Committee hears how sales, meals taxes feed Education Fund as exemptions shrink base

On Thursday, Jan. 16, the Ways & Means Committee heard a briefing from Joint Fiscal Office staffer Ted Barnett on consumption taxes in Vermont and their connection to the Education Fund. Barnett told the committee that consumption taxes are a significant revenue source — forecast at $1.34 billion in the July 2024 revenue forecast for fiscal 2025 — and that sales-and-use and meals-and-rooms taxes provide a sizable share of nonproperty revenue directed to the Education Fund.

Barnett said sales-and-use tax collections are dedicated 100% to the Education Fund and that 25% of meals-and-rooms tax revenues are allocated to the fund. "These two taxes make up a considerable portion of our nonproperty tax revenue sources that go to the education fund," he said. He added that in fiscal 2025 those taxes together were forecast to provide roughly $680 million toward nonproperty Education Fund revenues and that nonproperty revenue for the Education Fund was forecast at about $769 million.

The briefing outlined the main consumption-tax types collected in Vermont: the 6% sales-and-use tax on tangible personal property (unless exempted), the meals-and-rooms tax (9% generally; 10% on alcohol), and various excises on items such as motor fuel, tobacco and cannabis. Barnett noted changes from the prior session, including the removal of an exemption for prewritten software accessed remotely ("cloud" services), which the office estimated would add roughly $10.3 million in fiscal 2025 and could grow substantially in later years as cloud usage expands.

Barnett also summarized how the cannabis taxes are structured: a 14% excise tax (directed to the general fund under recent budget action) and a 6% sales tax that functions like other sales tax revenue. He said the excise was estimated to produce about $22.2 million in fiscal 2025 and that for fiscal 2026 a statutory sharing formula directs a portion (about 30% in fiscal 2026, as discussed) to substance-misuse programming after certain control-board allocations.

Committee members and staff discussed tax-base trends that affect collections. Barnett described a long-term shift toward a services-based economy and explained why that matters: many services are not subject to the sales tax, so the tax base has grown more slowly than portions of personal consumption. He also noted that inflation temporarily increases nominal sales-tax revenue because the tax is levied as a percentage of price.

The briefing emphasized exemptions and tax expenditures as major drivers of foregone revenue. Barnett said the Joint Fiscal Office’s estimates put total sales-and-use tax expenditures in the mid-hundreds of millions: a table shown in the presentation estimated roughly $363 million in sales-and-use tax expenditures in fiscal 2026 (with later slides aggregating exemptions across the consumption taxes reported near $380 million). Major exemptions listed included the grocery exemption (estimated roughly $132 million), medical products (roughly $60–66 million across references), clothing and footwear (about $45 million), energy purchases for residences (about $56 million), and smaller items such as feminine-hygiene products (under $1 million). Barnett described how such exemptions are often adopted for equity, environmental policy or industry reasons but said they complicate administration and compliance.

Local-option taxation also drew questions. Barnett described the statutory local-option rate as 1% for sales and meals-and-rooms and said municipalities retain 70% of that local-option revenue while 30% is allocated to a pilot special fund. He added that the statutory structure and tax-administration limits have left municipalities and the Tax Department to work through practical issues such as ZIP-code boundaries that do not match municipal limits.

Committee members asked several technical follow-ups that Barnett said would be answered in later briefings or by named staff: how business-input exemptions apply (for example, whether farmers pay tax on lumber for barns), specifics on the application of the deli/takeout distinction in meals taxation, details on local-option charters in cities such as Burlington, and precise accounting for cross-border purchases and the use tax. Barnett told members the tax-expenditure report he previewed would be published later that day and that the office planned further briefings on property tax expenditures and other items.

The presentation also noted that Vermont is a member of the Streamlined Sales and Use Tax Agreement, which standardizes product definitions and aids multistate sellers and state administrations. Barnett asked the committee for a volunteer to be Vermont’s representative to the Streamlined governing group.

No formal motions or votes on tax policy were taken at the Jan. 16 meeting; the hourlong session was an informational briefing and question-and-answer period ahead of upcoming budget-adjustment work that could affect Education Fund allocations.

Looking ahead, Barnett and committee members flagged that any proposed changes to the consumption-tax base — for example, taxing more services or removing some exemptions — would require careful analysis of equity, economic impacts, and administrative feasibility and that some changes could materially affect Education Fund receipts if enacted.