Glander, C. Emory

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Sales and Use Tax AmendmentsC. EMORY GLAmDER*No legislative session in Ohio would be complete without someeffort to amend the sales tax law, and the recent general session ofthe 99th General Assembly was no exception. The legislative answerto the recommendations of the Tax and Revenue Study Commis-sion' and of the Governor was the Mechem bill which made sub-stantial changes in the law but did not alter its fundamental char-acter.2The widespread interest in this piece of legislation can best beunderstood against the background of the recommendations of theTax and Revenue Study Commission. In substance, it recommend-ed the substitution of what was popularly called a "gross salestax" for our present prepaid consumers' sales tax. Actually, itsrecommendation contemplated the retention in substance of thepresent sales tax structure, but the abolition of the prepaid taxreceipts system. With the abolition of the prepaid tax receipts orcoupons there would have been eliminated the vendors' discount,3commissions to the Treasurer's agents4 and redemption of tax cou-pons by religious and charitable organizations.5There can be no valid administrative objections whatever tothe substitution of a gross sales tax for Ohio's present sales taxsystem, provided the substitute is a true gross sales tax and pro-vided greatly increased appropriations also are made available foradministrative and enforcement purposes. Under a gross sales tax,however, the term "gross" has tremendous significance and mustnot be ignored. It means that the tax is applied to all, or substantial-ly all, sales and not to selected transactions. By this test, the Study* Of the firm of Wright, Harlor, Purpus, Morris and Arnold; Past TaxCommissioner of Ohio; Past President of the National Association of TaxAdministrators; Member of the Ohio Bar.1A fifteen-member tax and revenue study commission was created bythe 98th General Assembly with instructions to study the tax and revenuesystem of the state and to submit its report by January 15, 1951. Am. Sen.Bill No. 42, effective October 28, 1949.2 Am. Sen. Bill No. 111, amending Sections 5546-2, 5546-5, 5546-8, 5546-26aand 6290-5 of the Ohio General Code. This bill was presented to the Governoron May 8, 1951, and was neither signed nor returned to the Senate whereinit originated within ten days after being so presented, exclusive of Sundaysand the day it was presented. The bill was filed in the office of the Secretaryof State on May 22, 1951 and, being a law providing for a tax levy, it becameimmediately effective in accordance with Article II, Section ld of the OhioConstitution.3 Onro Gus. CODE § 5546-8.4 Omo GEN. CODE § 5546-7.s Onro GEN. CODE § 5546-26a.OHIO STATE LAW JOURNALCommission had not recommended a gross sales tax at all. It wouldhave eliminated the stamp or coupon system, but would have re-tained practically all the numerous exemptions which in fact haveconstituted our law a selective sales tax as distinguished from agross sales tax. Herein existed the administrative weakness of itsproposal.It may be argued, and it is readily admitted, that the couponsystem is an expensive device in tax administration. It may alsobe argued that the Department of Taxation, in all likelihood, mightmake better use in an expanded field audit program of money nowexpended for the coupon system. It would be folly, however, toconclude that the mere abandonment of the stamp system, and noth-ing more, would result in increased revenues to the state.Under a sales tax law such as ours which, in addition to atleast fifteen specific exemptions,6 excepts sales to farmers, manu-facturers, processors, public utilities, merchants, and other com-mercial and industrial users, 7 a variety of enforcement devices isboth necessary and desirable. We have three such devices underour existing law: audit of vendors' records and assessment of taxdeficiencies thus disclosed;8 prosecution of vendors who, amongother things, fail to deliver prepaid tax receipts to consumers; 9 andredemption of prepaid tax receipts which are surrendered primari-ly by religious and charitable organizations.10All of these enforcement devices have been employed in thepast by the Tax Commissioner; yet, under the Study Commission'sproposal, both the second and third devices would have been dis-carded and the Tax Commissioner confined to audits as the solemeans of enforcement. An audit program would be sufficient undera true gross sales tax. It is likely to be inadequate, however, undera