Metro Pulse/Cover/Tennessee Sales Tax

Comment
on this story

Smugglers' Blues
Border shopping may be common, but it's technically against the law

Take the METRO PULSE SALES TAX QUIZ!

Not only are sales and use taxes high in Tennessee, but they are pretty damned complicated. If you don't believe us, take this sales tax quiz. Assume you are in Knox County, where the combined state and local sales taxes are assumed to be 9.25 percent.

(Editor's note: If you get more than 10 of these questions right, we suggest you immediately call the Department of Revenue and apply for a job, because a good part of their job right now is explaining this bizarre system to frustrated small business owners.)

1. What is the sales tax on a loaf of bread?

2. What is the sales tax on a Snickers Bar?

3. What is the sales tax on a Reese's Stick Bar?

4. What is the sales tax on a package of cough drops?

5. What is the sales tax on baby food?

6. What is the sales tax on horse food?

7. What is the sales tax on a newspaper?

8. What is the sales tax on a magazine?

9. If someone does repair work on a central air conditioning unit, what is the tax on that labor?

10. If someone does repair work on a window air conditioning unit, what is the tax on that labor?

11. What sales and use tax rate does a manufacturer pay for electricity used in the manufacturing process?

12. What sales and use tax does a residential user pay on electricity?

13. In addition to the sales tax, what is Tennessee's current cigarette tax per cigarette?

14. If your cable bill is $50, how much sales and use tax do you pay?

15. If you buy a car for $10,000, what is the combined state and local sales taxes on the purchase?

(Answers)

The sales tax hike drives dollars out of state

by Bill Carey and Joe Tarr

Williamsburg, Bristol and Ft. Oglethorpe seem like awfully long drives just to pick up some cigarettes or load of groceries. But Tennesseans trying to avoid the sales tax are finding that those towns in Kentucky, Virginia, and Georgia are not as far as they once thought. All three communities are located along the Interstate and just across the state line to the north, northeast, and south. And with the Legislature's recent sales tax hike, many such border towns have things that residents of East Tennessee are looking for: cheaper food, cheaper clothes, cheaper beer, cheaper cigarettes, and even lottery tickets.

Because of higher taxes on food, beer, liquor, cigarettes, and gasoline, Tennessee residents in border cities have been shopping in neighboring states for years. With the recent tax increase, the amount of tax revenue Tennessee loses to its eight surrounding states and the number of people who make the drive to shop elsewhere are expected to go up.

Of course, state lawmakers knew this when they passed the tax increases in July. According to the Legislature's own financial planners, the expected $933 million increase will boost the state's tax leakage by at least $75 million.

According to state Comptroller John Morgan, $75 million would be enough money for the state to float bonds to build $681 million in new buildings at the state's ailing colleges and universities. "That would be nice money for us to have," Morgan says. But instead, that money is being used to build schools, libraries, and sewer systems in places like Williamsburg, Bristol, and Ft. Oglethorpe. And the residents and officials of those communities love it. "We collect about a million dollars in sales taxes per year, and I would estimate that at least 15 to 20 percent of that comes from Tennessee residents who shop here," says Ft. Oglethorpe's city manager Paul Page. "I have to admit that I was tickled to death to find that both gubernatorial candidates up there are opposed to the income tax."

So many people cross the state line to shop that it is tempting to call it one of those "victimless crimes." But there are victims, such as the people who own small businesses in Tennessee communities near the border. One such town is Jellico, Tenn., which is about 55 miles north of Knoxville and right across the Kentucky state line from Williamsburg, Ky. Jellico's Sterling Baird, who owns Creekmore and Son Supermarket, has watched helplessly as customers drive across the border.

Baird knows the grocery-store business. He started in it more than 45 years ago, when he went to work for his father-in-law who owned a grocery store in downtown Jellico. At one time, Baird and his father-in-law ran two stores just a couple of blocks from each other in this town of 2,500 people.

But lately, business hasn't been so good. If you step out into Baird's parking lot and peer through some trees you can see a sign for Ray's Superior Market. It's just outside the downtown area and just over the border into Kentucky. So, if you live in Jellico, you could pay 8.25 percent tax on groceries at Creekmore or go another couple blocks and pay no tax at all at Ray's. In Kentucky, you will also pay 17 cents a pack less on cigarette taxes, 5 cents a gallon less in gas taxes, and you can buy a lottery ticket there (fortunately for Baird, you can't get beer across the state line from Jellico because Whitley County, Ky. is dry).

"I'm only three or four blocks from the state line," says an exasperated Baird, dressed in a red plaid shirt. "What can you do? I'm serious—what can you do?

"I've got a lot of loyal customers, but that's the only thing keeping me alive. How long I can last, I don't know.... I'm in a no-win situation. I can't move my land and I can't move my building. I can fight competition, but I can't fight the state."

