Nothing is certain in life but death and taxes. And, in Mississippi, the one tax certain to head the small business owners’ list of most unpopular taxes is the state inventory tax.
“This is the worst tax in the world, a very regressive tax,” said Spence Dye, past president of Retail Association of Mississippi. “It is just unfair. I think it is horrible. Forty six or 47 states have eliminated that tax all together.”
“It is outrageous,” said Carol Ann Dunn, owner of Sportique in Jackson. “It takes away most of our profit. Big companies are able to avoid paying the tax by moving their inventory out of state just before the first of the year. This tax discourages small businesses from even opening.”
“It is unfair for the small business person, and prevents people from investing in Mississippi,” said Rosalind Gunn, owner of The Bird-Fish House in Hattiesburg. “I have been told by several people who were interested in coming to Mississippi that our taxes are too high on things such as inventory. They can do business in other states that don’t have that tax.”
The ins and outs
of the inventory tax
At the first of each year all stores in the state are required to pay a 15% tax on all inventory.
Unlike an income tax where you only pay taxes on income earned, the inventory tax represents paying 15% on merchandise that hasn’t sold and that, in many cases, hasn’t even been paid for yet. For a small business owner struggling to pay workmen’s compensation, Social Security, sales tax, income tax and property tax, the addition of the inventory tax can push a business over the edge to unprofitability or even bankruptcy.
Small business people suspect widespread cheating with inventory taxes. So the small business person who is honest and reports every item in inventory is left at a competitive disadvantage by those who don’t.
Large stores also have an advantage in that inventory tax can be credited against the amount due on their state income tax. A small business owner operating on a small profit margin might not pay a lot of income tax, and hence doesn’t get a break on the inventory taxes.
Gunn said she feels like she has been a voice crying in the wilderness for years in her criticism of the state inventory tax. A native of Scotland, she became an American citizen four years ago and said she feels a strong moral obligation to pay all of her taxes. But she finds the inventory tax particularly burdensome.
“The Legislature needs to review this,” Gunn said. “They need to readjust their thinking because this inventory tax prevents young people from starting small businesses in Mississippi.”
Dunn agrees that the tax has an unfavorable impact on the economy. “A lot of small businesses don’t open, and this town has an unusually high rate of small retail stores having to go out of business because they can’t make enough profit to pay all of the taxes,” Dunn said. “After all the taxes, there is not much profit to live on.”
Dunn said she feels the system encourages widespread cheating, and favors big chain stores that are headquartered out of state over the small business person in Mississippi.
“Small businesses are the backbone in this economy,” Dunn said. “We live here, work here, and our money stays in state. Contrast that with all the big mall stores where every cent is electronically transferred to headquarters out of state. Wal-Mart electronically transfers every cent to Arkansas. All chains transfer their money to their headquarters. The only thing that stays here is a little bit of salary. With small businesses like mine, everything we take in stays right here locally.”
Dye agrees that the tax places an unfair burden on small businesses. He said inventory tax is paid just on what is on the shelves. A large store selling televisions, for example, will sell and replace the inventory on their shelves twice a week. The competitor, the small independent retailer, doesn’t sell in nearly as high a volume, but still pays a 15% inventory tax on everything on the shelves.
Dye said one merchant he talked to had a shipping error that meant her spring inventory was delivered in December. Normally, the spring inventory would be gone by the time inventory tax rolled around. This one shipping error was very costly for the merchant.
In most cases retailers are borrowing money to purchase inventory, so they also have to pay financing costs on top of the inventory taxes.
“You don’t even own it, yet are paying inventory tax on it,” Dye said. “What makes it even more unfair is that the Legislature passed a bill six years ago that if you pay inventory tax, then you get a deduction on state income tax. This is great for big stores because they pay a lot of income taxes, and get all the inventory tax back. But the little person out there that didn’t make much money doesn’t get anything back. The unfairness of it really irritates me. It is so regressive. It is not based on profit. It isn’t based on anything.”
Unfair and regressive?
Several years ago, the federal government appointed a special commission to look at inventory tax. The commission recommended that because of the regressive nature of that tax, states should move towards eliminating it.
“It is an unfair burden on the retailer,” Dye said. “Some of the inventory may still be in stock a year later. And you have to pay inventory tax again, even though you have already been taxed on it. Retailers out there are struggling to survive against strip malls, but you need a level playing field. It is not fair for the small, independent owners of small business to pay more taxes based upon volume than the big guy. It ought to be based on gross receipts, and everyone would pay at the same rate.”