(Kitco News) - Michigan coin dealer Pat Heller saw how much it helped business when his state instituted a law that exempted sales taxes on precious-metals coins…and he noticed how dealers in neighboring Ohio were hurt when such an exemption was taken away.

Industry officials say the lack of such exemptions hurts dealers in those states since many potential customers might simply buy from elsewhere. Furthermore, they argue that a sales tax is inappropriate for an investment product such as gold anyway; after all, there aren’t sales taxes when buying equities or real estate as an investment.

As a result, the Industry Council for Tangible Assets—a trade group for the rare coin, precious metals and tangible assets industry--is urging members to monitor their state legislators for any attempts to take away exemptions, as well as to speak on behalf of dealers in the most recent sales-tax battleground of Maryland. If the state loses its exemption, others could follow, starting a “domino” effect, ICTA said in an alert to its members. Plus, ICTA said, loss of the Maryland exemption could be a threat to a series of well-attended coin shows held in Baltimore.

Michigan exempted sales taxes on precious-metals coins in 1999, said Heller, owner of Liberty Coin Service.

“From the time we got our exemption, our company’s total sales have gone up 10 times,” Heller said. “But, our in-state retail sales have increased about 30 times. The business has been good, but the improvement in Michigan retail sales was highly affected by the existence of the exemption.”

Heller’s business grew from six to 22 employees.

“There have also been more conventions in Michigan,” he continued. “Ohio used to have an exemption. And because of that, many Michigan dealers would go to coin shows in Ohio to set up and do business.”

When Michigan approved an exemption, its dealers began staying in-state to set up coin shows. Then when Ohio lost its exemption, dealers from there began traveling to Michigan to set up shows, Heller said. This meant the exemption also benefited Michigan hotels, restaurants and gas stations.

Further, Heller said, there were estimates that within six months after Ohio revoked its sales-tax exemption, at least 100 coin dealerships closed or else cut back their staff. “It had an immediate and dramatic effect.”

Industry Told To Be On Lookout For Threats To Sales-Tax Exemptions

A proposal that would have taxed coin sales was beaten back last year in Texas and Maryland, before the issue resurfaced in Maryland, said Diane Piret, director of industry affairs for ICTA. State governments everywhere are on the lookout to increase revenue, not just in Maryland, she said. Lawmakers tend to look at any tax exemptions as lost revenue and feel that taking these away is less likely to draw the wrath of voters than would outright tax hikes. Some states do tax coin sales, although in the majority, there is either an exemption or no sales taxes at all.

“All states are looking at how they can raise money,” Piret said. “There are no states saying they have so much money they don’t know what to do with it.”

Nevertheless, she and others say damage would be caused by removal of exemptions, both to coin services and other businesses, such as less money spent at hotels and restaurants if states were to lose coin shows and conventions.

Philosophically, many in the industry consider a tax on an investment product such as gold coins to be improper to begin with. Imagine putting a sales tax on purchases of stocks. “That wouldn’t go over very well, would it,” Piret said.

Further, dealers in states that repeal the exemption are likely to lose sales. For instance, Maryland’s sales tax is 6%. So at $1,740 an ounce for gold (around the time Piret was interviewed Thursday), the sales tax would be $104. “That’s horrific,” she said.

ICTA urges the dealing community to monitor legislatures in individual states and to consider hiring lobbyists. Often, lobbyists can act as eyes and ears in the hallways of legislative buildings and help nix proposals while they are still in the talking stages and before they formally introduced, Piret pointed out.

“We always have to watch out for these things,” Piret said. “If you don’t have somebody watching your legislature, get somebody…They (exemptions) are hard to get to begin with. To get one back that they’ve repealed takes years and a lot of money.”

The Maryland situation is especially frustrating for those in the industry, Piret said, since opponents thought they had won the fight just last year. At the time, the group urged members from around the country to call the Maryland governor’s office and received a large response.

Maryland Becomes Latest Battleground Over Exemption

Maryland Governor Martin O’Malley has proposed not only new taxes but a repeal of several sales-tax exemptions, including gasoline, to balance the budget. The coin business also would be affected.

This would “dramatically” impact a series of three major shows held in Baltimore each year by Whitman Coin & Collectibles Expo, said David Crenshaw, general manager. The state now has an exemption on sales of $1,000 or more, he explained. The Whitman expos have been in Maryland for 40 years and have been held at the Baltimore Convention Center for two decades. It draws several thousand attendees who come from many states.

Loss of the exemption would also have an impact on coin dealers and their employees in the Maryland, Crenshaw said. His company is encouraging the collecting community, including dealers in and out of state, to communicate opposition to the exemption repeal to members of the key legislative committees. Whitman has dedicated a portion of its Web site to the issue (http://whitman.com/news/Maryland-Governor-Proposes-Sales-Tax-Exemption-Repeal) and has enlisted a lobbyist.

Longtime Maryland dealer Julian Leidman, owner of Bonanza Coins, recounted that the industry won approval of the exemption back in 1991 to “even the playing field” so Maryland firms would not lose business to out-of-state companies. The field would be uneven again with loss of the exemption, he said.

“It would send the person out of state to buy something,” said Leidman, who has been in the business since 1965. “Now, they can already buy it on the Internet and pay a small shipping charge. But some people like to do business locally and come in and see who they are doing business with. That is going to drive these people away. Adding 6% to the price of a gold coin is kind of ludicrous. I’m lucky on a large purchase if I make 1%....

“So, how it would affect me is that it would take all of those people away and reduce my sales and profit significantly. And, to be honest with you, it very well might have me close the retail business here.”

Proponents for retaining the sales-tax exemptions argue that their loss would even have negative ramifications for state coffers. Lawmakers might find they end up with less, not more, revenues.

For instance, the Baltimore expos contribute several million dollars a year to the local economy, Crenshaw said. The expo generates some 1,000 room nights over a week. As a result, a loss in attendance would mean less for the state in lodging taxes and sales taxes on other items such as restaurant, souvenir and entertainment spending by those who travel to Baltimore for the expos.

In Michigan, Heller did a study four years ago on the long-term implications for state coffers following removal of the sales-tax exemption on precious-metals coins. He concluded that other forms of taxes—such as income taxes on a greater number of businesses and employees--more than offset the loss of sales-tax receipts on coins.

“The exemptions have actually proved to be a net benefit to the State of Michigan,” Heller said. “I’m confident that is applicable elsewhere around the country. I don’t think it makes fiscal sense to eliminate that particular exemption.”