall cost to government agencies of filing sales and use taxes. Hrabe said that he hopes legislators will act quickly to exempt state agencies from the sales and use taxes before a lengthy report becomes necessary.

Attempts to exempt government from the sales tax have been around for a long time. As long as twenty years ago, advocates tried to exempt school districts from the taxes. The federal government is not required to pay California sales tax.

But not everyone in government stands to gain if the state is exempted from its own sales tax. A portion of sales tax goes to local governments, for which this tax can be a significant portion of the budget. In San Francisco, local sales tax constitutes about 11% of the proposed budget revenue. Local governments would lose some of this revenue if state agencies were no longer required to pay sales taxes. Hrabe argues that funds could be shifted from the state to local levels to make up the difference.