‘Tax Free’ Purchases for Flood Victims Advances in Senate

Lawmakers are trying to work in sales tax relief to victims of this month’s flood, a move some worry could be abused by people trying to “game the system.”

Roughly 50,000 people have filed claims with the Federal Emergency Management Agency to line up for federal disaster aid. The state wants to tack a little extra relief onto that — up to $2,500 in sales tax refunds.

The program would be implemented by Department of Revenue Commissioner Reagan Farr, who will have to develop a system to safeguard abuses.

“If all of the sudden we see three dishwashers on somebody’s claim, well, then we’re going to take a closer look at that, ” Farr told TNReport.

The $19.9 million program, yet to be approved by the Tennessee Legislature, would allow any household that qualified for FEMA aid to submit copies of receipts highlighting items bought as a direct result of the floods that sunk parts of the state. Those items range from water heaters, refrigerators and vacuums to couches and drywall.

The state will refund local and state sales taxes for major appliances and furniture purchased for up to $3,200 each. Residential building supplies, such as tools, trash bags, sheetrock and paint, will be reimbursed for each item under $500.

“What’s nice is this reminds me a little bit of our sales tax holiday where we’ve identified very specific sets of items that qualify for the holiday,” said Farr.

The trick, he continued, will be watching out for scams.

Some might try to file a claim for hundreds of dollars in sales tax refunds without having suffered any flood damage. Others who do qualify could try to sneak in receipts for items that don’t quite check out as flood-related purchases, or buy a few extra items for their friend or family.

Auditors and tax enforcement staff will keep an eye out for violations, which would ring up to a $25,000 fine if caught, according to the legislation.

But, under the bill as is, there’s nothing stopping someone who qualified for flood damage from scoring a sales tax refund for upgrading an undamaged couch or a new set of tools.

“In any situation in life, you’re going to have people who cheat,” said Sen. Douglas Henry, vice chairman of the Senate Finance, Ways and Means committee which added the measure to a budget bill Wednesday.

The department expects to handle up to 30,000 refund requests if the measure is approved.

If OK’d, purchases from May 1 to Sept. 30 would be eligible for sales tax reimbursement. Refunds requests would need to be submitted by Nov. 30 and would take two to three weeks to process.

“We have seen so much damage to homes and lives throughout Tennessee,” said Rep. Gary Odom, a Nashville Democrat and top party leader in the House of Representatives who introduced a similar bill this month. “This will help our neighbors get back on their feet.”

Given the Davidson County tax rates, a household — including those in rental properties — can purchase $27,000 worth of applicable purchases and qualify for the maximum $2,500 refund in the fall.

Purchases by contractors won’t count for a sales tax refund. In those cases, Farr said, individuals would need to purchase the building materials the contractors need to install in order to put those items toward the state’s tax relief package.

While the tax relief measure is tied to qualifying for FEMA assistance, all applicable households would qualify for the sales tax refund regardless how much federal help it received.

“I very strongly believe that we need to do this for our flood victims because this is property they wouldn’t have purchased otherwise had it not been for the flood,” said Sen. Joe Haynes, D-Nashville.

“This is the least we can to do relieve them of some of the stress and damages that they’re incurring,” he continued. “They’re not going to be made whole. I guarantee. They’re not going to be made whole. I don’t care how hard we try. There’s not going to be enough flood insurance. There’s not going to be enough FEMA participation and they’re going to come out on the short end of the stick.”

Sen. Bo Watson, a Hixson Republican, said he’d like a committee to spend the rest of the year studying the long term relief needed in order to recover from any future natural disaster.