» » » Virtual Taxes In Lieu of the General Excise Tax

Virtual Taxes In Lieu of the General Excise Tax

posted in: Weekly Commentary 0
By Lowell L. Kalapa

A reader asked that further explanation be given to the taxes that are imposed in lieu of the general excise tax and the reasons why these taxes are imposed instead of the 4% tax.
As noted in the earlier comments, these in-lieu taxes include the public service company tax, the bank franchise or financial institutions tax, and the insurance premiums tax. All of these taxes are imposed on the transaction for payment of the goods or services these particular taxpayers provide. Thus, they are in lieu of the general excise tax on transactions of other providers of goods and services.
While the public service company tax was originally imposed on all companies which are regulated by the state’s public utilities commission, today the tax applies only to providers of energy and telecommunications. The tax is imposed in lieu of the general excise tax and the real property tax. Thus, taxpayers who pay this tax do not pay either the general excise or the real property tax.
Why is this tax in lieu of the property tax? Well, when you think about it, utility property tends to be rights-of-way over which lines or pipes pass so that the energy or telecommunications providers can get their product to you the customer. Utility property can also include generating plants where it may be difficult to distinguish between real property and personal property such as machinery. Is, for example, a generator which is bolted to the floor of the building real property like the structure in which it is housed or is it personal property much like your television set? Utility property can also include six square feet on which a booster box or a panel of telephone lines is housed.
Thus, if this property were subject to the real property tax, tax assessors would have a difficult time trying to put a value on these snippets of real property or trying to slice the difference between real property and personal property. Thus, lawmakers long ago saw the wisdom of utilizing a tax based on the gross income of these public utilities rather than incurring substantial costs in trying to determine the value of these parcels of real property.
Since the public service company tax is in lieu of the general excise tax and the real property tax, a rate greater than the 4% imposed by the general excise tax is levied on these taxpayers. Thus, the rate starts at 5.885% and rises to a maximum of 8.2%. The rate is determined on a complicated formula that measures the ratio of net to gross income. And because of this determination of the ratio, these taxpayers pay current taxes based on the prior year’s income.
The proceeds of this tax used to go entirely into the state’s general fund as do the proceeds of the general excise tax. However, because the tax is levied in lieu of the real property tax, the counties protested this disposition since the counties have had complete control over the real property tax since 1978 when the constitutional convention of that year gave them that authority.
While the counties couldn’t do anything about this vexing situation until 1989 because the constitutional convention had imposed a moratorium on all exemptions for an eleven-year period following the convention, the counties spent more than a decade trying to get the state to share a portion of these revenues with the respective counties. Finally, things came to a head in 2001 when the counties threatened to impose the real property tax on these public utilities and the legislature acceded to their demands. As a result, each county receives an amount of the public service company tax that represents the tax collected in excess of what would have been generated by a 4% rate. The rationale is that had these public utilities not had the real property tax exemption and paid the 4% general excise tax and the real property tax, the higher public service company tax rate is the amount that is in lieu of the real property tax.
As for the other regulated companies like tour bus providers or trucking companies, they were switched over to paying the general excise tax in the aftermath of September 11th. Because the public service company tax is based on the prior year’s income, these taxpayers found themselves unable to pay taxes on what had been a better year prior to the September 11th tragedy.
Next week we will take a look at the bank franchise tax and the insurance premiums tax which are also imposed in lieu of the general excise tax.

Print Friendly, PDF & Email

Leave a Reply