Greedy states exaggerate tax yield
November 15, 2018
Last week, I traveled to another state to meet, along with some of that state’s coin dealers, with revenue and tax officials. The purpose of the meeting was to discuss the impact on state tax collections should a rare coins, precious metals, and paper currency sales tax exemption be adopted by the state in 2019. Currently, only 13 states and the District of Columbia that impose a sales tax do not have a complete or partial sales tax exemption for rare coins, precious metals bullion, and currency.
Since the 1990s, I have supported successful efforts to gain or expand such exemptions in the states of Alabama, Indiana, Iowa, Louisiana, Michigan, Minnesota, Nebraska, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Texas, and Virginia. I have traveled to several of these states, as well as to Kansas and Tennessee, to speak with the fiscal agencies and/or to legislative committees considering such legislation.
When sales tax exemption bills are introduced into the legislative process, the staffs in the revenue, fiscal, and tax agencies are asked to project a static tax impact statement on how much existing tax collections would be lost if the exemption became law.
Determining such a number is not straightforward. Even if the agency staff could identify which businesses were coin dealers (which is difficult to do) and total up their sales tax collections, virtually all coin dealers also handle other merchandise on which sales tax is collected but would not be affected by the exemption. Examples of other sales-taxable merchandise sold by coin dealers are jewelry, antiques, hobby supplies, other collectibles, and a wide range of electronics, hardware, and other products sold by coin dealers who are also pawnbrokers.
To help such agencies produce a realistic tax impact statement, the Industry Council for Tangible Assets (ICTA), the national coin dealer trade association, did a national survey in 2016 of coin dealers on their 2015 actual sales (separating in-state retail sales between rare coins and precious metals bullion and other kinds of merchandise subject to sales tax), sales tax collections, and attendance at coin shows broken down between shows held in states with complete or partial sales tax exemptions or states with no exemption at all. On average, coin dealers in states that did not have to charge sales tax on rare coins and precious metals bullion enjoyed more than 10 times the sales volume of in-state retail sales of rare coins and precious metals bullion.
They also averaged several times the sales volume of other merchandise still subject to sales tax.
The reason for the higher sales of other taxable merchandise is due to higher store traffic. When Michigan adopted a rare coins and precious metals sales tax exemption in 1999, my company’s in-store traffic nearly tripled.
The agencies asked to produce the tax impact statements for a rare coins, precious metals bullion, and currency sales tax exemption have often used a standard methodology for calculating the potential decrease in sales tax collections that is also used to analyze other tangible goods such as for food, clothing, shelter, and transportation. As a result, their tax impact statements have typically reported a far higher amount of potential lost tax collections – often into the millions of dollars – than actually are received.
In years past, the typical effort to gain a rare coins, precious metals bullion, and currency sales tax exemption involved a dealer or group of dealers in a state asking a friendly legislator to introduce such a bill. However, once the tax impact statement showed a large potential loss of tax collections, the bill almost always died.
That situation came up in the state in last week’s meeting, where a 2013 exemption effort could not overcome a tax impact statement of lost tax collections in the millions of dollars. One of the participants in last week’s meeting was a staffer who had a major part in preparing that 2013 tax impact statement. He said he was receptive to information that would show that his analysis in 2013 was more than 10 times what coin dealers were actually collecting but that he had a high degree of confidence in his original analysis.
The main reason his original analysis is flawed is that he did not understand that someone looking to purchase rare coins, precious metals bullion, and currency have far more options to make an acquisition where no sales tax would ever be due whereas there are almost no such options available for consumers purchasing food, clothing, shelter, and transportation.
What I am referring to specifically are the options to purchase “paper” precious metals instead of the physical products handled by coin dealers or to purchase physical precious metals in ways that will never be subject to sales taxes.
In fact, precious metals transactions are overwhelmingly conducted for paper assets instead of the physical products. In order to get a better gauge on how small the physical precious metals markets are, I did some research in the gold market.
Recent mintage figures for bullion gold coins are only available on a haphazard basis. So, I had to go back to 2010 to derive mintage figures for the various sizes of bullion-priced gold coins issued in Australia, Austria, Canada, China, South Africa, and the United States. Between them, they manufactured almost 4.25 million ounces of such gold coins. The average gold price in 2010, according to www.statista.com, was $1,224.53. That means that the annual output of mints in those six nations generated less than $5.2 billion in sales.
True, this analysis does not also include trade in gold bars. However, the gold bar trade is dominated by central banks and major investment funds. Gold bar demand by the kinds of people that purchase bullion-priced gold coins is only a fraction of the demand for coins.
So, say that the demand for physical gold coins and bars by customers who may patronize coin dealers comes to $7 billion annually worldwide. How does that compare to the paper gold trade?
Between the London Bullion Market Association and the New York COMEX, the average daily gold volume of trade in commodity contracts is more than $20 billion! That is more than $100 billion per week and over $5 trillion per year! That does not include the volume traded on other exchanges such as the TOCOM in Tokyo or exchanges in Australia, China, and Switzerland.
Then you have other forms of trading gold in paper form such as options contracts, shares in exchange traded funds, certificates for shares of precious metals stored at the Perth Mint and Royal Canadian Mint, or shares of stock in gold mining companies. It is even possible today to establish a checking account where the account balance is denominated in grams of gold, even though payments may be made in U.S. dollars or other currencies.
As for rare coins, some brokerage firms have established rare coin investment funds where the rare coin assets owned by the fund are stored in a state with no sales tax (Alaska, Delaware, Montana, New Hampshire, or Oregon).
Further, much of the trade in physical gold bars and coins is handled in such a way that they would never be subject to sales tax. For instance, customers making large purchases of physical gold coins and ingots may find it more practical to have them stored in vaults in Delaware. Or people can establish a self-directed precious metals Individual Retirement Account (IRA) where the assets are typically stored in Delaware. Pension plans and 401k plans may or may not be able to purchase rare coins, physical precious metals, and currency directly, but they can and do acquire any of the paper forms listed above.
Therefore, it was entirely possible that the analyst in the meeting last week could be accurate that the demand for rare coins, precious metals bullion, and currency in his state would, if it were all traded in tangible products that entered the state to be subject to sales tax, might amount to the total he calculated. However, sales of precious metals are so sensitive to having to pay a sales tax that most customers in states where they would have to pay the tax make alternate arrangements to legally avoid it. As a consequence, it can also be true that the actual amount of sales taxes collected by dealers in the few states that do not yet have a rare coins, precious metals bullion, and currency sales tax exemption is just a small fraction of what such an analyst might project.