As summer approaches, many of us are looking to the horizon, ready for vacation. But if you’ve been on a road trip recently, you may have had to endure some less-than-perfect driving conditions. Our roads and highways are one of the infrastructure items that are paid for with taxes. But declining revenues mean that states are struggling to pay for roads, both new ones and repairs to existing roads. From New Jersey to New Orleans, a battle is raging over how to pay for construction and road projects. The struggle to find revenue has been going on for years, but states are now poised to make changes that could impact retail businesses.
Here is a look at some of the problems and solutions for gas, road and other travel-related taxes that both consumers and retailers need to understand. Be aware that new regulations, increases and taxes could go into effect as soon as this year.
Declining Gas Tax Revenues: How States Are Now Paying for Construction
According to the Columbus Dispatch (page has been deleted), gas tax revenue for cash-strapped states is declining, because cars are getting more fuel-efficient and gas sales are hitting a plateau. In addition, gas prices have been lower, leaving even less tax revenue. Moreover, as roads and highways age and crumble, damage and repair costs rise while state budgets dwindle. Population growth in states like Texas also overburden roads and create congestion, adding to a state’s need for repair and construction. In response, states are attempting to find new areas of revenue to replenish this deficit. These include several strategies that may put more of a burden on retailers. Here are the top revenue creators that governors and senators across the country are reviewing and how they can affect retailers:
1. Creating a Wholesale Fuel Tax
Many states are considering charging tax on the wholesale price of gas, rather than or in addition to the pump price. In Virginia, the per-gallon tax paid at the pump has been replaced by the wholesale tax. However, in Minnesota, a new fuel tax would be added on top of the per-gallon tax, which was also recently increased. This two-punch tax could be a blow to consumers, shippers and retailers alike.
2. Raising Taxes at the Pump
According to the NY Times, increasing gas tax is an issue in New Jersey, and has growing support from voters, although it still would be a battle to get the law to pass because of tax-resistant politicians. Utah is facing a proposal to raise gas taxes by 10 cents per gallon, and Illinois is actively debating the issue now, as local businesses raise their concerns. Proponents argue that these tax rates have not gone up in more than a decade – not since 1990’s for Utah as well as other states, like California, which already pays the highest gas tax in the country. This issue is being debated all over the country and will probably have an impact at the ballot box come election time as congressmen divide across party lines on the issue of raising taxes.
3. Retail Sales Taxes Increases
Other states are discussing raising current sales tax rates to fund road and highway projects. Arkansas made this change in 2012, but other states are fighting against this idea. The Times-Picayune reports that the Louisiana House of Representatives just failed to pass such a measure, voting down a 1% sales tax increase on May 28th, but other states might not be so lucky. In addition, states have already turned to creating district sales taxes to pay for roads, such as Missouri did back in 2008. This is an important issue online retailers need to keep a sharp eye on, since it will directly impact their tax collection procedures and overall prices when they have a nexus in these states.
4. Mileage Taxes
These are taxes on the number of miles traveled and involves using GPS devices to track that mileage. This is a sticking point for some with privacy concerns as well as the additional cost of requiring vehicles to have such systems. The Des Moines Register reports that Oregon will be testing this system in July, 2015, with some 5000 volunteers. The issue has already been studied in California, Minnesota, and Nevada. In Oregon, this tax will only be for Oregon drivers, however, any retailer shipping from or to that state may feel the pinch in shipping costs.
5. More Tolls
Tolls are another way to bring in revenue to pay for damaged roads, but they may need to be very high to support funding existing and proposed roadway projects. For example, one study found costs could be as high as “as high as $30 per car and $90 for heavy trucks” just to fund one proposed highway rebuild project in Missouri. Again, this can place a heavy burden on shipping costs across the country.
6. More Vehicle Fees
Some states are tacking on additional fees. The Des Moines Register reported in December, 2014 that the state of Washington is now taxing electric vehicles, and its Governor Jay Inslee has also considered taxing carbon emissions. Talk about covering all sides of the coin! California is also looking at raising registration fees as well as a special fee for zero-emission cars. Retailers need to keep an eye all these vehicle taxes and their affect on shipping, especially when using third party services, like a drop shipper.
7. Redirected Taxes
Texas is a prime example of redirected funding. When the budget was cut in 2011, money was taken from the state’s “Rainy Day” fund to compensate. While its current Congressional leaders vow not to raise taxes, growth demands and lower oil revenues mean that current budgets are too small to meet the demand for road repairs and construction. The state’s transportation committee chairman, Robert Nichols, proposed that motor vehicle sales tax be redirected and targeted for road and highway repairs. Dedicating funding instead of relying on a rainy day will help Texas avoid tax increases for now, but it will be interesting to see how this plays out.
8. More Complicated Tax Proposals
In Michigan, a comprehensive tax measure proposal was just defeated. This proposal would have increased the fuel tax, eliminated sales and use tax on fuel for vehicles while increasing them on non-fuel items. Its defeat shows that raising tax is not a desired solution to road improvements. However, it does leave the future of taxes uncertain in that state and serves as a warning that big changes in sales and use tax may be underway in any state. (In an amusing twist, Michigan legislators are now considering legalizing marijuana and taxing it to pay for roads, in a “pot for potholes” campaign.)
9. 2015 Raise in IRS Standard Mileage Rates
Finally, Forbes reported this winter that the “standard mileage rate for federal income taxes is going up for business miles,” rising from 56 cents for business miles driven to 57.5 cents for taxes reported for 2015. This can help improve deductible for businesses, but with all the changes it might not be enough.
While all this is indeed a tax a challenge for retailers, making roads safer and more efficient will eventually have a positive impact on reducing liability, reducing insurance rates and ensuring the safe and timely delivery of goods. Unfortunately, the pain of tax increases and higher shipping rates will squeeze retailers sooner rather than later. In addition, some of these measures will complicate the process of keeping up to date on state and local sales tax regulations and income tax write offs. The importance of a robust ecommerce solution and a knowledgeable accountant is a must-have for all retailers, especially those who have third party suppliers or nexus in any state to keep their sales and use tax collection and reporting accurate and avoid audits.