An Estimate of Revenue From a Tourism Tax in Montana

July 2000

Montana Department of Revenue Tax Policy and Research Process

An Estimate of Revenue from a Tourism Tax in Montana

ntroduction and !ummary Visitors to Montana benefit from state and local government services, such as police and fire protection. However, visitors do not pay state income or property taxes which fund general government services. Visitors do pay excise taxes on gasoline and accommodations, but these taxes are earmarked for specific uses and do not pay for general government services. One way to have visitors contribute to the cost of general government services in Montana would be to levy a selective sales tax on goods that are bought primarily or disproportionately by non-resident visitors. his report examines the potential revenue from levying a tourism tax at a rate of !". his report is divided into four sections. he first section presents estimates of the annual number of visitors and their spending in Montana. he second section estimates the si#e of the tax base and the revenue that would be collected by a tourism tax. he third section estimates how much of that revenue would be collected from non-residents and how much would be collected from residents. he final section estimates administration and compliance costs. $ !" sales tax on prepared food, alcohol sold by the drink, car rentals, tickets to sporting events, concerts, plays and similar events, sightseeing excursion fares, souvenirs, and recreation goods and services would generate revenue of about %!&.& million in fiscal year '(('. )esidents would pay between &(" and *(" of this tax. he state+s costs of administering such a tax would be at least !" of revenue, and merchants+ costs of collecting it would be about ," of revenue. "isitors to Montana and Their Purchases he -nstitute for ourism and )ecreation )esearch .- ))/ at the 0niversity of Montana surveys visitors to the state every year. he - )) estimates the number of visitors, the average stay, and how much visitors spend. he - )) estimates there were 1,,'2,((( visitors to the state in !111, and they spent %!.&22 billion while they were here. he - ))+s estimates for !11! are 3,&!1,((( visitors and %!.',( billion spent. 4rom !11! to !111, the average annual rates of growth were '.1" for visitors and 5.!" for visitor spending. he average stay for a visitor reported by the !111 - )) survey was ,.5 days. 6ith 1., million visitors each staying an average of ,.5 days, there are on average !!(,((( out-of-state visitors in Montana at any time. he state+s resident population is about 22(,(((. hus, on average, !!" of the people in Montana are out-of-state visitors. '

able ! shows the - ))+s estimates of how visitor spending was divided between eight sectors of the Montana economy in !111.
Ta+le % %,,, -on.Resident "isitor !pendin/ !ector $ccommodations $uto )ental and )epairs ransportation 4ares :asoline ; Oil )estaurants ; 9ars :roceries ; <nacks )etail <ales Miscellaneous =xpenses, <ervices Total # million % '35.&( &&.3( 2.(( 5&'.1( '1!.,( !''.,( 525.*( !((.1( $ !3.'(" 5.&(" (.&(" ''.'(" !2.5(" 3.3(" ',.'(" *.,(" %00)00$

# %&'(()*0

he retail sales and miscellaneous categories are composed of many specific types of purchases. 4or the purposes of estimating revenue from a tourism tax, it is useful to recategori#e these items. able ' shows visitors+ estimated retail and miscellaneous spending reorgani#ed into four categories.

Ta+le 2 %,,, -on.Resident "isitor !pendin/ Retail and Miscellaneous !ector heater and =vent ickets <ouvenirs )ecreation 8on- ourist >urchases Total #million % !1.!( 1(.&( 21.(( '2*.(( $ !.'(" &.3(" &.*(" !2.((" 10)'0$

# *(*)00

)ecreation includes ski e7uipment, lift tickets, sporting goods, outfitters, golf fees, bait, and hobby supplies. 8on-tourist purchases includes items such as clothing, household goods, farm supplies, appliances, and used cars. his category is relatively large because 9illings is a regional trade center serving northeastern 6yoming, as well as eastern Montana. 5

