Sales taxes are probably the most hidden form of the three major taxes (income, sales, and property). Income taxes you see on a paystub or when you file your taxes, and property tax is generally paid in one sum or through a mortgage company.
Sales taxes, on the other hand, are automatically calculated and added to the final price, without the consumer ever really thinking about it. In fact, most people probably don’t think of the total amount of sales taxes they pay annually.
In Utah, sales taxes are collected on many purchases, including online retail. However, state policymakers have wisely taken the stand of not placing sales taxes on business inputs or on most services.
The Tax Foundation found that Utah ranks 35th in the amount of sales taxes collected per capita. On average, Utahns paid $989 annually in Fiscal Year 2018 in sales taxes on the purchases they made.
Across the nation, five states Alaska, Delaware, Montana, New Hampshire, and Oregon, do not impose sales taxes at the state level. The highest state sales tax collections per capita were found in Hawaii ($2,694), the District of Columbia ($2,128), Washington ($2,118), Nevada ($1,941), Louisiana ($1,852), and South Dakota ($1,702). The Tax Foundation notes that both Hawaii and South Dakota impose sales taxes on many services. Hawaii also imposes sales taxes on many business-to-business transactions, otherwise known as tax pyramiding.
The negative consequences of taxing business inputs are significant, including: inefficient tax pyramiding, a lack of transparency, higher consumer prices and reduced economic activity. As a result of sales taxes on business inputs and extensive pyramiding, states like Hawaii often double taxing certain industries.
While Utah’s policymakers have done a fairly good job in ensuring tax pyramiding is avoided in Utah, there are still certain industries that are subject to this double taxation, including the production of software, electrical generation, and oil and gas exploration.
Your Taxpayers Association has strongly supported the use of sales tax exemptions on business inputs in order to avoid tax pyramiding, which has helped establish Utah as the state with the best economic outlook for 14 years running, according to ALEC’s Rich States Poor States annual ranking.
However, Utah still imposes punitive sales taxes on oil & gas exploration and production and non-renewable electric generation. Unfortunately, this has had an adverse effect on the eastern part of the state, most prominently the Uintah Basin counties of Duchesne and Uintah.
Utah has a history of eliminating sales taxes on business inputs. For example, passage of the 1995 manufacturing sales tax exemption ensured Micron’s initial investment of more than $1 billion in Lehi. The “three-year-life” manufacturing exemption legislation in 2018 ensures that Utah manufacturers continue to provide jobs for Utah families.
Unfortunately, the oil and gas operations in the Uintah Basin and other oil and gas counties such as San Juan continue to pay punitive sales taxes on all of their machinery and materials consumed in the process. This sales tax combined with a hefty severance tax makes capital investment less attractive and leaves the region victim to ongoing boom and bust cycles.
Utah also has not eliminated sales taxes on business inputs on software services. As Utah’s tech sector continues to employ more and more Utahns, this exemption needs to be provided to continue the boom that the industry is experiencing.
The Association is strongly supportive of upcoming legislation that will fix this issue and lead to stable, strong growth and economic prosperity for those areas in Utah that desperately need attention.