Tax trade-off: New tax law brings bevy of sales tax expansions, eliminates business fees

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Tax trade-off: New tax law brings bevy of sales tax expansions, eliminates business fees

Consumers will start seeing some extras added to their subtotals as a result of a state law adding sales tax to a variety of items that had previously not been taxed, or were taxed at a lower level. Among them are mobile and manufactured homes, electric bills and “service contracts,” which is basically a catch-all entailing labor costs for everything from car repairs to plumbing.

These increases are part of the 48-page Omnibus Tax Law Changes, signed into law May 29. It’s the same law that prevented municipalities from collecting fees for business licenses.

According to Sen. Jim Davis, R-Franklin, the change is just part of an overall effort to shift to a lower sales tax spread across more products and services. In 2012, the state sales tax rate changed to 4.75 percent from its previous 5.75 percent. Eventually, he’d like to see income tax disappear and sales and use taxes expand to include a wider spectrum of goods and services.

“A consumption tax is a more predictable source of revenue, so it would be easier for legislators to estimate budgets,” Davis said, “but it also takes the legislature out of the business of getting special breaks for the companies, and that’s where the legislators get in the business of picking winners and losers, and we don’t think that’s best way to run a railroad.”

Ultimately, Davis said, his goal would be to transition from income-based to consumption-based taxing with some kind of lower limit in place so that people are only taxed on the money they spend that is above that amount.

Davis, along with local legislators Rep. Michele Presnell, R-Burnsville, and Rep. Roger West, R-Marble, voted with the majority of 38 senators and 84 representatives to pass the bill. Rep. Joe Sam Queen, D-Waynesville, joined the 29 nos in the House vote.

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“The lower your tax bracket, the higher your rate increase has been,” Queen said. The reason, he said, is that people who make less money spend a greater proportion of it on necessities. An oil change costs about the same for a millionaire as it does for a fast food worker.

Service contracts

Previously, businesses that provide labor-based services, such as car or bike repairs, had collected sales tax on the parts used to make the repairs but had not charged it for the labor rate. Under the new law, the whole bill will be subject to the 4.75 percent sales and use tax after Oct. 1.

“It’s gonna hurt. And not really me — it’s going to hurt my customers,” said Darrin Sutton, owner of Dillsboro Automotive. “I’d just have to pass it on. Labor’s a big portion on some jobs.”

Sutton couldn’t say exactly what his total revenue’s labor-to-parts ratio is — coming up with that number would entail a lot of time spent poring over the last year’s Quickbooks files — but on some tickets it’s quite high. For example, he said, it takes about seven hours to put an intake gasket in, and there’s barely any parts charges included in that bill. By contrast, the bill he was looking at before answering a call from the Smoky Mountain News charged $670 for parts and $200 for labor.

In some respects, Sutton said, the new law might not hurt his business much, since having a functioning automobile is a necessity for most people. But for someone who’s on the bubble financially, an extra 4.75 percent could be the difference.

“Anything that hurts the customers can hurt the business,” Sutton said. “Granted, most people have to fix their cars, but if it reaches to a certain point someone can’t fix it, what do you do? You can’t fix it if you ain’t got the money.”

For Dave Forshee, co-owner of Smoky Mountain Cycles in Franklin, the possibility of adding sales tax to his labor for bike repairs doesn’t sound so bad. Bike repairs are cheaper than car repairs, so even an expensive $200 bill would rack up only $8.50 in sales tax. He doesn’t expect that would much deter someone from fixing their bike, but, he cautioned, you never know.

“Sometimes it’s hard to see what effect these things have until they actually go into effect,” he said. “I would not think it’s a big deal, but I’m not the one being charged.”

Electricity

Forshee’s customers wouldn’t just be paying the extra sales tax on their bike repair bill. They’d see the increase in other areas of their lives, from plumbing to window installation to car repair, and a different section of the law would mean they’d also see a tax increase on electricity.

Currently, electric companies pay a 3.22 percent business license fee on their gross receipts, an amount that is automatically added into the customer’s bill. So, the bill is 3.22 percent higher than what the company actually counts as revenue. Then, an extra 3 percent sales tax is added onto the subtotal, which includes the 3.22 percent. Combined, the current tax constitutes an effective rate of 6.32 percent.

Under the new law, the 3.22 percent gross receipts tax would go away, but the 3 percent sales tax would turn into 7 percent. The electric rate that customers see on their bill will go down by 3.22 percent, but the overall total for which they are charged will increase by 0.68 percent. On a $100 electric bill, that would mean paying an extra 68 cents.

“The new law is really nothing more than shifting funds, and so as far as we’re concerned it’s pretty neutral,” said Ken Thomas, manager of marketing and communications for Haywood Electric Membership Co-op.

Because it’s an amount tacked onto the receipts of all power companies and then simply passed along to the state, Thomas said, it won’t much affect the business. However, he said, he feels that even a small increase like 0.68 percent is noteworthy in a struggling economy.

“In this economy with so many folks struggling already, I feel it’s significant,” he said.

Mobile homes

Mobile and manufactured home sales are another area where new taxes will apply. Currently, the sales tax is set at 2 percent with a $300 per floor cap. So, the most sales tax somebody buying a single-wide trailer would pay is $300, and the highest tax bill for a double-wide is $600.

Under the new law, the cap would disappear and the tax rate would go to 4.75 percent, the standard sales tax rate. On a $40,000 double-wide, that means a jump from $600 to $1,900. That’s a change that has Queen angry.

“The rich get a tax break and the working men and women in North Carolina get to pay the full fee,” the representative said. “Never has there been [full] sales tax on a mobile home.”

Davis doesn’t see it that way. He sees the expansion of sales tax as a move to a more fair way of doing things and believes the states’ ability to try different taxation schemes is one the country’s major strengths.

“I would say you have in the United States the ability of the states to do different things. It’s a great laboratory to see if that’s true or not,” he said.

However, according to Amy Clark, office manager for Board of Trade in Canton, which sells foreclosed, repossessed and new mobile homes, the new law is causing some issues for customers, many of whom are lower on the socioeconomic scale.

“Especially when they’re looking on the used end and just trying to buy something on the used end and not have to finance it, that’s when it really affects them,” Clark said.

The law does have an exception for mobile homes sold straight from an individual or bank, so Clark has seen customers steer toward purchases that wouldn’t cost them an extra $2,000.

“It’s an extra cost,” Clark said. “They don’t see it as the home’s value is worth that extra money on some of them for them to put into it, and the banks aren’t necessarily adjusting their price, either, to compensate for the extra tax.”

The N.C. Manufactured Housing Association is planning to fight the tax increase, Clark said, “but till then we’re stuck with that.”

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