Analysis: Tax notices split Missouri officials

JEFFERSON CITY, Mo. -- The concept seems simple: Businesses should be told of changes in sales tax policies before they are expected to pay the tax to the state.

Yet that concept has become the latest flashpoint in a yearlong fight over Missouri's tax laws between legislators and Gov. Jay Nixon.

This past week, the Democratic governor vetoed a pair of bills passed by the Republican-led Legislature that would require the state to notify businesses of court rulings or Department of Revenue decisions modifying the list of things that are subject to the state sales tax.

Legislators had passed the measures overwhelmingly. Their research staff projected it would cost merely the price of postage and a few more hours of work to implement. Over a year, that could amount to over $100,000, according to the legislative analysis.

Yet Nixon warned that it could result in a whopping $200 million loss in state and local revenue while creating a "windfall for businesses" by providing a legal loophole to avoid paying taxes.

The gulf between those two forecasts illustrates the growing ideological divide between the governor and Legislature. Again and again, the Legislature has passed measures to reduce the state's taxes and Nixon has objected by highlighting a worst-case scenario for the effect on the state budget.

Last year, the Legislature passed an income-tax cut that it estimated could eventually reduce state revenue by almost $700 million annually. Nixon vetoed it while suggesting the budgetary hit could be as large as $1.2 billion in a single year. Nixon's concerns helped dissuade some legislators from overriding his veto.

Earlier this year, the Legislature again passed an income-tax cut. This version was projected by legislative staff to eventually reduce state revenue by $620 million annually. Nixon again vetoed it, suggesting the cost could be as high as $4.8 billion. In May, legislators overrode the veto and enacted the tax cut, dismissing Nixon's concerns as ill-founded.

Last week, the sales-tax notification measures were part of a package of 10 bills Nixon vetoed that he said could cost a combined $425 million in state revenue and $351 million in local revenue. Nixon accused lawmakers of "blowing large, large, large hole" in the budget.

Lawmakers essentially accused Nixon of blowing smoke.

"The governor has displayed a tendency to release phantom numbers to the media," Sen. Will Kraus, R-Lee's Summit, said in a written statement. "There is no possible way that properly notifying businesses when they need to collect sales taxes will cost Missouri more money."

The bill, which Kraus sponsored, originated from a legislative belief that some Missouri businesses have been blindsided by the Department of Revenue's evolving interpretations of which services are subject to state sales taxes. Republican and Democratic lawmakers alike expressed outrage about gymnastics studios or personal fitness trainers getting told by state revenue officials that they could owe back taxes, after years of believing they did not need to collect them.

The Senate passed two versions of the tax-notification legislation without any "no" votes. The House approved both versions with at least a two-thirds majority, the threshold needed for veto overrides during a September session.

But Nixon contends the legislation would have unintended consequences. In a written veto message to legislators, he said the notification requirement would reverse a "long-standing principle of our democracy that individuals are presumed to know the law." For example, state law doesn't require notices of new criminal laws to be sent to potential criminals before they can be prosecuted, Nixon said.

Missouri has about 140,000 businesses registered to collect sales and use taxes. The Revenue Department says it doesn't track the items sold by each business, so it would have to notify every business every time there's a change in sales tax policy for any item. It said that could cost $500,000 per year. Legislative staff assumed the agency could do the job more efficiently for over $100,000 annually.

Nixon's cost estimates are developed from what the Revenue Department characterizes as the "broadest meaning" of the legislation.

The governor said businesses getting notices of tax policies could receive "retroactive immunity" for taxes that they should have already been collecting. Under one version of the bill, he said businesses also could try to claim refunds for properly paid sales taxes by arguing that they had never received a notice telling them the taxes must be paid. That's what he said could create a "windfall" resulting in the loss of $100 million of state revenue and an additional $100 million of local revenue.