Reuters: State and local leaders on both sides of the aisle ask Congress to close online sales tax loophole

October 4, 2011
Reuters: Strapped states crave bigger online tax bite

Reuters: Strapped states crave bigger online tax bite

We were fascinated by a new Reuters article that focuses on states’ loss of revenue due to uncollected online sales tax.

Among the facts that caught our eye was this tidbit:

On the state level . . . financial pressures seem to have erased partisan division on the issue. Texas’ majority Republican legislature passed its legislation, and California’s measure had support from both parties.

Hoping to bring that cooperation and a sense of urgency on the issue to Washington, local businesspeople, mayors and other officials from states have been lobbying on Capitol Hill. (emphasis added)

We’ve always believed that online sales tax collection is a bipartisan issue—it’s not about creating a new tax or raising taxes; it’s simply about closing a loophole that’s draining states’ abilities to fund critical local services. We’re glad to see that state politicians are willing to forget about partisanship in order to serve the greater good, and we think that even on the federal level, there’s more agreement than not on the issue. Over time, we believe that more and more political leaders on both sides of the aisle will speak out for the Main Street Fairness Act—particularly since the article quotes a spokesman for the Alliance for Main Street Fairness as saying that “between 150 and 200 members of Congress come from states which have recently taken action and would see hometown support for a federal solution.”

The article also includes a quote from Oklahoma City Mayor Mick Cornett, who’s “lobbied extensively for federal action” (and who is, we note, a Republican), that offers some specific figures on what the lost sales tax revenue would have paid for:

Cornett says the $10 to $15 million a year his city loses on uncollected taxes equates to between 100 and 150 firefighters or police. He says he’s making progress arguing that these are taxes already owed, not new taxes.

“Now you find conservatives in Washington who understand this is closing a loophole, it’s not a new tax,” says Cornett.

Most cities are just hanging on, trying to keep the firefighters and police on the street. This is one way Congress can help local governments without it costing them anything.” (emphasis added)

Granted, that figure applies only to Oklahoma City, but it does give us some idea of just what we lose when online retailers don’t collect sales tax. Consider, too, that the 100 to 150 firefighters or police officers that sales tax would have paid for isn’t only a loss to the community, as important as that is. It’s also a loss of new jobs at a time when they are desperately needed. If Oklahoma City had had the $10 to $15 million a year that it’s due in uncollected sales tax, it could have created 100 to 150 new jobs.

The article concludes with a discussion of how sales tax contributes to state budgets:

Nationally, the cost of running local government is rising faster than tax revenue. Sinking property values are hurting real estate tax collections. Stagnant salaries have kept income tax flat in the states which impose one.

Oklahoma’s cities rely on sales taxes for 55 percent of their budget on average. In some places, sales tax covers more than 90 percent of the local budget.

Arkansas municipalities rely on it heavily too, for close to 50 percent of their income from sales taxes. Slack receipts have driven 15 Arkansas cities to institute sales tax increases so far this year, according to the Arkansas Municipal League.

Texas Comptroller Susan Combs calculates that in fiscal 2010, which ended August 31, her state lost $658 million in uncollected sales taxes. Sales tax contributes 55 percent of the state’s total income. (emphasis added)

These figures are revealing, particularly when you consider the fact that sales tax revenue has been declining for the past decade, due mainly to the increase in online shopping. Add up these three facts—sales tax provides at least 50% (in some places, up to 90%) of city or municipal income in Oklahoma, Arkansas, and Texas; sales tax revenue has been declining for a decade; and in this economy, other sources of revenue, such as income tax and property tax, are also declining—and it becomes clear why 15 Arkansas cities had to raise sales taxes this year. If online retailers were collecting the sales tax that’s already due, those increases would not have occurred.

Near the beginning of the article, Mick Cornett, mayor of Oklahoma City, directs a plea toward Congress: “We need help at the federal level. . . . There’s a limit to what we can do [locally].” If Congress is paying attention to what its counterparts at the state and city level are saying, not to mention to the needs of Americans for new jobs, firefighters, and police, the Main Street Fairness Act should pass soon, by a wide margin.


Amazon asks Texas for break on collecting sales tax in exchange for 6,000 jobs, but will collect regardless upon federal legislation

June 27, 2011

According to Internet Retailer and the Austin-American Statesman, Amazon’s Paul Misener, Vice President of Global Public Policy, has sent a letter to Texas legislators asking that Amazon be exempt from a provision in Texas’ budget bill that says any retailer with a distribution or fulfillment center in Texas must collect sales tax from Texas customers. (The Statesman article includes a link to the letter itself, which we have provided here.) In return, the letter suggests, Amazon could create 6,000 jobs in Texas:

I am writing to request your support for a safe harbor provision in the budget bill that would allow Amazon fulfillment and customer service affiliates to bring Texas at least 6,000 new full time jobs with comprehensive health care and other benefits, as well as at least $300 million in capital investment.

This is an increase from Amazon’s previous offer of 5,000 jobs. In the end, the letter says, Amazon could generate over 10,000 new jobs in Texas:

South Carolina recently enacted a nearly identical law that will bring at least 2,000 jobs and $125 million to that state, where officials estimate that the number of indirect jobs created will be at least as great as the number of direct jobs. By the same calculus, Texas stands to gain well over 10,000 new jobs.

