The National Retail Fairness Act – Where it’s Been and Where it’s Going

by Wyoming Liberty Group Staff

Starting this Spring, the Joint Revenue Interim Committee will take a second look at a number of the failed tax bills from the spring 2019 session. One of the bills that could be reintroduced in the next session is Wyoming House Bill 220 (HB 220), "The National Retail Fairness Act". This bill will be in the discussion regarding efforts to restructure the tax base in the state. The restructuring efforts could lead the reintroduction of the failed tax bills, leading to increased taxes. HB 220 will be a major part of the interim discussion.

This bill was a selective 7% corporate income tax, proposed to "bring money back into the state." The tax would have been on select corporations (mostly retail lodging and food service) ¹ with more than 100 shareholders ². After being rushed through the house on January 25th with a vote of 44 to 14, the bill was shelved by the Senate Corporations Committee on February 14th when the committee declined to vote.

Those in favor of the bill sold it as a way to bring into Wyoming $45 million. These dollars were going to go into the School Foundation Fund, where they would be redistributed to School Districts across the state. Supposedly, we are already paying these dollars in corporate income taxes, collected on businesses located in other states, on business done here. This is only half of the story. One of the biggest misconceptions surrounding this issue of the selective corporate income tax is that all businesses domiciled in other states are paying taxes on the revenue generated in Wyoming. This is not true and as always there is more to the story.

29 other states have corporate income taxes that are lower than 7%. This would be a tax increase on their business done here since they pay a lower rate in their home state. Also, not all states collect taxes on the business that is done out of state by corporations domiciled in their state. There are 19 other states where there is no "Throwback Rule." The corporations in these states may not be paying taxes on their business done in Wyoming.

Due to the large size of the retailers and their nationwide pricing models, the tax would be absorbed through cuts to variable costs like labor. A corporate income tax such as this one could discourage the businesses effected from making increases to the employees in this state.

Also, due to the nature of how corporations are structured, not all big or chain retailers, hotels, or restaurants would be subjected to this tax. Some are franchises, privately held, who would not be subjected to the tax. Also, some businesses have both corporate and privately-owned franchises within the same town. This could mean that some of their income would be subject to the tax and some would be exempt. HB220 is a tax increase that creates a corporate income tax in Wyoming. The tax policy is selective and creates problems just by the nature of being selective.

According to a report given to the Senate Corporations Committee on February 14th, 2019 ³, this 7% tax increase would cost a large retailer such as Walmart about $3.50 per $1000 of gross revenue. It was estimated that the average Walmart store in the U.S has about $80 million in gross revenue. After expenses of $76 million, that store would be taxed at 7% on $4 million in net revenue. The taxes paid per store would be $280,000. There are 12 Walmart stores in Wyoming and 2 Sam's Clubs. The tax might amount to $3.9 million for all 14 stores in the state.

For this example, we will say an employee at Walmart makes $11 an hour. This amounts to $880 a month before taxes for a part-time employee working 20 hours a week and $1,760 for a full-time employee. The employer's portion of FICA tax for an employee is 7.65%, that then raises the employer's cost of an employee to $1,886.04. This is a total of $22,632.48 per year in wages and taxes to that employee. Assuming other administrative costs of employment of about 10%, we will say that the worker costs Walmart $25,000 without employer-subsidized health insurance.

It is easiest for a business to cut its variable costs, such as labor, instead of their fixed costs such as rent or payments on debt. Employee hours and positions would be the items first cut. The tax burden works out to be about the same amount as the wages and taxes of about 11 employees per store. This would mean 154 employees that Walmart would have to cut from all 14 of its Wyoming stores to make up the difference needed to pay the tax. This example just looks at one business, just think of what the impact would be for other similar retailers in the state.

¹ The language of the bill specifies NAICS North American Classification System for sectors 44, 45 and 72. https://www.naics.com/naics-search-results/

² The more than 100 shareholders are due to the definition of a Small Corporation or S corp. S corps can have up to 100 shareholders. If a S crop wishes to have 101 shareholders, they must become a corporation or C corp. The difference between S and C corps is the rate of taxation that the business is subject to. S corps are privately held small businesses that are taxed the same way that a private business set up under an LLC might be taxed for Federal and state income tax where applicable. C corps are taxed at the full corporate Federal tax rate and their state income tax rate where applicable.

³ Report from an analysis given in a handout to the Senate Corporations Committee February 14^th, 2019. The report was obtained from records of the meeting kept by the Wyoming Legislative Service Office.