Smoking a cigarette in his little office in the back, Baird says he wishes the Tennessee Legislature would pass a state income tax, coupled with eliminating the food tax and reducing other sales taxes. And he's angry at how little consideration lawmakers had for business owners along the border. Not only did they give their customers greater incentive to shop out-of-state, the Legislature put the new tax laws into effect in the middle of the month. And it's confusing. He points out that candy is supposed to be taxed at the highest rate, 9.25 percent. But Twix and Kit Kat, because they contain flour, are considered food, and taxed at the 8.25 percent rate.

"Who came up with that? That's the stupidest thing in the world. We hope we're [taxing] it right. How do you know? It's going to take a couple of months to get it all ironed out," says Baird, who often punctuates his sentences with "am I right or am wrong?"

He predicts the tax revenue will fall far short of what the Legislature estimates. "There's no way to know just how much business the Legislature is driving out of Tennessee. But it would be shocking. It would blow your mind."

Four blocks away in Kentucky, Wayne Barton is eager to serve the customers Tennessee sends to Ray's Superior Market. Barton says the latest sales tax hike hasn't increased business any, since the state didn't increase food tax and the high cigarette tax was already driving people into the Bluegrass State. "The biggest thing people from Tennessee drive over here to buy is lottery tickets," he says. "We have a huge crowd from Knoxville who come buy their lottery tickets."

Because of proximity to the Interstate exit, most Tennessee residents who go to Whitley County, Kentucky, to shop would bypass Ray's Superior Market and head about 10 miles north to Williamsburg. The amount of commercial development at the Williamsburg exit is notable. Within a few hundred yards of the exit are a half-dozen fast food places; a half-dozen gas stations (each of which has posted signs for the Kentucky Lottery); a couple discount tobacco stores; a Dollar General; and a Wal-Mart Supercenter. Over a three-hour period on a recent Thursday afternoon, about one-quarter of the license plates say Tennessee, with some from as far away as Blount County. However, most of the Tennessee shoppers who are interviewed say that the main reason they come here is not so much the sales tax difference as it is the convenience of the Wal-Mart store, the largest grocery store in the area. "I come up every week," says Jellico resident Forester Baird (who is not related to grocer Sterling Baird). "I'm not trying to avoid the sales tax, but in Jellico I have to go to several different places to get what I need." The manager of the Wal-Mart store says that Tennessee shoppers are more likely to come up on weekends.

There are dozens of places along the long Tennessee border with situations that are even stranger than Jellico and Williamsburg. About 100 miles east of where I-75 crosses from Tennessee into Kentucky, I-81 crosses from Tennessee into Virginia. There, the towns on both sides of the state line are called Bristol—Bristol, Tenn. on the south side and Bristol, Va., on the north side. Because of cheaper food, beer, cigarettes, and the lure of lottery tickets, Bristol residents are far more likely to shop on the north side of the border. According to a recent study by the Sullivan County Economic Development Commission, Bristol, Tenn.'s residents have an effective buying power of $462 million a year, but retail sales in the city are only about $329 million. Bristol, Va.'s residents have an effective buying power of $229 million, but retail sales there total $565 million.

Perhaps there is no better symbol of the situation in Bristol than the new Kroger store on the state line. The Kroger's parking lot is in Tennessee. The store itself is in Virginia.

Much like in Williamsburg and Bristol, Ft. Oglethorpe, Ga. gets shoppers from across the state line in Chattanooga who are looking for lower taxes (Georgia has no statewide sales taxes on food and a gasoline tax that is 14 cents a gallon less than Tennessee's.) Also like Williamsburg and Bristol, Ft. Oglethorpe has a disproportionate amount of retail for a town its size, with a Wal-Mart, Lowe's, and a Bi-Lo grocery store. But as border towns go, Ft. Oglethorpe has a unique twist. Georgia has the Hope Scholarship, the lottery-funded program that gives free college tuition to a Georgia college for everyone who graduates from a Georgia high school with at least a "B" average. The Hope Scholarship has actually been causing people to move across the state line, says City Manager Paul Page. "So in our case, we're not just getting people who come down here to shop," he says. "We're getting many who come down here to stay."

Of course, there are two other ways Tennessee residents can avoid paying sales taxes to their state government, and most families don't even have to leave the comfort of their homes to take advantage of either one. The first is catalog sales. According to case law, companies that sell products via catalog or mail order do not have to pay sales taxes if they do not have a store, plant, warehouse, or other physical presence in that state (a legal concept known as nexus.) What that means is that a lot of the catalogs that you get in the mail are selling tax-free products. Catalog sales are known to cost the state several hundred million dollars a year in revenue.