You can find more about the Texas debate over Amazon and sales tax here.

Interestingly—and this part isn’t mentioned in either article—Amazon’s exemption would end upon the enactment of federal legislation on sales tax collection:

This safe harbor provision would serve as a time-limited exception to the new tax nexus language already included in the budget bill, and would expire immediately upon the effective date of a federal law on state sales tax collection. (emphasis added)

The South Carolina deal contained a similar provision. The state’s Senate Bill 36, which automatically became law a week ago without the governor’s signature and which amended South Carolina’s tax code to include the terms of the deal with Amazon, says that the deal will not apply upon

the effective date of a law enacted by the United State Congress that allows a state to require that its sales tax be collected and remitted even if the taxpayer does not have substantial nexus with that state.

(If you click the above link to look at the bill, scroll down to section 3 for the language regarding the deal with Amazon; the provision about federal legislation is at section 3, paragraph D, line 3.)

Amazon has long said that it supports federal legislation on online sales tax collection, and we’re thrilled to see that it’s, if you’ll forgive the cliche, “putting its money where its mouth is.”

While states and retailers remain at loggerheads over state sales tax collection laws, it’s remarkable that they agree on thing: the need for federal legislation. Congress, are you listening?


Online sales tax collection would pay for more than 460,000 teachers

June 20, 2011

UPDATED 6/22/2011 : Associated Press just issued a correction for this article: AUSTIN, Texas (AP) — In a story June 19 about collecting sales tax on Internet sales, The Associated Press incorrectly reported that the $23 billion in uncollected sales and use tax could employ 46,000 teachers. That number should have been 460,000 teachers.

Original Post 6/20/2011: A terrific new AP article puts a human face on just what the failure to collect sales tax online means by looking at its impact on state budgets:

State governments across the country are laying off teachers, closing public libraries and parks, and reducing health care services, but there is one place they could get $23 billion if they could only agree how to do it: Internet retailers such as Amazon.com.

That’s enough to pay for the salaries of more than 46,000 teachers, according to the U.S. Bureau of Labor Statistics. In California, the amount of uncollected taxes from Amazon sales alone is roughly the same amount cut from child welfare services in the current state budget.

It looks at the case of Texas in particular, which has been in the news recently—and this blog—for the public debate between the governor and legislature over online sales tax:

Texas cut $24 billion in state services to cover its revenue shortfall. That included decisions not to fund the expected growth in the number of public school students and the expected growth in the caseload for Medicaid, the health care program for the poor and disabled.

The article emphasizes that in Texas, as elsewhere, small businesses are suffering because they cannot offer the sales tax discount that online retailers can:

When Texas lawmakers took up such a bill [to force big online retailers to collect sales tax], most of the testimony came from owners of small businesses. Gregg Burger, the general manager of Austin’s Precision Camera, complained that customers come into his store to inspect the products, but then go online to buy them to avoid the sales tax.

“We get people all the time who come in, talk to a salesman for 15 minutes to half an hour … and then go, and we know they are going to buy it online because they can save money. In theory, they are stealing our time,” Burger said. “We’re losing at least 15 percent to online, out-of-state, so we’re losing anywhere between $3 million and $5 million a year in business.”

The article offers a clear and thorough background on online sales tax, too—but we recommend it particularly for its explanation of what collecting online sales tax could mean for state budgets, and therefore for ordinary citizens.


Texas’ very public debate over online sales tax

June 10, 2011
Statesman.com

Statesman.com: Texas House breaks with Perry

According to this article from the Austin American-Statesman (TX) and this press release from Texas Governor Rick Perry, it seems the Texas House of Representatives is at odds with the governor over provisions that would clarify what constitutes a retailer’s “physical presence” in the state. Retailers with a physical presence in the state are required by law to collect Texas sales tax.

The debate began last September, when Texas comptroller Susan Combs “sent Amazon a notice that it owed $269 million in sales taxes it failed to collect from 2005 to 2009. She noted that Amazon had a distribution center in Irving.” In response, Amazon threatened to close the distribution center, which would eliminate 119 jobs, and dropped plans for expansion that would have created 1,000 jobs.

The proposed provisions, which have now been added to Senate Bill 1, the omnibus fiscal matters bill, makes it clear that a distribution center does qualify as a physical presence. The Texas House and Senate already passed a bill (HB 2403) containing this language, but it was vetoed by Gov. Perry less than two weeks ago. The House passed the bill on fiscal matters with the provision intact on Thursday.

Interestingly, both the governor and supporters of the provision claim to be acting to support jobs. Said Ronnie Volkening, president and CEO of the Texas Retailers Association:

“We’re disappointed that the governor does not seem to appreciate the negative impact on job creation that continuing a sales tax structure that is discriminatory against Texas retailers can have.”

In turn, the governor issued a statement saying, in part:

I believe this provision risks significant unintended consequences, including a loss of Texas job opportunities and weakening of our state’s competitive advantage.

