Note to Minnesota lawmakers: Business-to-business tax proposal should be dropped

As the legislature considers a variety of tax reform options, I urge lawmakers to reject the implementation of a business-to-business sales tax.

In his tax reform proposal, Gov. Dayton advocates for a reduction in the state sales tax rate but a broadening of the sales tax base, including a new business-to-business tax. If additional state revenue is truly necessary, I urge the Governor and lawmakers to focus on the income tax. A business-to-business sales tax is both regressive and opaque, making it an objectionable option for tax reform.

As the sole owner of a small publishing company dependent upon advertising revenue, I quickly calculated the impact of the proposed 5.5 percent tax on advertising, one of the business-to-business services targeted in the Governor’s proposal. The amount would be about 16 percent of my company’s net income, on top of the income tax I already pay.

Advocates for the tax will argue that I should be able to pass that sales tax cost onto the purchaser. While that may have been possible in the pre-financial crisis environment, I can assure you that is not possible today. My business competes with publications based in surrounding states; these competitors can offer ad rates free of sales tax. If I want to compete, I have to respond to the market; ad buyers already negotiate hard and there simply is not 5.5 percent leeway in those negotiations. Implementation of the tax will mean customers will buy less or I will have to pay the tax.

Painfully, I will be required to pay for this tax regardless of my net income. Even in years when things are slow, I will be subject to the tax. Although I am not a fan of paying taxes I am willing to pay my fair share according to my earnings. An income tax has the semblance of progressivity; this business-to-business tax approach ignores ability to pay, making it regressive.

If the argument is made that all sellers of business services can pass the tax along, the obligation to pay the tax ultimately hits the working consumer. There is no place for the average citizen to pass along the tax. He or she is stuck with it in the form of more expensive goods and services. And again, the obligation applies regardless of ability to pay, making it unacceptably regressive.

Furthermore, it will be very difficult for consumers to determine what portion of the purchase price is the result of taxation. As vendor after vendor in the supply chain build in new layers of tax, the consumer will be hard pressed to discern what portion of the purchase price reflects the cost of the product and what portion represents taxation. That kind of opacity also is unacceptable.

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One Response to Note to Minnesota lawmakers: Business-to-business tax proposal should be dropped

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