Over the years, the Industry Council for Tangible Assets has had significant success at supporting efforts to enact sales and use tax exemptions for the retail sales of precious metals, rare coins and paper currency in several states.
In the past year or so, the state of Nebraska has enacted an exemption, and Oklahoma and Texas have expanded their existing exemptions by eliminating a minimum purchase requirement. The Virginia legislature just passed a bill granting a sales and use tax exemption on retail bullion sales. It is now waiting for the signature of the governor to become law. Once this occurs, Virginia will become the 32nd state that either has no sales tax at all or grants complete or partial sales and use tax exemptions on the sales of precious metals bullion, rare coins, or currency.
The Indiana House of Representatives passed HB 1046 on Feb. 23 by a vote of 94-0 for a sales and use tax exemption on the retail sale of bullion, coins and currency. The Bill is now assigned to the Senate Tax and Fiscal Policy Committee. The chair of this committee has been added as a sponsor of this bill. The Senate committee is holding hearings on the bill March 10.
In support of the bill, the state representative who sponsored it will speak, then David Hendrickson of SilverTowne, then me. First I will present some remarks in my capacity of treasurer and as a member of the board of directors of ICTA. Then I will speak as a coin dealer who was involved in the successful effort to adopt Michigan’s exemption in the 1990s and who documented the growth of the industry that resulted from the exemption.
Over the years, I have heard numerous people point out that subjecting money to sales tax does not make sense. While I agree, it takes a bit more work than that to achieve enough legislative support to achieve enactment of a sales and use tax exemption. To give you a better idea of what is involved, please continue reading the rough draft of my remarks before the Indiana Senate committee:
Patrick A. Heller of Liberty Coin Service in Lansing, Mich.
In Support Of HB 1046 Sales Tax Exemption For Bullion, Coins, or Currency
Indiana Senate Tax and Fiscal Policy Committee
March 10, 2015
Chairman Hershman and members of the committee, thank you for the opportunity to testify in support of HB 1046 for a sales and use tax exemption for the retail sales of precious metals bullion, rare coins and currency.
My name is Patrick A. Heller. After working as a CPA in Michigan in 1981 I became the owner of Liberty Coin Service in Lansing, Michigan’s largest coin dealer. When Michigan enacted a comparable exemption in 1999, the House and Senate fiscal agencies and the Michigan Treasury used my calculation of forsaken tax collections in their analyses. I also conservatively forecasted the likely increase in Michigan tax collections if the exemption was enacted and later documented that the actual increase in tax collections nearly doubled my estimate. Both my analyses of tax expenditures and of documented increases in state treasury tax collections were subsequently used to support successful efforts to adopt precious metals, bullion, rare coin and bullion sales and use tax exemptions in Iowa, Pennsylvania, South Carolina and Nebraska. These same analyses were used to expand the tax exemptions in Texas and Louisiana. Most recently, they were used to support a successful bill in Virginia that passed the legislature and is now awaiting signature by the governor.
I am here to address two issues about which members of the Indiana House Committee expressed concern. First is the question of whether enacting a sales tax exemption for money and not for other tangible property is fair. Second, I review the limitations of a static tax impact analysis instead of a dynamic analysis.
Precious metals bullion, rare coins, and currency are not consumed
Precious metals bullion, rare coins and currency have a major distinction to other tangible assets subject to sales and use tax. Sales and use taxes are consumption taxes on assets that are consumed or used. In contrast, precious metals bullion, rare coins and currency are not consumed. Often, they are acquired as investments to be sold. Others are acquired for the enjoyment of a hobby, but are still preserved carefully with an eye toward future sale. They are not worn, used, or otherwise consumed.
The Internal Revenue Service and the Indiana Treasury confirm that precious metals bullion, rare coins and currency are capital assets that are not consumed. Both tax agencies anticipate that these assets will be sold and that the owners will report and pay income taxes on their profits from the sales. In fact, the IRS has a Form 1099-B used by coin dealers to report to the IRS some bullion and coin purchases from the public.
Static versus dynamic tax analysis
State treasuries and legislative fiscal agencies use a static analysis of the impact of tax law changes. If a sales tax exemption is enacted, how much existing tax collections would be lost?
