A glimpse inside the sales tax sausage factory

“And it came to pass in those days, that there went out a decree from Caesar Augustus, that all the world should be taxed.

— Luke 2: 1. (A Christmas thought for you.)

When I attended law school at Emory University, Dean Ben F. Johnson made it a point to teach at least one class to all the students so he could get to know them personally. That gave him the opportunity to tell us about his own experience as a lawyer, and especially his experience working for the Georgia Department of Revenue.

As I explained in the first of my series of educational articles before the Fayette November SPLOST vote that brought us to the 7 percent level, the Georgia sales tax started in 1951, at 3 percent. The state had to set up the apparatus to collect this tax, and as a young lawyer Ben Johnson was hired to work on sales tax collection.

His favorite story from his experience was about a drugstore owner in south Georgia who had sent in a form reporting taxable sales, but no money. Needless to say, the Department of Revenue sent him a letter bringing the oversight to his attention and asking for an explanation.

Here’s the explanation he sent back, as related by the dean.

“Dear sirs, I am sorry I was unable to enclose your tax money with my last sales tax return. When customers make taxable purchases in my store, I collect your sales tax and put it in a jar that holds only sales tax money. Every night I secure the jar in a locked cabinet. Right as I was about to send you my tax return, my store was burglarized and the burglar stole the jar with your money. That explains why I could not send it with my return.”

Then the dean would laugh, as would the rest of us, and he made it clear that the state eventually got its money, and not from the burglar.

Sales tax doesn’t collect itself by itself. There is work involved in collecting it, and the higher the tax rate, the more work there is.

Collecting sales tax is a two-part process. First, the merchant has to collect it from the customer, and that’s really the easiest part. Next comes getting the money from the merchant, and as the drugstore owner’s story shows, that’s where the problems really begin.

You see, the sales tax is really an income tax. It’s a tax on the gross income of a merchant. Whether the merchant states the sales tax separately from the basic sale price (as Georgia law requires) or not, it usually does not go into a separate jar.

It is all part of a large pool of money the merchant has, and a merchant’s priorities and timing in disbursing funds can mean that the sales tax does not get remitted to the state.

If a large Wall Street firm could cheat its customers out of $50 billion, as is now being reported about the Madoff firm, imagine what thousands and thousands of small merchants can do. For many smaller firms, it is altogether easy to underreport sales and otherwise manipulate the system.

Even collecting taxes that are clearly disclosed and due can be daunting. The recent presidential campaign disclosure that Joe the Plumber, in Ohio, had an Ohio tax lien recorded at his local courthouse illustrates the point. Obviously, collecting taxes from Joe is a problem, and there are many Joes out there.

It is a mind-blowing experience for many of us to witness the love affair many of our citizens have with the sales tax. Many romantically call it the Fair Tax, with delusions of easy collection and of abolishing the Internal Revenue Service. Politicians who favor the so-called Fair Tax receive big majorities from Fayette citizens at the polls. It’s hard to see why.

Otto von Bismark is given the credit for saying that it is better for us not to see how laws or sausages are made.

Averting their eyes to the realities of collecting sales taxes may provide a warm glow for the more naive among us, but the hard reality is that collecting sales taxes requires a considerable enforcement effort.

Allocating local sales tax to the right county has to rank fairly low on the scale of priorities, and our Fayette citizens should not expect too much.

[Claude Y. Paquin, a Fayette County resident, is a retired lawyer and actuary who received the Prentice-Hall Tax Award upon graduating from Emory University Law School.]