Utah intent on taxing more services, increasing sales tax on food

For the past six months, the Utah Tax Restructuring and Equalization Task Force has studied Utah’s tax structure and held town hall meetings around the state to solicit taxpayer ideas. It released new draft legislation on Friday, November 22, and some taxpayers are decrying the plan that would increase the sales tax on food, tax a variety of currently exempt services, and eliminate several sales tax exemptions.

The task force is focusing on sales tax because “sales tax is capturing a declining share of total consumption” at a time when the state is growing and in need of more sales tax revenue. Although Utah is one of the fastest growing states in the nation, sales tax revenue in the state is a steadily declining portion of the General Fund. This puts stress on the services it funds, such as Medicaid, public safety, social services, and transportation.

In October, task force co-chair Senator Lyle Hillyard said the goal of the task force was to “expand the sales tax base that will grow with the population so we don’t come back in another two or three years and say, ‘Oh gosh, this is dying out like sales tax on goods.’” House Speaker Brad Wilson says Utahns would pay less tax overall under this plan, in part because corporate franchise and income tax, as well as individual income tax rates would decrease. 

Increase tax on grocery food

Grocery food is currently subject to reduced rate of state sales tax in Utah: 1.75% rather than 4.85%. Since local option and county sales tax also apply to the sale of grocery food, the combined sales tax rate is 3% throughout the state. Under the Task Force plan, grocery food would be taxed at the full 4.85% state rate, plus applicable local taxes.

To offset the additional tax, there would be a refundable grocery tax credit of $125 per household member. A family of four earning less than $35,535 annually would be eligible for a $500 credit. For each dollar that family makes above that threshold, the grocery tax credit would be reduced; it would not apply to a family of four making $64,106 or more.

Tax more services

The plan would also broaden sales tax to the following services:

• Dating referral services
• Identity theft protection
• Installation services (of tangible personal property when part of a taxable sale)
• Parking, garaging, or storing a motor vehicle (excluding valet services)
• Pet boarding and daycare services
• Personal transportation services (i.e., limousine, ride-share, taxi, and sightseeing transportation in a motor vehicle)
• Prewritten computer software (delivered electronically or by load and leave; or seller-hosted)
• Security system monitoring of real property
• Shipping and handling when part of a taxable sale
• Sports instruction
• Streaming services (digital audio-visual works, digital audio works, digital books, or gaming services)
• Storage of tangible personal property not held for sale in the regular course of business
• Tow truck services for motor vehicles

Veterinarian services and wedding planning services, which would have been taxed under an earlier version of the plan, would not be taxed under this version.

Eliminate existing exemptions

The draft proposal calls to eliminate the sales tax exemption for the following goods and services:

• Admissions to college sporting events
• Certain car washes (unless payment is exclusively through machines that only accept cash or coin)
• Cleaning of tangible personal property (unless payment is exclusively through machines that only accept cash or coin)
• Construction materials used in the construction of a new or expanding life science research and development facility (repealed effective January 1, 2027)
• Electricity for ski lifts
• Certain electricity produced from new alternative energy sources
• Fuel sold to a common carrier railroad and used in a locomotive engine
• Newspapers and newspaper subscriptions
• Sales to a public transit district (includes construction materials converted to real property)
• Textbooks purchased by a student (not including a college bookstore, seller sells primarily textbooks)
• Use of unassisted amusement device (unless payment is exclusively through machines that only accept cash or coin)
• Vehicles used for temporary sporting events
• Vending machine food sold for $1 or less under certain circumstances (unless payment is exclusively through machines that only accept cash or coin)

The existing exemption for machinery, equipment, or parts purchased by owners of certain data centers would be modified to include lessees of certain data centers. The sales tax exemption for motor fuel and some special fuels would also be repealed. Finally, the state would levy a new excise tax on diesel and increase taxes on rental cars.

Exempt tampons

Finally, bucking the broader sales tax trend in Utah but in step with a growing number of states, feminine hygiene products would be exempt under the task force’s plan.

Additional details are available in the Task Force Tax Restructuring Policy Proposal and draft legislation.

Wondering if you have a sales tax collection obligation in Utah? The Avalara Sales Tax Risk Assessment can help you find out.