On Oct. 1, 2013, the United States reached its borrowing limit and the government shut down. This left many business owners scratching their heads. After all, it’s one thing to see a local business shut its doors when it can’t afford to go further into debt. It’s tough to imagine the same thing happening with the federal government.
Of course, these are the crazy times we live in. While the government shutdown has been resolved for the time being, it’s important to understand what happened because it could easily happen again.
The basics of the government shutdown
In order to keep government running, Congress needs to authorize the borrowing of money. When government borrowing reached Congress’ arbitrarily imposed debt ceiling the government had to stop writing checks. In order to get things running again Congress needed to pass a bill allowing the debt ceiling to be raised. The debt ceiling has been reached before. In 2011 and again earlier this year Congress was able to come to a consensus and raise the limit in the nick of time.
This time bipartisan bickering caused total political gridlock. Republicans refused to raise the debt ceiling in protest against spending in general and the Affordable Care Act (ACA), President Obama’s landmark healthcare bill, specifically. Both sides refused to blink and government ran out of money for nearly two weeks until both the House and Senate finally passed an agreement and reopened for business on Oct. 17.
What exactly shut down?
The government shutdown affected the country nearly immediately. Thousands of government employees had to stop working which meant many agencies couldn’t function as normal. National parks closed down, government medical research was temporarily suspended, and the Food and Drug Administration had to limit its safety testing. Some governmental agencies were able to remain open. The military, post office, air traffic control, and Social Security were among the essential programs that continued to operate.
More than just a big nuisance, the shutdown hurt the economy at a time when its recovery is anything but assured.
The shutdown’s impact on taxes
With the government closing down many key services, more than a few optimistic Americans wondered if that meant they could stop paying income and corporate taxes. After all, why pay for something that wasn’t working? Wouldn’t that be nice? But Washington makes sure it gets its tax revenues even if the government wasn’t open to spend it.
During the shutdown state and local governments continued to operate as normal so in terms of sales taxes the shutdown had little impact. Sales taxes are controlled at the state level and don’t currently have any connection to the federal government. This could all change rapidly if the federal Marketplace Fairness Act passes into law.
Will sales tax collection bring the parties together?
While Republicans and Democrats usually take opposite stances on most issues, there’s been an interesting degree of bipartisanship when it comes to the collection of sales taxes. Many in congress have been working to pass regulations that would standardize the collection of sales taxes while vastly increasing the types of transactions subject to sales tax across the entire country.
The Marketplace Fairness Act (MFA), a bill designed to force retailers to collect sales taxes on out-of-state sales, passed handily through the Democrat-lead Senate. It is currently before the Republican-controlled House where many have speculated it will be defeated because Conservative dogma generally opposes strict new government regulation.
I do not believe the death of the MFA is a foregone conclusion however if you take a look at which states have signed up to take part in the Streamlined Sales and Use Tax Agreement (SSUTA). The SSUTA aims to define and standardize tax terminology and the taxability of many items and services. It is possible that the MFA would force the adoption of the SSUTA on all states should it become law.
The SSUTA has been implemented by no fewer than 24 states currently and covers nearly one-third of the U.S. population. Twenty one of the 24 states are “red” states. In fact, if you look at the political affiliation of these states’ Representatives in the U.S. House there are 104 Republicans to just 52 Democrats while there is just about a perfect 50/50 split in the Senator’s parties.
Twenty-one of the 24 Streamlined Sales and Use Tax Agreement-participating states are considered red states with Republican U.S. House Representatives outnumbering Democrats two to one.
This seems like an odd disconnect but maybe the weary American public can find some measure of relief in the fact that Congress can actually agree on something – even if all they have in common is the lust for more sales tax revenue.
What happens next?
So now that the government shutdown is over, can we all relax? Of course not. While the government finally came to an agreement, it was a short-term deal and only funds operations until mid-January. If Congress doesn’t come to another deal by then we’ll likely be in for worse troubles.
In the meantime, make sure to stay compliant with your sales tax collections because even though Congress is a mess, your business still needs to keep its act together. If only the government held itself to the same standard that it holds taxpayers.
Lucinda Rowlands has been the general manager at Zip2Tax since 2010. She has extensively researched sales and use tax regulations in order to help small businesses navigate complicated tax rules.