Dale Neuman and his wife had a regular order at Wendy’s that came to exactly $10. Recently, his $10 bill wasn’t good enough. He was charged a penny more.
It’s because a new sales tax had just gone into effect, workers at the south Kansas City fast-food restaurant told him.
Surely — just days after Kansas Citians approved an eighth-cent citywide sales tax for central city redevelopment — it couldn’t already be programmed into retail registers, Neuman thought.
Indeed not. It wasn’t that eighth-cent sales tax on his Wendy’s receipt.
Neuman’s receipt reflected a different eighth-cent sales tax that Jackson County voters approved in November and went into effect on April 1. Kansas City’s central city tax isn’t due to be effective until October.
Neuman said he was fine with paying either tax (the Jackson County one channels funds to help nonprofits provide community children’s services), but the whole extra penny on his bill raised another question:
Since his bill was rounded up, does at least part of the rounded-up increase go to businesses’ bottom lines because the full amount isn’t technically owed to the taxing jurisdictions?
The quick answer is no.
“Sales taxes are conceptually simple, but have a way of becoming devilishly complex,” said Randy Hilger, a certified public accountant who once worked in the state revenue department.
Hilger said Neuman’s question was a good one. It pointed out that consumers can’t dig in their pockets and fish out an eighth-cent coin or any other denomination less than one penny. So even the tiniest of increases may push the tax rate up just enough that it costs a penny more to consumers.
According to Missouri tax statutes, sellers have the legal right to round to the nearest cent. They can round up or down. And tax authorities say it’s highly unlikely that any business collecting sales taxes enriches its coffers by rounding up.
Vendors in Kansas also round to the nearest cent, with a little bit more specific guidance. Kansas, unlike Missouri, is one of 22 states signed onto the Streamlined Sales Tax agreement that codifies the familiar math formula of rounding down when the total is less than 5/10ths of a cent and rounding up when the amount is 5/10ths of a cent or more.
So, who gets the rounded-up difference if the total sales tax amount collected from consumers exceeds the actual sum of taxes due to the taxing jurisdictions, such as school and library districts, tourism districts, counties, cities and any other levies?
According to a spokeswoman for the Missouri Department of Revenue, there is no rounded-up windfall from what’s technically called “breakage.” The retailer “should be remitting the full tax collected from their customers,” said Michelle Gleba, the department’s communications director
For example, if the actual sales taxes owed amounts to 9.75 cents on the dollar, the retailer rounds up to 10 cents, collects the 10 cents from the consumer, and sends the 10 cents to the revenue department. If the actual taxes owed equals 9.25 cents, the retailer rounds down to 9 cents, collects 9 cents from the consumer and sends 9 cents to the state.
Here’s what happens after that:
“The concept of rounding at the customer level really does not come into play when the department distributes taxes to the local governments and taxing districts,” Gleba said. “Essentially, the department places all the local taxes it receives from all filers in one account throughout the month.
“We then determine the total taxable sales attributed to each political subdivision or taxing district during that month, multiply that amount by their tax rate, and distribute funds accordingly. The department follows the same rounding up or rounding down philosophy when we distribute funds to the political subdivisions and taxing districts.”
Gleba offered a rounding example: “If the total taxable sales made in a particular taxing district, multiplied by the tax rate, yield $450.4532 in tax, (the taxing district) receives $450.45” from the state. If the total taxable sales yield $450.4557 in tax, they receive $450.46.”
Over time, taxing authorities say, the rounding up and rounding down becomes something of a wash. Neither the retailer, the state or the taxing districts get or keep more or less than is appropriate.
Tom Kruckemeyer, with the watchdog Missouri Budget Project, said the project hasn’t been compelled to investigate sales tax collection and distribution.
“I’ve assumed that balances out,” Kruckemeyer said. “I don’t think there’s a secret kitty.”