Auditor recommends cap on sales tax discounts for Missouri businesses. Here's why

A recent audit of the Missouri Department of Revenue revealed that the state gave up $158 million in tax revenue in the 2022 fiscal year, due to a tax discount for Missouri businesses that was found to be the most generous in the nation.

Currently, businesses that submit their sales and use tax “in a timely manner” are allowed to keep up to 2% of the sales tax owed to the Department of Revenue.

"I believe the discount serves a meaningful purpose as it allows businesses to recover some of the costs associated with collecting and remitting these taxes,” State Auditor Scott Fitzpatrick said.

However, Fitzpatrick also recommends placing a cap on the sales tax that businesses are allowed to retain.

“As someone who believes in a low tax burden and allowing Missourians to keep more of their hard-earned dollars, I support a reasonable cap on the discount that would generate revenue the legislature could then use to provide a tax cut for every Missourian,” Fitzpatrick said.

The sales tax refund policy originated in the 1940s, at a time when tax preparation was done by hand, requiring much more time and resources to complete.

It was established to both encourage businesses to pay their sales and use tax in a timely manner and allow them to recover a portion of their costs to comply with state sales tax laws.

With the advent of tax preparation software, many states shifted away from offering such a generous tax discount to businesses. Now that the technology is readily available and relatively inexpensive, Fitzpatrick feels that it is time to implement a cap on the discount.

While 27 other states still use similar vendor discounts, 18 of those have capped the amount of that discount the states can retain. Additionally, nine of those 27 states have a lower discount rate than Missouri.

“Missouri has maintained the old method of providing a very generous, timely filing discount,” said Jeremy LaFavre, spokesperson for the Missouri Budget Project. “This is fairly outdated for current tax preparation purposes, and, as the auditor correctly pointed out, results in a significant amount of lost revenue to the state.”

For example, neighboring Arkansas also has a 2% timely discount rate, but the state caps the amount that can be retained at $1,000 per month.

Had Missouri instituted a similar cap on its discount amount, the state could have collected an additional $93.2 million in state and local tax revenue during the 2022 fiscal year.

“Every dollar that we don't recoup is a dollar that the state is not able to invest in communities and invest in itself,” LaFavre said.

In the report, Fitzpatrick recommends that the General Assembly reevaluate the timely sales tax discount and consider implementing a monthly cap on the amount that can be retained.

He also suggests that the Department of Revenue be required to annually report to the General Assembly how much of this discount is retained by businesses.

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This is not the first time that an auditor has taken aim at revising this tax policy. In 2010, former State Auditor Susan Montee found that the discount cost the state about $93 million.

Again in 2017, former state Auditor Nicole Galloway also recommended revisiting the policy in a similar audit she released.

Former Gov. Eric Greitens also recommended eliminating it in 2018, but that piece of his tax package didn’t cross the finish line in the General Assembly.

When state coffers were flush with federal funds during the pandemic, experts felt that there was not as much interest in recouping every tax dollar. However, that sentiment may soon be changing.

“I think now that the federal tax money is gone, our budget will start to tighten, and we'll start to see lawmakers look at opportunities like this to make the tax code more fair and to make sure that we've got the resources to provide for the communities that the state serves,” LaFavre said.

This article originally appeared on Springfield News-Leader: Auditor recommends cap on sales tax discounts for Missouri businesses