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Why should you pay sales tax on money you didn’t spend? That’s what one Kansas state lawmaker says a constituent asked, wondering why her state – and 44 others – charge sales tax on the value of any manufacturer’s coupons you use.

Say you’re buying a $1 item and you have a $1 coupon making it free. In most states, you’ll pay nothing for the item itself – but you’ll still pay the full amount of tax on the item’s pre-coupon selling price.

Now a new agreement among a consortium of two dozen states could help clear the way for more of those states to ensure that “free” item really is free.

Members of the Streamlined Sales Tax Governing Board’s advisory council have recommended the approval of an amendment to the group’s tax guidelines, that would allow member states the option of excluding manufacturer coupons from the definition of “sales price.”

That may sound bureaucratic and complicated, but the end result could be member states getting the green light to change their tax codes if they wish, to quit charging you sales tax on the manufacturer’s coupons you use.

Right now, only Connecticut, Massachusetts, Missouri, Pennsylvania and Texas exempt manufacturer’s coupons from sales tax, which means you pay state tax only on the discounted price. All other states charge sales tax on your total before your manufacturer’s coupons are applied.

Some lawmakers in Kansas, among others, don’t think this is fair. But they’ve been worried about changing their law, for fear of violating their multi-state tax agreement

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24 states are part of the Streamlined Sales and Use Tax Agreement (SSUTA), which aims to simplify and harmonize state tax systems so they’re more consistent from state to state. But their agreement doesn’t say whether member states can change the way they tax manufacturer’s coupons if they choose. So the amendment would clarify that “states may also exclude from ‘sales price’… all coupons issued by a manufacturer,” so that “only the amount paid by the purchaser is included in the sales price.”

Such an exception would be a victory for Kansas state Senator Caryn Tyson, chair of her state Senate’s Assessment and Taxation Committee, who has championed a bill to stop taxing manufacturer’s coupons. The idea for the bill came from a constituent, she said, who testified in favor of the bill earlier this year.

“I am your average woman who has been the main purchasing agent for my household for over fifty years,” Kansas resident Barbara Saldivar told the committee. “I have on occasion clipped coupons. My relatives clip coupons. Time spent on this, well, if you are an avid coupon person, it can take hours. Now, we discover we are paying taxes on the whole purchase instead of the actual amount. I cannot help but say ‘that is just not fair’ because it is a hidden tax and because we already are overtaxed in other areas. We need a break!”

The state Department of Revenue, however, warned that the bill “has the potential to place Kansas out of compliance with the Streamlined Sales and Use Tax Agreement.” Hence, the proposed revision.

The bill that Kansas considered didn’t pass in this year’s legislative session. But a revised SSUTA could give Kansas lawmakers the momentum to become the sixth state to exclude manufacturer’s coupons from sales tax. And other member states may be inspired to follow their lead.

There’s just one problem. Eliminating a taxable item means the state government takes in less money to pay its own bills. “Kansans redeem approximately $34 million in coupons each year,” the state’s Department of Revenue estimated. As a result, eliminating sales tax on manufacturer’s coupons “would result in a loss of approximately $2 million in state sales tax revenue,” in addition to decreased local sales tax revenues.

The cynical shopper may conclude that the government is going to find a way to cover that shortfall one way or another. You could save more money with coupons, but end up paying more somewhere else to make up for it. So it would be a victory for couponers to only pay sales tax on what you actually pay out of pocket. If these changes end up being implemented in your state, though – just be sure to watch your other pocket, just in case.

Image source: cpyles

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