Tax Commission eyes pawnshops

A Utah Tax Commission finding that it should start collecting sales tax on pawned items has pawnshop owners — and some legislators — scrambling to amend Utah's tax code to prevent what they say could be disastrous consequences for pawnshops and Utah's economically disadvantaged.

Utah Tax Commissioner Bruce Johnson told the Administrative Rules Committee last week that although the commission has not collected sales tax on pawned items, a recent tax audit of a pawn business found that under Utah's tax code, the state is entitled to collect sales tax when the loan from the pawnshop is paid off and the debtor retrieves the item, securing the loan.

Pawnshops already charge sales tax on items sold to customers not seeking a loan.

Committee Chairman Sen. Howard Stephenson, R-Draper and president of the Utah Taxpayers Association, said a tax on pawned items could prove a huge burden on Utah's economically disadvantaged.

"This change in application has far-reaching effects, especially for those in the lower rungs of our society," he said.

In a letter to the commission, Stephensen and Rep. David Ure, R-Kamas, who co-chairs the Administrative Rules Committee, expressed concern that the state would collect double sales tax on pawned items — once when an item such as a television is purchased from a retailer, and second if the television is pawned.

Robert Jolley, who represents the Utah Pawn Shop Association, said if the state collected the tax on items taken in as security against the loan it would have a serious impact on the pawnbroker industry.

"From now on when you redeem your property, you'll have to pay sales tax on your loan," Jolley said, noting that adding sales tax, typically around 6 percent depending on the city, could very well double the interest rate on a pawn loan.

The consequences for pawnbrokers are heavy, Jolley said. Because the tax commission could in theory go back three years to collect back sales tax, Jolley said the tax bill could reach $300,000 to $1 million for large pawn businesses and into the tens of thousands for smaller shops. Such a move could very well put a lot of mom-and-pop pawnshops out of business, Jolley said.

Johnson defended the Tax Commission's move, saying that under Utah's current tax code the commission should be collecting sales tax on pawned items because the transaction changes title of ownership. Johnson has indicated that the commission will probably not seek three years in back sales tax from pawnbrokers.

The issue began during an ongoing audit of a large pawn business. Johnson said while going through the audit, a state auditor realized that the pawnshop should be collecting sales tax when customers return to pay off their loan and get their items back.