law containing numerous exemptions or exceptions.The reasons for this view are simply stated. There are approxi-mately 240,000 licensed vendors in the State of Ohio-almost aquarter of a million. The maximum number of audits the Depart-ment has been able to make in one year with legislative appropria-tions available was about 8,000. We have a four year statute oflimitations." This means that under the most favorable circum-stances the Department has been able to audit at the rate of but32,000 of the 240,000 licensed vendors within the statutory period6 Onio Gm. CoDE § 5546-2.7Omo GE. CoDE § 5546-1.8 Omo GEN. CODE §8 5546-9a, 5546-9b, 5546-9c, 5546-12, 5546-12a and 5546-12b.9 Omo GEu. CoDE §8 5546-13, 5546-13a, 5546-13b, 5546-15, 5546-16 and 5546-17. 10 Omo Gzi. CoDE § 5546-26a.n OHIo GE. CoDE § 5546-9d.[Vol. 12SALES & USE TAX AMENDMENTSopen for audit. Now, of course, it is unnecessary and impracticalto have an audit force that would enable the Department to checkevery taxpayer within the statute of limitations. A very large pro-portion of business is done by little more than half the licensedvendors and, in general, the concentration of the audit program mustbe in that sector. But even if a greatly enhanced audit force wereprovided in Ohio, the elimination of tax coupons would not neces-sarily be justified, because it is the existence of the exemptions inour law which really complicates and slows down the process ofauditing. So long as these exemptions remain, enforcement devicesin addition to auditing are advantageous. Prosecution of vendorsfor failure to issue coupons as well as redemption of coupons areimportant additional enforcement devices under a selective salestax law.It should be emphasized that the abolition of the coupon sys-tem alone will not assure an increased yield from the Ohio salestax. The yield of our tax, when broken down on a per capita levelrate basis, is substantially lower than that of other large stateswhere comparable economic conditions prevail. The per capita yieldof each 1% of tax in each of the states indicated below was report-ed by the Federation of Tax Administrators12 as follows:California ..................................... 10.57Illinois ........................................ 9.58Iowa .......................................... 10.54Michigan ...................................... 10.69Ohio .......................................... 5.58The primary reason for this low yield in Ohio is the existenceof more numerous exemptions under our law. Consequently, evenunder a sales tax system which excludes coupons the yield of theOhio tax would be substantially lower than that of comparablestates because of the restricted nature of the sales tax base in Ohio.An added reason for the low per capita yield in Ohio is the lackof sufficient auditors or examiners. The most effective part of asales tax organization for insuring compliance with the law is thefield audit staff. There is considerable variation among the statesin the relative size of the staffs maintained, much of the differencebeing due to the reluctance of legislatures to appropriate sufficientfunds. The following table, also compiled by the Federation ofTax Administrators, shows the relationship between licensed vend-ors and audit staff work-loads in the five states above referred to:12 Special report prepared for the Tax Commissioner of Ohio, dated Janu-ary 26, 1951, and not published for general distribution. The Federation ofTax Administrators is the official organization of tax administrators in theseveral states and has its offices at 1313 East 60th Street, Chicago, Illinois.OHIO STATE LAW JOURNALAccounts per AuditorCalifornia ...................................... 307Illinois ......................................... 1074Iow a ........................................... 1030M ichigan ....................................... 556Ohio ........................................... 