The Tourism Tax 2ase and Revenue he - )) visitor spending estimates point out seven areas of significant spending by tourists? sales of prepared food@ alcoholic beverages sold by the drink@ tickets to events such as plays, concerts, and sporting events@ car rentals@ sightseeing fares@ recreation@ and other souvenir items.

hese items are included in the tax base for the revenue estimate provided here. he primary source of information for estimating the tourism sales tax base is the !113 =conomic Aensus, which was conducted by the Aensus 9ureau of the 0< Bepartment of Aommerce. he =conomic Aensus gathers detailed information on business activity at the state level. he tax base estimates presented here are based on sales of businesses grouped by types of business. Many businesses sell several types of products, but all sales by a business are reported together. o estimate sales for specific types of goods and services, it is necessary to make estimates of how some industries+ sales are divided between the various categories of goods and services. he Aensus 9ureau is scheduled to begin publishing estimates of sales grouped by types of goods and services in $ugust '(((. his product line sales information could be used to refine the estimates presented here. >repared 4ood <old in )estaurants 4ive census categories consist of businesses that sell prepared food and little else. hey are 4ull-<ervice )estaurants, Cimited-<ervice )estaurants, <nack and 8onalcoholic 9everage 9ars, Mobile 4ood <ervices, and Aafeterias. he Aafeterias category includes both cafeteria-style restaurants and workplace cafeterias.

able 5 shows estimated receipts for these establishments from the !113 Aensus.
Ta+le 1 !ales of Prepared Food %,,3 Economic 4ensus Estimates )eceipts .%million/ % 52*.*( '**.,( '3.*( *.'( !.&( # 0(')%0

-ndustry 4ull-<ervice )estaurants Cimited-<ervice )estaurants <nack and 8onalcoholic 9everage 9ars Aafeterias Mobile 4ood <ervices Total

-f all food sold in cafeterias is included, the value of taxable sales is %*2&.! million. =xempting sales in workplace cafeterias would reduce the tax base by an amount less than %* million. Brinks <old in 9ars $ll establishments that are primarily in the business of selling alcoholic beverages by the drink are included in the single Aensus category DBrinking >laces.D he !113 =conomic Aensus estimate of receipts from these establishments is %!&'., million. <ome restaurants sell drinks and many bars sell food. -f both food and drink are subEect to the tourism tax, this will not affect the estimate of the total tax base. <ome bars charge for entertainment andFor gambling. Aasinos and other gambling establishments sell food and drinks. he !113 =conomic Aensus estimate for revenue of gambling establishments is %!&*.* million. -f we assume that the value of food and drink sales at gambling establishments is similar to the value of entertainment and gambling at bars, the net effect of counting all revenue of drinking places and not counting any revenue of casinos should be close to #ero. 0ntil the =conomic Aensus estimates of sales by product categories are available, sales of Brinking >laces can be used as an estimate of sales of alcoholic beverages.

&

4ood, Brinks, and Other -tems <old at Hotels, Motels, and )V >arks Montana has a ," use tax on lodging charges. he lodging facilities use tax applies only to lodging charges, and excludes other charges for items such as food, transportation or entertainment. 4ood, drinks and other items sold at lodging facilities could be included in the base for a tourism tax. he value of these other sales can be estimated by taking the difference between total revenue of lodging facilities and room charges, which currently are taxed. wo =conomic Aensus industries are subEect to the lodging facilities use tax? D raveler $ccommodationD and D)V >arks and )ecreational Aamps.D Aombined revenue for these industries for !113 was %55,.1 million. Codging facilities use tax revenues for !113 were %1.3* million, which implies a tax base of %',,., million. <ubtracting lodging charges from total industry receipts gives an estimate of non-lodging sales of %1(.& million. able , shows this calculation.

