Audit: Missouri could better track cost of its sales tax exemptions

JEFFERSON CITY, Mo. -- Missouri policymakers confronted with budget shortfalls are being left in the dark about how much money the state is losing as a result of its 131 sales tax exemptions, the state auditor said Wednesday.

The Department of Revenue fails to track the cost of each tax exemption -- even though lawmakers continue to add to the number of items that aren't taxed, said Auditor Susan Montee.

"When they are making cuts to social services and potentially education, they need to look at the things on the revenue side of the equation as well, and right now there is no way to do that," Montee said.

The auditor also said lawmakers should reconsider a half-century-old incentive for businesses to submit sales taxes promptly and should change state law to require businesses to refund overcollected sales taxes to customers whenever possible.

Missouri imposes a tax of a 4.225 cents on each $1 of sales, and cities and counties often charge a couple of pennies of tax on top of that. But state law exempts a variety of goods and services from those taxes, including groceries, medicines and utilities.

The Department of Revenue said in a written response to the audit that tracking and reporting how much money is not collected because of each exemption would require "a substantial increase" in employees and a significant computer reprogramming, for which there is no money budgeted.

Montee said the agency has provided similar responses to auditors for the past decade.

"There needs to be a better explanation for not tracking things of this magnitude," she said at a Capitol news conference.

Montee said department records show more than $150 billion of sales were exempt from taxes in the 2008 fiscal year -- up from about $120 billion five years ago. She said the department requires businesses to report sales related to some exemptions, such as food, but does not require them to detail each exemption when submitting their sales taxes.

Department spokesman Ted Farnen said he did not immediately know Wednesday which -- if any -- sales tax exemptions already are tracked by the department, nor how much a comprehensive tracking system would cost. He said an additional 21 full-time employees would needed if the agency were to track all tax exemptions.

Beginning in 1959, Missouri businesses were allowed to keep 3 percent of the sales taxes they collected if they submitted them to the state on time. That prompt-payment incentive was reduced to 2 percent in 1984.

Montee said the incentive dates to an era when sales taxes were calculated by hand -- not computer -- and it is time for lawmakers to consider whether the incentive should be eliminated or capped.

Twenty-six states give businesses a discount for timely payment of sales taxes and 13 (including Missouri) have no dollar-figure ceiling on how much businesses can keep, Montee said.

Missouri businesses kept about $93 million in sales tax revenue under the 2 percent prompt-payment incentive during the 2008 fiscal year, Montee said.

When businesses overpay their sales taxes due to the state, they can seek a refund. Montee said lawmakers should pass legislation requiring businesses to return those refunds to the consumers who originally paid the tax whenever that is possible to determine. Similar bills have failed in previous years. The state distributed about $69 million in sales tax refunds in 2008, the audit said.