Sales Tax Exemptions Have Far-Reaching Effect

Gov. Dave Heineman wants to eliminate Nebraska's individual and corporate income tax and pay for it by getting rid of some of the sales tax exemptions on businesses. But how could that affect businesses that rely on those exemptions?

During his state of the state address, the governor said he wouldn't tax food, but didn't get into specifics about what sales tax exemptions he would eliminate.

Right now, there are 84 different sales tax exemptions. One of those is for churches, nonprofit colleges and medical facilities. Nonprofits like Grace University in Omaha pay no sales tax on most of their purchases, including everything from office supplies to maintenance equipment. If that exemption went away, Executive Vice President Michael James says it could cost the university an additional $150,000 a year.

"We have no profit that we can draw upon from year to year to cover a change in expenses like that," said James.

Another sales tax exemption is in manufacturing. Right now, companies do not pay sales tax on raw materials or parts that go into any product that will eventually be sold at retail.

For example, a cabinet manufacturer does not pay any sales tax on the lumber used to build it. The sales tax is charged on the finished product. But if that sales tax exemption goes away, the extra sales tax will make the finished product more expensive, ultimately passing the extra cost along to the consumer.

According to a state report, eliminating the tax exemption on parts and raw materials would alone bring in an estimated $1.2 billion in revenue for the state. The governor says he will share more specifics of his plan with lawmakers over the next few days.

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