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Why is there sales tax on money?

Before Michigan’s sales and use tax exemption on the retail sales of rare coins and precious metals took effect in July 1999, I can’t count how many times that prospective customers commented, “You mean there is sales tax on money?”

When Michigan’s sales tax exemption took effect in mid-1999, our Michigan retail sales soared.

When Michigan’s sales tax exemption took effect in mid-1999, our Michigan retail sales soared.

As many of you know, in my previous career I worked as a certified public accountant. As part of the four-year effort to gain Michigan’s sales tax exemption on the retail sales of rare coins and precious metals, I projected that the Michigan Treasury would make a profit from giving up sales and use tax collections. In early 2012 I gathered data for the year 2011 and conservatively projected that the Michigan Treasury not only fully replaced lost sales and use tax collections, but other tax collection increases amounted to $1.75 million for the year.

How is it possible that giving up tax collections could enable the Michigan Treasury to increase total taxes received? Easily:

• The number of coin dealerships had grown more than 70 percent.

• Industry employment had more than doubled.

• Total industry sales had increased by almost 600 percent.

In total, coin dealers actually collected a greater amount of sales taxes. This came from the growth in sales of merchandise not exempted from sales taxes such as jewelry, antiques, collector cards, hobby supplies and the like. Further there were higher purchases of other merchandise subject to sales tax made by the greater number of people with jobs. The increase in jobs also resulted in higher individual income taxes collected. Finally, there were higher business tax collections resulting from the increase in the number of businesses and the higher sales volume per business.

When Michigan imposed a 4 percent sales tax up to May 1, 1994, my company rarely made in-state retail rare coin or bullion sales greater than $1,000. Coin and bullion sales of $5,000 or more where we collected sales tax maybe happened once a year. When the sales tax rate increased to 6 percent on May 1, 1994, my company’s taxable sales declined one-third in the 12 months after the increase compared to the year before the rate hike – meaning that my company collected the same total of sales taxes.

When Michigan’s sales tax exemption took effect in mid-1999, our Michigan retail sales soared. In 2011, our Michigan annual retail sales were almost 2,600 percent higher than before the exemption at the same time that our Michigan wholesale sales were up just over 500 percent!

By 2011, my company had point of sale computer software to make it comparatively easy to analyze the annual data. It turned out that 94 percent of our 2011 Michigan retail sales volume was for transactions of $5,000 or larger! How could this be?

It turns out that buying rare coins and, especially, precious metals bullion is, to a large degree, fungible products that can be purchased from all across the country. Customers are not inclined to pay sales tax to acquire merchandise from in-state suppliers when they can easily do so from out-of-state dealers without paying such taxes.

The good news is there are now only 18 states and the District of Columbia that still impose sales and use taxes on both rare coins and precious metals. These tend to be smaller states. Using 2010 Census data, only 24.5 percent of the American population live in jurisdictions with no exemptions on the retail sales of rare coins and precious metals bullion.

Say you live in Kansas, Nevada, New Jersey, New Mexico, or Vermont. While these states still impose sales taxes on both rare coin and precious metals bullion purchases, residents of those states can drive to any of the bordering states to make their purchases without sales tax. Should those buyers then leave their purchases stored in safe deposit boxes in those neighboring states, they are also not subject to use taxes, which would apply if the merchandise were brought back in state.

In fact, there is only one state in the country – Hawaii – that assesses sales taxes on rare coin and bullion purchases where that state has no bordering states with a tax exemption.

As many readers of this column know, I have served on the board of directors and as treasurer of the Industry Council for Tangible Assets (ICTA) since 2002. My continuing research on the increased tax collections by the Michigan Treasury has been used to support successful efforts to gain rare coin and precious metals exemptions in Iowa, Pennsylvania, South Carolina, Nebraska and Virginia. It has been used to expand exemptions in Louisiana, Oklahoma and Texas. It is being used to support exemption legislation currently pending in Indiana and Ohio.

It took a four-year effort to gain a rare coin and precious metals bullion sales tax exemption in Michigan. Since then, with documentation of the benefit to the state treasuries of such an exemption, most efforts have taken only six months to two years to achieve. Further, there has not yet been a single state where constant efforts to gain an exemption have ultimately failed (though the recent Wisconsin effort is currently on hiatus).

At the most recent meeting of ICTA’s Executive Committee, I recommended that the organization adopt a goal of supporting efforts to gain rare coin and precious metals bullion sales tax exemptions in the remaining 18 states and the District of Columbia. My reasons are two-fold. First, just as customers told me before mid-1999, charging sales taxes on money and related forms of financial assets does not make sense as a concept.

Second, should something evolve out of the “Streamlined Sales Tax” or the “Main Street Fairness” efforts, that would effectively create a nationwide sales tax, having a rare coin and precious metals bullion exemption in all or virtually every jurisdiction would likely preserve all the existing exemptions. This second reason means that dealers and collectors living in states with existing exemptions have an incentive to support tax exemption efforts in other states.

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As of now, the jurisdictions with no rare coin and precious metals bullion sales tax exemptions are Alabama, Arkansas, District of Columbia, Hawaii, Indiana, Kansas, Kentucky, Maine, Minnesota, Mississippi, Nevada, New Jersey, New Mexico, North Carolina, Ohio, Vermont, West Virginia, and Wisconsin.

As has been demonstrated in other states, the most effective means to gain the exemptions have come from coin dealers working together, with further support from that state’s collectors. The effort does take time and money.

Figure that the monetary cost will be $25,000-$50,000 in most states, mostly for the coin dealer organization to hire a lobbyist. It is not tax-deductible. Costs of these efforts would be borne by in-state dealers and collectors.

ICTA has a wealth of accumulated documentation, ranging from a how-to guide to work on gaining a sales tax exemption to a massive amount of data that can used to gain support for enactment of an exemption bill. Also, where dealer organizations have been able to cover the costs, ICTA representatives have been available for meetings with government staff and legislators to support exemption efforts.

For further information on how to start an exemption effort in your own state, you can call Kathy McFadden, ICTA’s executive director, at (410) 626-7005. You can also go to www.ictaonline.org for information, or send an email to info@ictaonline.org.

I personally spent hundreds of hours and tens of thousands of dollars out of my own pocket working on Michigan’s exemption. It has turned out to be one of the best investments I ever made. With the support of ICTA, new efforts to gain exemptions in additional states should be faster and less expensive to accomplish.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He is the owner emeritus and communications officer of Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com). His radio commentaries titled “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).

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