1533It is an interesting fact, and incidentally a good illustration ofthe way in which expenditures can be channelled into the most pro-ductive activities, that sufficient field auditors can be maintainedin California to service approximately 275,000 accounts (1950 es-timate) on a basis of one auditor for every 300 (a ratio five timesthe coverage reported for Ohio) at an annual cost of about $4,500,-000. This sum is only about $900,000 more than the auxiliary costsof the coupon system in Ohio (agents' fees, redemption, printing).In the last fiscal year this field audit program in California pro-duced deficiency assessments of $9,758,950. The total amount oftax assessed as the result of both office and field audit programstogether was $10,648,485. The predominance of the field audit pro-gram is thus emphasized.13The foregoing views, of course, are those of the writer and donot constitute an argument either for or against the coupon systemof sales tax administration. It was and is his conclusion that if theGeneral Assembly should decide to abolish the coupon system itshould also abolish substantially all, if not all,14 exemptions now inour law; that if the General Assembly should decide to retain ex-isting exemptions, or substantially all of them, it should also re-tain the coupon system; and, in either case, that it should providesufficient funds to finance an adequate field audit program. Afterall, an adequate audit program is the best means of securing uni-form and consistent taxpayer compliance; and we should never for-get that where appropriations for an adequate audit program arenot available, the honest and conscientious vendor as well as thepublic do not receive the protection to which they are entitled.Whether the General Assembly was conscious of the foregoingconsiderations or not, the fact remains that it did not choose to adoptthe recommendations of the Tax and Revenue Study Commissionwhich, as pointed out, fell short of a true gross sales tax law. In-stead, it enacted certain amendments designed to increase the yieldof the sales and use taxes and to make possible more adequate en-forcement of the law.13 Ibi&L14 The General Assembly is undoubtedly powerless to remove the foodexemption contained in Ohio General Code Section 5546-2(2) because of con-stitutional limitations. Article XII, Section 12 of the Constitution of Ohio pro-vides that "On and after November 11, 1936, no excise tax shall be levied orcollected upon the sale or purchase of food for human consumption off thepremises where sold."[Vol. 12SALES & USE TAX AMENDMENTSThe first amendment of consequence pertains to the casual saleof motor vehicles. Prior to the amendment, the sales tax law ex-empted casual and isolated sales by a vendor who is not engagedin the business of selling tangible personal property. 15 A similarexemption existed under the use tax act.16 The amendment pro-vides that these exemptions shall not apply to casual and isolatedsales of motor vehicles and house trailers.17Heretofore, as a means of enforcing compliance with the taxlaw in respect of the sale of automobiles other than casual sales,the statute provided that the clerk of courts shall refuse to acceptfor filing any application for certificate of title and shall refuse toissue certificate of title when the motor vehicle was transferred inthe State of Ohio unless prepaid tax receipts were presented withthe application. s This provision of law was amended to permit theapplicant in appropriate cases to submit with the application pay-ment of the tax by cash, certified check, draft or money order pay-able to the clerk of courts who is required to issue a receipt there-for in the form prescribed by the Tax Commissioner. Such receiptsare deemed to be consumers' portions of prepaid tax receipts forthe purposes of the statute and are subject to redemption in thesame manner and at the same rate as therein provided with respectto the redemption of consumers' portions of prepaid tax receipts. 19This amendment was designed to adapt existing law to the casualsale of motor vehicles and house trailers.Likewise, in respect of the casual sale of motor vehicles andhouse trailers, the new tax provides that the purchase price for thepurpose of determining the tax by the clerk of courts shall be thepurchase price on an affidavit executed and filed with the clerkof courts by the vendee and shall be prima facie evidence of theamount for the purpose of determining the tax, in a form to be pre-scribed by the Tax Commissioner. 20Is OHio GEN. CODE § 5546-2(7).16 Omo GEN. CODE § 5546-26(3).17 Omo GEN. CODE § 5546-2(7), Am. Sen. Bill No. 111, § 1. Ohio GeneralCode Section 5546-26(3) was not rewritten but a provision was inserted inthe amendment of Section 5546-2 to the effect that Section 5546-26(3) shallnot apply to the purchase of motor vehicles or house trailers for storage, useor other consumption in this state. It would have been better legislative formto have added this language to Section 5546-26(3) directly.Is Oaro GEN. CODE § 6290-5.19 OHio GEN. CoDE § 6290-5, Am. Sen. Bill No. 111, § 1. The Tax Commis-sioner, under date of May 29, 1951, revised Rule No. 143 to provide for remit-tances to the Treasurer of State of sales and use taxes collected under thissection of the law as amended.20 Ibid. The Tax Commissioner has promulgated appropriate forms for thispurpose and the Division of Sales and Excise Taxes has issued circular in-structions with reference thereto.1951]OHIO STATE LAW JOURNALIn order to relieve the casual sale vendor of the requirementsof law as to vendors' licenses and semi-annual returns," the amend-ment provides that when the vendor is not regularly engaged inthe business of selling motor vehicles or house trailers he shall notbe required to purchase a vendor's license or make reports for andconcerning such sales. 