Ta+le * Food& Drin6s& and 7ther Revenue of 8otels& Motels and R" Par6s %,,3 Economic 4ensus Estimates and Accommodations Tax Receipts )eceipts .%million/ % '12.*( 5*.5( # 11*),0 ',,.,( # ,0)'0

-ndustry raveler $ccommodation )V >arks and )ecreational Aamps Total less? axed Codging Aharges -on.5od/in/ Receipts

his figure may slightly overestimate sales of other goods and services at lodging facilities because facilities with single room rates less than *(" of the state per diem rate are exempt from the accommodations tax. Aonse7uently, a portion of the %1(.& million may represent accommodations charges for these type of rooms that would be exempt from both the accommodations tax and any tourism tax. $uto )entals he =conomic Aensus combines income from both long-term leases and short-term rentals of vehicles. Most long-term leases from Montana car dealers will be to residents, and should not be included in the base for a tourist tax. he - )) reports that visitors to Montana in !111 spent %&&.3 million on car rentals and repairs, but does not track rentals and repairs separately. he =conomic Aensus has a separate *

category of automobile repair. -n !113, revenues totaled %',2 million in Montana. Visitors are !!" of the people in the state on the average day. -f they make !!" of expenditures on car repairs, their spending on repairs would be %'3.5 million. <ubtracting this from visitors+ %&&.3 million spending on rentals and repairs leaves an estimate of visitor rentals of %'2., million. he =conomic Aensus estimate of total car rental and lease payments is %51.' million. <ubtracting %'2., million of visitor rentals from this leaves %!(.2 million of car lease and rental payments by residents. How the estimates are distributed between leases and rentals is unknown. -f residents make &" of total car rental payments, total car rental payments are %'1.2 million. ickets to <porting =vents, Aoncerts, >lays, and <imilar =vents able & shows revenues for businesses that sell admission tickets to special events or to sites such as amusement parks or museums.
Ta+le ' Tic6ets to Events or !ites %,,3 Economic 4ensus Estimates )eceipts .%million/ % !'3.*( 2.'( 5.(( '.,( (.2( (.5( # %*2)10

-ndustry >erforming $rts Aompanies $musement >arks and $rcades <pectator <ports >romoters of >erforming $rts, <ports, and <imilar =vents Aoncession Operators of $musement Bevices and )ides Museums, Historical <ites, and <imilar -nstitutions Total

<ome of these organi#ations have other sources of revenue. organi#ations probably overstate the receipts from ticket sales. ourist ransportation 4ares

otal receipts of these

4ares for two types of transportation are assumed to be subEect to the tourism tax. hey are local sightseeing excursions and taxis. he Aensus 9ureau does not release information from the economic census that could be used to infer sales or other information about individual firms. he Aensus 9ureau is withholding information on three of the four industry subsectors that provide 3

transportation to tourists because there are so few firms in them. 4or these subsectors, it is necessary to estimate sales either as a fraction of the sales of a larger sector that contains the sector of interest or as a multiple of the sales of a smaller sector that is contained in it. able * shows receipts for sectors that were reported by the Aensus 9ureau, the estimated share of those receipts that would be subEect to a tourism tax, and the estimated tax base.
Ta+le 0 Tourist Transportation Fares %,,3 Economic 4ensus Estimates

-ndustry axi <ervice Aharter 9us -ndustry <cenic and <ightseeing ransportation, 6ater 8onscheduled $ir ransportation Total

)eceipts .%million/ % 5.' *., !., ''.*

=stimated ax 9ase F )eceipts !((.(" !&.(" !53.&" ,.&"

