Sales tax change prompts worries

Levy funds much of municipal budget

By Greg Elias
Observer staff

Rules designed to simplify the state sales tax have complicated Williston’s municipal budget process.

The rules, which went into effect Jan. 1, make Vermont part of a nationwide drive to adopt uniform sales tax collections.

The state will now tax some items – beer and computer software, for example – that were formerly exempt. And clothing, which was formerly taxed only if the purchase was more than $110, is now exempt.

But the biggest change involves so-called “sourcing” rules. Sales tax on items delivered or shipped is now charged based on the purchase’s destination.

So if a consumer buys a refrigerator in Williston but has it delivered to South Burlington, the purchase is exempt from Williston’s 1 percent local option tax. On the other hand, if the same refrigerator is bought in South Burlington but delivered here, the 1 percent tax is tacked on to the price. The changes do not affect in-store sales when the customer takes purchased items home.

No one – particularly Williston town staff trying to formulate the 2007-08 municipal budget – know for sure how much the changes are going to affect sales tax revenue. The answer is particularly important in Williston because the town depends heavily on the local option tax. In the current fiscal year, sales tax revenue will fund an estimated 38 percent of the $6.9 million municipal budget, according to Susan Lamb, the town’s finance director.

“We don’t have any clue about what the financial impact might be,” said Town Manager Rick McGuire.

That uncertainty was echoed by Michael Wasser, policy analyst with the Vermont Tax Department.

“Quite frankly, it’s almost impossible to predict,” he said. “We won’t really know until we get some experience on how it will all balance out.”

Wasser said it will take about a year to accurately gauge how the new system will affect the state as a whole and the four municipalities – Williston, Burlington, Manchester and Stratton – that have local option taxes. Sales tax revenue varies greatly from quarter to quarter.

Williston voters approved the 1 percent local option tax in 2002. The levy has been a boon for Williston homeowners, allowing the town to reduce its municipal property tax rate to a fraction of its former level.

But some Williston businesses warned at the time that the tax would put them at a competitive disadvantage with companies in nearby towns, none of which then levied the local option tax. ( Burlington later enacted its local option tax.)

One of the opponents was Doug Griswold, owner of S.T. Griswold and Co., which sells ready mix and pre-cast concrete as well as landscaping and home improvement products on Industrial Avenue in Williston. But he said on Monday that the tax ended up having little impact on his business.

Griswold feels the new rules will make the sales tax fairer but create accounting headaches because businesses must now track where products are delivered.

Wasser said the state is setting up tools on its Web site to help businesses calculate sales taxes. When a company ships or delivers goods, it can type in a zip code to find out whether a local option tax applies and how much the sales tax will be on a given purchase.

Griswold said his business collected roughly $70,000 in local option sales taxes in each of the past two years. Under the new rules, Williston will lose most of that revenue because about 90 percent of Griswold’s sales are to customers who had their purchases delivered outside of Williston.

“If all the businesses in town had the same numbers, it could have a big impact,” Griswold said.

McGuire said the big question will be how many Williston purchases are shipped or delivered out of town versus the number of out-of-town purchases made by Williston residents.

The town has tentatively decided to use exactly the same sales tax projections in 2007-08 budget that it used for the current fiscal year.

Using those projections represents a hedge because the town will likely collect more tax than estimated in the current fiscal year, McGuire said. The town also keeps a budget reserve in case revenue falls short of projections.

The changes in Vermont are part of a nationwide effort to standardize sales taxes called the Streamlined Sale Tax Project. The goal is to pave the way for federal legislation requiring Internet sales to be taxed, thus capturing revenue that has largely eluded states and municipalities.

Supporters of the proposal also say the change would eliminate a competitive disadvantage faced by brick-and-mortar sellers.

Congressional opposition to the law has focused on impediments to interstate commerce posed by the lack of standardized sales tax rules.

Vermont residents are legally obligated to report and pay sales tax on Internet purchases when filing their state income tax returns. But few residents fully report the tax and it is impractical to audit enough returns to ensure compliance, the Tax Department’s Web site states.