Missouri Passes Nation's First-Ever Ban on Services Sales Taxes

As states increasingly try to tax services like Netflix and yoga, Missouri voters have decided to keep that from ever happening. How that will impact consumers is unclear.
by | November 9, 2016
In Missouri, the Department of Revenue decided to start applying the state’s entertainment sales tax to activities like dance. (FlickrCC)

Read all of our coverage on 2016 ballot measures at governing.com/ballotmeasures.

As more governments look to expand their sales tax to services like Netflix and yoga, Missouri has become the first state to pass a ban on doing so.

With nearly all precincts reporting, voters approved the ban Tuesday 58 percent to 42 percent, persuaded by the argument that the measure was designed to protect the state's middle class and lower income earners.

The sales tax is generally seen by economists as regressive, meaning it places a bigger burden on low-income families because it takes a bigger chunk of change from their income.

“The time was right to make a stand," said Scott Charton, a spokesperson for the ballot measure's backers. "This is a victory for Missouri’s hard-working taxpayers and their families."

Some worry, however, that Missouri's ban on expanding the sales tax to more services limits its policy options and could actually be a greater burden on the poor. Without the option to expand the sales tax base, Sujit CanagaRetna, an analyst with the Council of State Governments, has warned that lawmakers looking to stabilize their slowly shrinking revenue would only be left with the option to raise the sales tax rate.

Across the country, states have struggled to keep up the same revenue growth as they experienced before the recession and one big reason is that their earnings from sales taxes are declining. That's because these days, consumers are spending far more on services -- most of which aren’t taxed -- than goods, which are.

Lawmakers have tried and had varying degrees of success expanding the sales tax to services. Massachusetts passed a tax on the cloud and quickly repealed it after the tech industry complained. Pennsylvania enacted the so-called "Netflix tax" on streaming video services. Washington, D.C., added a long list of services to be taxed: yoga, tanning and bowling, to name a few.

The efforts have generally been piecemeal because powerful business groups have had a history of beating back more widespread attempts.

Most tax policy experts promote expanding the sales tax in concert with reducing the sales tax rate. That combination is seen as more progressive because it not only captures spending on services, which wealthier people are more likely to use, but also lowers the rate, which could give poorer people slightly more money in their pockets.

In 1987, the Florida Legislature expanded the sales tax to services such as advertising, legal, accounting and construction. The move was met with enormous outcry from powerful groups. Advertisers and the media joined with lawyers, realtors and homebuilders in fighting the new law. Major corporations like Coca-Cola and Procter & Gamble canceled or reduced their advertising in the state to protest the tax, while business groups canceled at least 60 conventions. Protesters even poured instant tea mix into Florida's harbors, mimicking the famous Boston Tea Party revolt. After six months, the services tax was repealed and replaced with a sales tax hike from 5 percent to 6 percent, making the tax more regressive than before.

In Missouri this year, similar lobbying forces were at play. The proposed constitutional amendment was backed by the Missouri Association of REALTORS. Even the state press and broadcasters associations -- which rarely endorse campaigns -- endorsed Amendment 4 because they saw it as a threat to their advertising revenue.

But the true effect of the ballot measure will only be realized when the legislature reacts.

Read all of our coverage on 2016 ballot measures at governing.com/ballotmeasures.