As the vast majority of state governments stare down budget shortfalls, new ideas about how to responsibly and fairly fill those gaps should receive an enthusiastic welcome. A new report from Good Jobs First, entitled Skimming the Sales Tax, does exactly that by revealing that states are currently giving away over $1 billion through "vendor discounts" or "dealer collection allowances" that reduce sales taxes.

Vendor discounts allow retailers to legally keep a portion of the sales tax revenue they collect as compensation for the costs involved in collecting and remitting the tax. Twenty six states currently provide retailers with such compensation, amounting to a total of over $1 billion in annual revenue losses for those states.

The policy prescription in many states is fairly clear. While there may be room for debate over whether any compensation is warranted, what is not in question is that there should be a sensible limit on the maximum amount that any one business can receive via this practice. As author Philip Mattera points out, "the main expenses that retailers incur with regard to sales taxes, especially software programs to track them, are fixed costs that do not rise in tandem with growth in receipts."

Those states without such a limitation in many cases forfeit quite substantial amounts of revenue through vendor discounts. Illinois, for example, loses over $126 million annually due to the practice. Texas, Pennsylvania, and Colorado each lose in the neighborhood of $70 - $90 million per year. Thirteen of the twenty six states offering vendor discounts do not cap the amount any individual retailer can claim. In addition, five states that do impose limits on maximum compensation have set those limits at seemingly excessive levels, ranging from $10,000 to $240,000 per retailer.

For state-by-state details on existing vendor compensation practices, as well as other ways in which retailers are being subsidized through the sales tax, see the report here.

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