=stimated ax 9ase .%million/ % 5.' !.( !.1 !.( 3)%

he =conomic Aensus estimate for axi <ervice does not need any adEustment. he Aharter 9us -ndustry category includes interstate and intercity charters, which would not be taxed, as well as local sightseeing charters. he Aensus 9ureau reported revenues for the combined category. -t also reported that there are ten firms in the total category and seven in the interstate and interurban charter subsector. -f revenue in the charter bus category is earned proportionally by local and long-distance charters, and half of local charters are for tourism, !&" of the revenue of the Aharter 9us -ndustry sector would be subEect to a tourism tax. he <cenic and <ightseeing ransportation sector includes three subsectors, Cand, 6ater, and Other. he Aensus 9ureau reports estimated revenue for the eight firms in the 6ater subsector. -t does not report either revenues or number of firms for the Cand and Other subsectors. -t reports that there are !! firms in the whole sector but does not give revenue for the whole sector. -f the three firms in the Cand and Other subsectors have the same average revenues as the eight in the 6ater subsector, revenues for the whole sector will be !!F2 G!53.&" of revenues in the 6ater subsector. he 8onscheduled $ir ransportation sector includes both freight and passenger subsectors. he Aensus 9ureau reported revenues for the '' firms in the sector. -t reported that there are !( firms in the passenger subsector but did not report their revenues. his subsector includes medical, corporate, and personal flights as well as charter flights for sightseeing or other tourism purposes. -f the ten firms in the 2

passenger subsector have the same average revenue as firms in the sector as a whole, and !(" of their revenue is from flights for tourism purposes, then ,.&" of the revenue of the 8onscheduled $ir ransportation sector would be subEect to a tourism tax. he total is relatively close to the - )) estimate of visitors+ spending on transportation fares. <ouvenirs he - )) estimates that visitors spent %1(.& million on souvenirs and similar items in !111. he !113 =conomic Aensus estimates sales of :ift, 8ovelty, and <ouvenir <tores at %&1.2 million. <ince other businesses, such as convenience stores and supermarkets, sell souvenir items, it seems reasonable to use the - )) figure as an estimate of taxable souvenir sales. )ecreation :oods and <ervices 9ased on the - )) survey, visitors to the state spent %1( million on recreation goods and services in !111. his included purchases and rentals of e7uipment, lift tickets, golf course fees, guides and outfitters, and bait. <ales reported by the !113 =conomic Aensus for the related sectors of D<kiing 4acilities,D D:olf Aourses and Aountry Alubs,D D<ports and )ecreation -nstruction,D and D<porting :oods <toresD total %!5!.2 million. <ince residents ski, play golf, and buy recreational e7uipment, the =conomic Aensus is a better estimate of taxable sales in this sector.

>otential )evenue able 3 shows the calculation of potential revenue from a selective sales tax on tourist items.
Ta+le 3 Potential Revenue from a ;Tourism Tax; ax )evenue 4H'((' .%million/ % 2.( !.2 !.! (.5 !.3 (.! !.! !.& %')'

ax 9ase -tem 4ood <old in )estaurants Brinks <old in 9ars 4ood, Brinks, and Other <old at Codging >laces Aar )entals =vent ickets <ightseeing 4ares <ouvenirs )ecreation :oods and <ervices Total

!113 <ales .%million/ % *2&.! !&*.* 1(.& '1.2 !,'.5 3.! 1(.& !5!.2

'((' <ales .%million/ % 312.! !2'., !(&., 5,.3 !*&.2 2.5 !(&., !&5.&

# %&111)3

# %&''1)0

he first column shows the items included in the tax base. he second column shows estimated sales of those items in !113. he third column shows estimated sales in '((' assuming an average annual rate of growth of 5.!" from !113 to '(('. his is the rate at which spending by non-resident visitors, as estimated by - )), grew from !11! to !111. he fourth column shows the revenue that would be generated in fiscal '((' with a tax rate of !". 9ho 9ould Pay: 4ood and drinks account for two-thirds of the revenue from a tourism tax, but two-thirds of sales in these sectors are to residents rather than non-residents. -t is not known how ticket and recreation services sales are divided between residents and non-residents, but sales to residents probably are significant. Most sales in the car rental, sightseeing fares, and souvenirs sectors are to non-residents. he fraction will depend on exactly which goods and services are taxed.

!(

able 2 shows an estimate of taxes that would be paid by nonresidents in each of the sectors.