Then there is the Internet. Starting about five years ago with the rise of web sales companies such as amazon.com, the amount of money that states lost to tax-free businesses on the Internet became notable. Today, web shopping has become commonplace. Although several companies that sell things on the Internet (such as Dell) pay sales taxes because they have nexus in Tennessee, there are thousands of companies that sell things on the Internet and pay no taxes in the Volunteer State. Few of the transactions carried out on eBay are taxed. And a recent story by the Associated Press reported there are at least 147 web sites that sell cigarettes tax free (a phenomenon that not only creates a huge tax drain but also makes it impossible for state officials to control the distribution of cigarettes to children).

Last year, Tennessee lost an estimated $192 million in tax revenue because of Internet sales, according to Dr. William Fox of the Center for Business and Economic Research at the University of Tennessee. Fox projects the Internet loss will exceed $650 million by 2006—which is why many people don't believe the Legislature's recent tax increase will last very long.

The National Conference of State Legislatures has been working on a system under which states would be able to collect sales tax on Internet transactions. Under the program, Internet companies would theoretically agree to allow a third-party entity to calculate and collect sales taxes on their behalf. "I think that the idea that the system would work is very realistic," says Matt Kisber, a member of the Tennessee state House from Jackson who happens to be the co-chairman of the NCSL committee working on the Internet sales problem. "Because of this, I think that within the next two to three years, some states will be collecting sales taxes on some Internet transactions that aren't being taxed right now."

Kisber hopes that his NCSL committee will have a proposal ready to go to each individual state legislature by Christmas (since he is not running for re-election to his state House seat, he will not be around to vote on it next year). He says the larger Internet sales sites, such as amazon.com, are agreeable to the proposal, and he says it might prove especially effective when taxing business-to-business transactions. But he says it would be unrealistic to predict its full impact.

"Like any system, you are always going to have people who manipulate it and try to illegally get around it," Kisber says. "So it would be hard to predict just how effective it would be."

Judging from the comments of the Tennessee residents who use the Wal-Mart in Williamsburg, Ky., it seems unlikely many of them have pondered the public policy implications of their actions. "I shop here because I save money," says Geneva Owens, a Tennessee resident who says she regularly shops at the Williamsburg Wal-Mart.

Although there are a handful of Knox and Anderson County license plates at the Wal-Mart in Williamsburg, there aren't enough to support the theory that many people from Knoxville are making regular runs for the border. It doesn't sound like very many Knoxville merchants are worried about losing shoppers either. "We're not close to a state line, so I don't think the tax increase will affect us very much," says Gus Kampas, the owner of Kampas Liquor Store on Alcoa Highway. Allen Tallent, the owner of MCS Inc., a computer store on Broadway, says he doesn't think the tax increase will hurt his profits too much, either. "It's still a little early to predict, but I don't think people really notice the extra percentage," he says. "Although I have to admit that it seems kind of odd to me that they don't," he adds. "When I did my monthly invoice last time and sent my sales tax money to the state I looked at the amount of money and said to myself, 'Wow, look at that!' But people don't seem to flinch."

Given the distance from Knoxville to Tennessee's bordering states, some small business owners and Knoxville residents might agree with Kampas and Tallent. However, Fox believes the increase will make it more likely that Knoxville residents will stop on their way home from other states to stock up on beer, canned goods, diapers, clothes, and other durable goods, not to mention shop on the Internet. "Although I don't see Knoxville residents heading to the state line in droves, I do think that as the tax rate gets higher, it will make it more likely that people will buy things when they happen to be in Kentucky or Georgia or another state," says Fox. "When I was in South Carolina last week, for instance, I was in a book store and it occurred to me that if I bought a book there it would be cheaper than if I waited until I got home."

State officials are also certain that the higher taxes will increase the business of "smuggling" cigarettes, beer, and liquor into Tennessee, and they already have an illustration to back up that claim. Two weeks ago, the Department of Revenue and the Sullivan County sheriff's office nabbed a 74-year-old man named Leonard Cutshall for trying to smuggle 200 cases of beer from Virginia to Tennessee. Had Cutshall succeeded, the state estimates he would have illegally avoided paying $951 in state taxes.

Knoxville may not have very many Leonard Cutshalls. But it may have its share of people like local attorney Charlie Thomas. On weekend getaways, Thomas frequently drives to North Carolina, which has lower taxes than Tennessee on gasoline, groceries, and cigarettes (unlike Georgia, Virginia, and Kentucky, however, North Carolina does not have a border town just across the state line and along Interstate 40 because of the mountainous terrain in the area). Since July's tax increase, Thomas says he has started going out of his way to stock up on groceries and gasoline when he is out of state. But his main reason is not to save money. It's to protest.

"I'm pretty fed up," says Thomas, who believes part of Tennessee's problem is exorbitant highway spending, which is supported by gasoline taxes. "At this point, I don't want to buy anything in this state if I don't have to.

"All my life, I've tried to defend Tennessee against charges that we're a politically backward state. I surrender now."