22For his services in receiving and disbursing sales and use taxespaid to him, the clerk of courts, under the new law, is allowed toretain a poundage fee of 1%, to be paid into the general fund ofthe county.2 3The second legislative amendment of substance provides thatthe Tax Commissioner shall employ a sufficient number of auditorsfor the purpose of auditing vendors' sales tax accounts and records,not fewer in number than one auditor for each one thousandvendors' certificates (licenses) outstanding.2 4 This requirementfalls short of the prevailing policy in California and ichigan, asheretofore shown, but it does place Ohio in line with Illinois andIowa and represents a decided step forward in enforcement policy.Of course, the requirement is and will continue to be subject tolegislative appropriations. It is the writer's belief, however, thatthis new provision, if faithfully observed, will mean much more tothe state by way of increased revenue than the provision for taxingcasual sales of motor vehicles or any other provision of the newlaw.The third amendment was directly designed to reduce admin-istrative costs incident to the prepaid tax receipt system. Hereto-fore, the law has provided for the sale of prepaid tax receipts tolicensed vendors by the treasurer of state, his agents, and the coun-ty treasurer at a discount of not to exceed three per centum of theface value thereof, as a commission for handling and cancellingsuch prepaid tax receipts; but, under the amendment, this discountwas cut to two per centum.25Finally, the General Assembly sought to tighten the law bypreventing abuse of its provisions for redemption of prepaid taxreceipts. The statute has provided that no redemption of consum-ers' portions of prepaid tax receipts shall be made when presentedby a vendor or seller, and the amendment restricts this prohibitionby adding the words "directly or indirectly".2 6 The Department of21 OHIo GEN. CODE §§ 5546-10 and 5546-12b.22 OHo GEN. CODE § 6290-5, Am. Sen. Bill No. 111, § 1. Again it wouldhave been better legislative form to have amended the appropriate sections ofthe sales tax law.23 OHIo GEN. CODE § 6290-5, Am. Sen. Bill No. 111, § 1.24 OHIo GEN. CODE § 5546-5, Am. Sen. Bill No. 111, § 1.25 Omo GEN. CODE § 5546-8, Am. Sen. Bill No. 111, § 1.26 Omo GEN. CODE § 5546-26a, Am. Sen. Bill No. M11, § 1.[Vol. 12SALES & USE TAX AMENDMENTSTaxation has always so construed the law as a matter of adminis-trative policy, and hence the amendment merely carries that ad-ministrative policy into statutory law.In the interest of completeness, it should be pointed out inclosing that the General Assembly, by separate enactment, amend-ed the provisions of the sales tax act pertaining to the "local gov-ernment fund" which is made up of monies derived from sales taxrevenues in amounts specificelly credited by the General As-sembly.27 This enactment credits to the fund twelve million dollarsfor the year beginning July 1, 1951 and eighteen million dollars forthe year beginning July 1, 1952. It also contains a section provid-ing for the distribution to local governments and school districts,in amounts of 30 per cent each, of any net collection of revenuesaccruing to the general revenue fund of the state during the fiscalyear 1950-51 in excess of estimated revenues, exclusive of educa-tional bequests and miscellaneous and student fees, in the amountof $260,357,000.2827 Am. Sub. House Bill No. 605, amending Sections 5546-18 and 5546-20 ofthe General Code. This bill was approved by the Governor on June 13, 1951,and was filed in the office of the Secretary of State on June 14, 1951. By spe-cific provision written into the Act, however, it became effective on July 1,1951.28 Am. Sub. House Bill No. 605, § 2.1951]

Sales and Use Tax Amendments

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Sales and Use Tax Amendments

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