However, if only the forsaken taxes are calculated, with no consideration of the change in behavior of Indiana residents after a tax change occurs, the overall impact on total tax collections will be inaccurate. Instead, a dynamic analysis is needed to reflect the impact of changes to other Indiana Treasury tax collections.
From my working with the agencies in Michigan, I learned that there is no approved methodology for state treasuries and fiscal agencies to do a dynamic analysis. I believe my findings of the coin dealer industry’s changes in Michigan once the exemption was adopted would help this committee in approximating a dynamic analysis.
• From the enactment of the exemption in 1999 to the end of 2011, I tracked a 60 percent increase of coin dealerships in Michigan. Half of this increase was from new businesses opening and about half was from existing businesses expanding their operations to also become coin dealers.
• Coin dealer employment more than doubled over this time frame and total payrolls increased by an even greater amount. For my own company from 1997 to 2011, total employment and contractors increased 243 percent while total payrolls increased more than 800 percent. Michigan Treasury research determined that 38.5 percent of payrolls are spent on merchandise for which Michigan sales tax is collected. The increase in coin dealer payrolls in Michigan generated additional sales tax collections that more than offset tax collections lost because of the exemption. I would also like to point out that this coin dealer employment increase occurred while Michigan as a whole was suffering a decline in employment.
• Industry sales soared. According to Dun & Bradstreet information in 1995, my company accounted for about 15 percent of sales by coin dealers in Michigan. From 1997 to 2011, my company’s out- of-state retail and wholesale sales and Michigan wholesale sales increased about 673 percent. Our Michigan retail sales during this time increased more than 2,500 percent. Yes, volume increased across the board, but there was a definite major volume increase specifically resulting from the new tax exemption.
• As coin dealers drew more customers for exempt merchandise, they also drew more customers for merchandise they handled that were still subject to sales tax. Major categories of such products handled by coin dealers were jewelry, antiques, sports cards, hobby supplies and other collectibles.
• As the number of coin dealers increased and their volumes rose, business tax collections from these companies rose.
• For my own company from 1997 to 2011, our total Michigan tax collections increased 216 percent despite the drop in sales taxes collected on our Michigan retail sales. Over the same period, our Lansing tax payments increased by more than 1,100 percent and our local advertising expenditures increased more than 480 percent!
• Further, the hospitality industry in Michigan increased tax collections as more coin shows were sponsored in Michigan, which encouraged more out-of-state dealers to spend money in Michigan.
Why would coin dealers experience such growth after an exemption? Because of thin profit margins on bullion products, the sales tax is a major impediment to potential buyers. In 1994, Michigan raised the sales tax rate from 4 percent to 6 percent. My company’s in-state retail sales for the 12 months following the increase fell by almost exactly one-third from the 12 months before the rate increase. Therefore, our sales tax collections did not increase.
When precious metals bullion, rare coins and currency were subject to Michigan sales tax, we rarely made in-state retail sales greater than $1,000. Yet, my analysis of my company’s 2011 retail sales showed that 94 percent of our Michigan retail sales volume was for transactions of $5,000 or more.
Who would benefit from the exemption?
Indiana residents can easily purchase precious metals bullion and rare coins from sellers in Illinois, Michigan, Pennsylvania, Texas, Florida, California and elsewhere and arrange for out-of-state storage. Generally the more affluent use such arrangements.
There are several constituencies that would benefit from enacting House Bill 1046 in Indiana. Among the beneficiaries would be:
• Indiana Treasury from increased tax collections
• More new and existing Indiana businesses with higher profits
• Indiana workers with more jobs and higher pay
• Indiana smaller-scale investors who can deal locally
• Indiana consumers better protected by dealing with local businesses than with strangers
• Indiana senior citizens who have more resources to avoid scam artists
All of these benefits and more happened in Michigan without any net cost to the state treasury or Michigan taxpayers.
In Michigan, a high percentage of sales tax collections are explicitly allocated to education funding. For this reason, the Michigan Education Association automatically opposes sales tax exemptions. However, the MEA did not oppose this particular exemption and was rewarded when total sales tax collections increased.
Thank you for the opportunity to speak.
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 and http://www.coininfo.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns). His Numismatic Literary Guild award-winning radio show “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).