Ta+le ( -on.Resident Tourism Tax Payments =stimated 4H'((' ax )evenue .%million/ % !(.1 (.5 !.3 (.! !.! !.& %')' =stimated 8on)esident >ercentage 55" 1&" &(" 1(" 1(" &(" *2$ =stimated ax )evenue from 8on)esidents % 5.* (.5 (.2 (.! (.1 (.2 0)'

Aategory of <ales 4ood and Brinks Aar )entals =vent ickets <ightseeing 4ares <ouvenirs )ecreation :oods and <ervices Total

he estimate for food and drinks is the ratio of the - ))+s estimate of non-resident visitor spending on these items to the =conomic Aensus estimate of total spending. $lmost all car rentals are assumed to be made by non-residents because non-resident rentals account for almost three-fourths of total rental and lease payments. he remainder of revenue in the car rental and lease sector would account for fewer than 5((( leased cars in Montana. he fractions of sales assumed to be made to nonresidents in the other sectors are very rough guesses based on the fact that residents make significant purchases in the recreation and tickets sectors, but not in sightseeing fares and souvenirs. 6ith these estimates of resident and non-resident purchases in each sector, nonresidents would pay ,'" of the tourism tax. =ven if the fraction of sales to nonresidents were 1(" for tickets, sightseeing fares, souvenirs, and recreation goods and services, residents would still pay &(" of the tourism tax. Cimiting the tax to the three categories where non-residents are estimated to account for at least three-fourths of the sales would limit tax receipts to %!.& million. Administration and 4ompliance ssues $ tourism tax would re7uire state resources for administration and would impose costs on merchants who collect the tax. here have been several studies of the administration and compliance costs of state sales taxes. he results of these studies have been summari#ed by Iohn Bue and Iohn Mikesell, in their book <ales axation? <tate and Cocal <tructure and $dministration, and by Ioel <lemrod, in a chapter titled !!

J6hich -s the <implest ax <ystem of them $llKL in =conomic =ffects of 4undamental ax )eform edited by Henry $aron and 6illiam :ale. =stimates of state administration costs range from (.," to !.(" of revenue collected. =stimates of merchants+ compliance costs range from '.(" to 5.2" of revenue collected. he administration and compliance costs for a selective sales tax aimed at tourists is likely to be a larger fraction of revenue collected than is typical for a general sales tax. he Bepartment of )evenue would have to process tax returns for and audit almost as many merchants as it would with a general sales tax, but would collect much less revenue. Merchants who collect a sales tax incur several kinds of costs. hey must track which of their sales are taxable and must charge customers tax based on the taxable portion of their purchases. hey must keep records of taxable sales as well as total sales. >eriodically, they must calculate their tax liability, complete a tax return, and submit payment. -n sectors where all or most products were taxed, merchants+ costs of collecting the tax and accounting for collections and payments would be comparable to their costs with a general sales tax. -n sectors where few products are taxed, merchant+s costs are likely to be comparable to their costs with a general sales tax, but they would collect much less tax revenue. 4or merchants who already collect the lodging tax, there may be no additional costs, or costs may actually be lower if they are allowed to collect, track, and pay a tourism tax together with the lodging tax. 0sing the upper end of the range of reported sales tax administration and compliance costs as estimates of the costs of a tourism tax gives estimated administration costs of !" of %!&.& million, or %!&&,(((, and estimated compliance costs of 5.2" of %!&.& million, or %&21,(((. he estimate of revenue from a tourism tax presented above assumes perfect compliance with the law. However, there are two compliance problems that are likely to be worse with a tourism tax than with a general sales tax. One is that merchants are likely to make more errors in deciding whether sales are taxable. -n most states, the general sales tax exempts a few, well-defined categories of sales, such as food and prescription drugs. <ouvenirs, recreation services, and tickets are not as clear-cut. he other problem is that merchants who have a very small fraction of sales subEect to the tax may not comply at all, either intentionally or out of ignorance.

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