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A complete copy of the Department of Revenue Retailers' Cost of Collecting and Remitting Sales Tax Study can be downloaded from here.
Executive summary
In fulfillment of the requirements of Engrossed Substitute Senate Bill 6108, this study identifies and measures the costs that retailers face in collecting and remitting Washington state and local sales tax. The study also estimates the costs of implementing a sales tax rate and/or base change and measures both direct and indirect compensation that retailers currently receive. The study measures these costs and benefits for large, medium, and small taxpayers. The study also examines regulatory procedures that impose costs and burdens on retailers. Finally, the study reviews how many other states provide compensation to retailers.
The total cost of collecting and remitting sales tax is 6.47 percent of total state and local sales tax collections for small retailers, 3.35 percent for medium retailers and 0.97 percent for large retailers. Small retailers are defined as retailers with gross retail sales between $150,000 and $400,000. Medium-sized retailers are defined as those with annual gross retail sales between $400,000 and $1,500,000 and large taxpayers are those with annual gross sales over $1,500,000.
For all retailers the total cost is 4.23 percent of total state and local sales tax collections when weighted by number of taxpayers. The estimate weighted by number of etaxpayers best describes the cost of sales tax collection for a typical Washington retailer. The total cost is 1.42 percent when weighted by dollar amount. The estimate weighted by dollar amount is best to use for any type of fiscal analysis. These estimates are costs only; they do not include the benefits listed in Table 2. Note that the estimates do not take into consideration the fact that retailers can deduct these costs from their federal income taxes.
The average annual state and local sales tax collections for the survey respondents are $18,352 for small retailers, $51,662 for medium retailers and $68,765 for large retailers.
Table 1
Total Cost of Collecting and Remitting State and Local Sales Tax
As a percent of total state and local sales tax collections
| Small | Medium | Large | Total, weighted by number | Total, weighted by dollars | |
|---|---|---|---|---|---|
| Total costs | 6.47% | 3.35% | 0.97% | 4.23% | 1.42% |
The above costs can be offset by direct and indirect benefits that retailers derive from the collection of sales tax. One benefit is the float (the value of the sales tax collections for the period of time that the retailers retain the money; the period of time is adjusted for the lag in payment for credit and debit card purchases). To the degree that it is regarded as compensation to retailers for sales tax collection, the lower B&O tax rate is the second possible benefit. The following table shows these benefits for all taxpayers and for small, medium, and large taxpayers.
Table 2
Benefits of Retaining Sales Tax
As a percent of total state and local sales tax collections
| Small | Medium | Large | Total, weighted by number | Total, weighted by dollars | |
|---|---|---|---|---|---|
| Float | 0.51% | 0.40% | 0.40% | 0.45% | 0.40% |
| Lower B&O | 0.18% | 0.20% | 0.23% | 0.20% | 0.22% |
Table 3 on the next page breaks down the costs by type. For most retailers, the greatest costs related to sales tax collection and remittance are the costs associated with filing the Washington State excise tax return. For large retailers the greatest cost is the fee on credit card sales.
The results show that the cost of collecting and remitting sales tax is not equal across the three size groups of retailers. Small taxpayers face the largest burden, 6.47percent of sales tax collections, large taxpayers the smallest, 0.97 percent of sales tax collections. The average sales tax cost as a percentage of sales tax collections is over six and one-half times greater for small retailers than for large retailers. To the extent that small Washington retailers compete with large Washington retailers, the cost of collecting and remitting sales tax puts small retailers at a competitive disadvantage.
Not only are there differences in cost between the size categories, there is also considerable cost variation among individual taxpayers within a size category. Individual retailers who are either audited, appeal an audit assessment or make honest mistakes in collecting and remitting sales tax can face a much larger cost. Similarly, retailers who are not audited or do not make honest mistakes face a somewhat smaller cost.
Data on the costs were collected via a detailed survey which was combined with Department of Revenue data. The survey was sent to 3,000 Washington retailers. A survey was also sent to 400 Oregon retailers. The Oregon retailers served as a control group for some of the costs. The response rate was 51 percent for the Washington survey and 36 percent for the Oregon survey. Industry data and Employment Security data were also used.
In addition to estimating the costs, focus groups were conducted to examine particular problem areas that retailers have with collecting and remitting sales tax and to look for administrative solutions to those problems.
As of January 1, 1998, 26 of the 45 states that have a retail sales tax allow vendors to keep a portion of the sales tax collections.
Table 3
Summary of All Costs
As a percent of total state and local sales tax collections
| Small | Medium | Large | Total, weighted by number | Total, weighted by dollars | |
|---|---|---|---|---|---|
| Additional clerk/cashier hours | -- | -- | -- | -- | -- |
| Additional/ more complex POS equipment | 1.59% | -- | -- | 0.69% | 0.06% |
| Additional customer service | 0.15% | 0.18% | 0.006% | 0.13% | 0.03% |
| Additional training | -- | -- | -- | -- | -- |
| POS rate and base changes | 0.32% | 0.72% | 0.07% | 0.42% | 0.14% |
| Credit and debit card fees | 0.89% | 0.74% | 0.76% | 0.81% | 0.76% |
| Total audit costs | 0.012% | 0.041% | 0.001% | 0.021% | 0.006% |
| Storage cost | 0.03% | 0.02% | 0.003% | 0.02% | 0.006% |
| Appeals cost | -- | 0.001% | 0.0001% | 0.0004% | 0.0002% |
| Total cost of filing tax return | 3.27% | 1.35% | 0.08% | 1.94% | 0.34% |
| Cost of mistakes | 0.17% | 0.30% | 0.05% | 0.20% | 0.08% |
| Total Costs | 6.47% | 3.35% | 0.97% | 4.23% | 1.42% |
| Float | 0.51% | 0.40% | 0.40% | 0.45% | 0.40% |
| Lower B&O | 0.18% | 0.20% | 0.23% | 0.20% | 0.22% |
| Total Benefits | 0.69% | 0.60% | 0.63% | 0.65% | 0.62% |
Table entries with no cost indicate that costs are less than 1/1,000th of a percent.
Table 4
Summary of All Costs
Average annual cost per size group and total for retailers (SIC 52-59) with incomes over $150,000
| Average small | Average medium | Average large | Total dollars (all retailers $150 K and over)* | |
|---|---|---|---|---|
| Additional clerk/cashier hours | -- | -- | -- | -- |
| Additional/more complex POS equipment | $291 | -- | -- | $2,256,000 |
| Additional customer service | $27 | $93 | $41 | $980,000 |
| Additional training | -- | -- | -- | -- |
| POS rate and base changes | $59 | $372 | $478 | $4,579,000 |
| Credit and debit card fees | $163 | $382 | $5,189 | $21,299,000 |
| Total audit costs | $2 | $21 | $1 | $163,000 |
| Storage cost | $6 | $10 | $21 | $181,000 |
| Appeals cost | -- | $1 | $1 | $10,000 |
| Total cost of filing tax return | $600 | $697 | $546 | $11,206,000 |
| Cost of mistakes | $31 | $155 | $341 | $2,438,000 |
| Total Costs | $1,187 | $1,731 | $6,623 | $43,178,000 |
| Float | $94 | $207 | $2,731 | $11,306,000 |
| Lower B&O | $33 | $103 | $1,570 | $6,235,000 |
Total dollar amounts represent only retailers classified under SIC 52-59 with over 50 percent of B&O activity classified as retailing and with at least $150,000 annual Washington sales.
