RALEIGH, North Carolina — Senate Republicans argue that exponentially expanding the number of transactions subject to the sales tax would promote fairness in a North Carolina tax system now packed with exemptions and loopholes.
Their tax overhaul proposal would make North Carolina's sales tax base one of the broadest in the country and subject nearly all consumer activities and products to the combined local and state rate, currently at 6.75 percent. In exchange, the top individual and corporate income tax rates would be lowered over three years and the combined sales tax would fall to 6.5 percent.
"That's a fair approach for taxes because everyone pays something," Senate leader Phil Berger, R-Rockingham, said in presenting the plan last week. "Everyone has control over how much you're taxed. The more you spend, the more you pay. The less you spend, the less you pay."
But some of the hundreds of thousands of businesses and charitable entities statewide worry the proposal would cause tax collection paperwork headaches and potential hardships. It may awaken scores of interest groups ready to fight the changes at the legislature and preserve their long-held exemptions.
The Senate plan would curb the ability of nonprofits to get refunds on sales taxes paid for the products and services they purchase. The Department of Revenue reported $427 million in state and local sales tax refunds to nonprofits in the 2010-11 fiscal year, of which $309 million went to 93 hospitals and other medical institutions. Legislators have been critical of giving breaks to nonprofit hospitals they argue act like profit-making corporations and give their CEOs large salaries.
Lawmakers "that I've talked to have never intended to hurt the people that we are charged with serving," said Walter Weeks of Coats, a rural hospital board member and executive director of Wake Enterprises, which provides services to more than 250 people with mental disabilities. Both organizations receive sales tax refunds. But "when you pile this on top of Medicaid cuts," Weeks added, "people who are in need of critical services just will not get them."
The Senate plan is a sweeping tax code rewrite developed as Republican leaders declared this year tax reform would occur after decades of failures. The House has been working on a yet-disclosed plan that isn't expected to be as far-reaching. GOP Gov. Pat McCrory has spoken of a more go-it-slow approach.
The sales tax would cover all kinds of professional services like those performed by physicians and lawyers, as well as automobile repair and barber shops and window washers. The exemption on state's portion of the food tax and the combined exemption on prescription drugs also would be eliminated.
Jody Whitehurst of Apex has never had to collect sales taxes from owners of the 25 to 30 dogs she sees weekly for services such as nail clippings, shearings and baths. Pet grooming would be subject to the sales tax in the Senate plan.
As a consumer, Whitehurst said the Senate plan seems fair. But as the proprietor of the Shaggy to Chic Dog Grooming, she's handling checks and cash and handling dogs. Collecting the tax from customers and remitting it regularly will be "kind of a logistical nightmare," she said.
Whitehurst said she'd be more cautious about raising prices to cover her costs because of the new 6.5 percent tax her customers would have to pay. Instead, she said, "it seems like I'm going to end up taking it out of my income."
One of the plan's authors, Sen. Bob Rucho, R-Mecklenburg, downplayed the extra record keeping and said it would be offset by a simpler income tax system. Business-to-business services — such as when a law practice pays a janitorial service — wouldn't be subject to the tax.
John Hood, president of the conservative John Locke Foundation in Raleigh, said the Senate tax plan still "picks unnecessary fights with dozens of industry groups who dislike the idea of becoming unpaid tax collectors for government."
A coalition called the Alliance for NC Nonprofits has been formed to fight any elimination of its members' sales tax exemption. Nonprofits would see at least a partial reduction of their exempt status. Berger's office said it's unclear now if the actual tax overhaul bill would eliminate the exemption.
By expanding the scope of the sales tax, however, Berger and his lieutenants deflect accusations that plagued other tax overhaul proposals that some industries were getting singled out for higher sales taxes. There's also a carrot for business owners and corporations to not oppose the plan with dramatically lower income tax rates.
Other plan critics say it creates a more regressive tax system that harms low- and middle-income families. Rucho said senators are considering options to address the concerns.
Members of the North Carolina Association of Certified Public Accountants have diverse opinions about whether they should collect sales taxes for the first time, as the plan also would require.
"Some changes might be a little bit painful at some point in time," said Rollin Groseclose of Asheville, who leads the association's tax modernization panel, but "we have to look at this collectively overall — what's best for our citizens at large."