Actually, we believe that both of them have a point. And even better, we have a solution.

Mr. Volkening is right that allowing online retailers to avoid collecting sales tax hurts local retailers. And since local retailers supply local jobs, hurting local retailers ultimately means fewer jobs. But Gov. Perry is also right to be concerned that Amazon’s closing the distribution center will cause a loss of jobs.

But the problem isn’t with online sales tax. The problem is that there is no federal legislation regarding online sales tax, which Amazon CEO Jeff Bezos has publicly supported many times. Without federal legislation, individual states are creating a multitude of laws that end up targeting particular retailers and make it more difficult for all retailers (online and offline) to collect sales tax for multiple states.

What we need is the Main Street Fairness Act, which would allow states that have made it easier for retailers to collect sales tax (by joining the Streamlined Sales and Use Tax Agreement) to require online retailers to collect sales tax.

When such federal legislation is passed, it will make sales tax collection rules consistent in every state, and states won’t need to worry about warehouses closing and eliminating jobs, and local retailers won’t need to worry that online retailers have an automatic price advantage because they don’t have to collect sales tax.

Don’t get us wrong—there will still be competition. States will still need to offer a business-friendly climate to attract companies, and retailers will still need to offer competitive prices. But that competition will finally be on a level playing field.


Sales tax “shouldn’t become a wedge that favors some retailers over others”

March 30, 2011

This terrific article by St. Louis Post-Dispatch columnist Bill Nicklaus offers a great summary of the debate over online sales tax and explores where the debate may go in the future.

We found this section particularly interesting:

Convenience and selection are the biggest reasons for the growth of e-commerce, but the tax-free shopping environment doesn’t hurt. One study, done by two Georgia State University professors in 2003, estimated that collecting sales taxes would reduce online purchases by 6 percent.

If that’s accurate, then traditional retailers are already losing some business because of the disparate tax treatment. They’ll lose more as e-commerce continues to grow.

It’s great to see a study confirm what we’ve long known from anecdotal evidence: although most consumers shop online for convenience and selection, some consumers shop online specifically to avoid paying sales tax, which means those are sales that would otherwise go to local retailers.

Among the other hot topics Nicklaus covers are Illinois’ recent enactment of affiliate nexus legislation and the $269 million bill that Texas recently sent to Amazon for uncollected sales tax.

Nicklaus notes that Senator Dick Durbin (D-IL) is about to introduce the Main Street Fairness Act in Congress because “he wants a federal version of Illinois’ Amazon tax, making it harder for online firms to play one state against another.” (A quick note of clarification: The column mentions that Illinois’ new tax law is called the Main Street Fairness Act. The federal legislation is also called the Main Street Fairness Act, but unlike Illinois’ law, it would allow all states to require online retailers to collect sales tax.)

Nicklaus closes with a strong endorsement of federal legislation and an equally strong condemnation of Amazon’s tactics: “The sales tax has long been viewed as an efficient and fair way of raising government revenue. It shouldn’t become a wedge that favors some retailers over others. If states can’t stand up to Amazon on their own, then Congress must find a way to end the bullying.” (emphasis added)


Small business owners testify in Texas

March 29, 2011
The Statesman: Small business owners testify in Texas

The Statesman: Small business owners testify in Texas

An article in The Statesman (Texas) describes a meeting of the Texas House Ways and Means Committee, which is considering how best to deal with the issue of online sales tax—a particularly sensitive issue in the state because of Amazon’s threat to close its warehouse there rather than collect sales tax for Texas, as it is required to if it has a physical presence in the state.

What we found most interesting was the testimony of small business owners before the committee:

Gregg Burger , general manager at Precision Camera in Austin, said his store last year had $17 million in sales and collected $1.5 million in sales tax. He estimated that Precision Camera loses about $5 million per year in sales to online retailers.

This is the first time we’ve seen a number that indicates just how much money local retailers are losing to online retailers, and it’s not a small number—it works out to about 30% of the store’s annual sales.

The testimony got emotional at times, showing just how important the issue is to local small business owners:

“We are losing tons and tons of business out of the state,” Burger said. “We are losing millions of dollars by letting out-of-state competitors take our jobs and our money. We want to collect the tax. Please, please, let’s get this through.”

The article also describes a pending bill that would “amend the state tax code to say that a company can’t be classified as a retailer required to collect sales tax if it, or a subsidiary, operates or uses “only a fulfillment center … or a computer server” in Texas. Clearly, it’s intended to allow Amazon to keep its fulfillment center in Texas open without having to collect sales tax for Texas.

But the bill contradicts the Supreme Court ruling that says a retailer with a physical presence in a state must collect sales tax for that state. Should the it pass, we predict that we’ll see court challenges and appeals that will prevent it from being enacted.

We also found a quote by the author of the bill, Rep. Linda Harper-Brown, interesting. The article quotes her as saying that “she is working ‘to make sure there’s balance in the bill to avoid hurting “mom-and-pop” businesses but not create more problems for Amazon.’ ”

By saying she’s working to avoid hurting mom-and-pop businesses with her bill, she’s implicitly acknowledging that they are hurt when online retailers avoid collecting sales tax—if they weren’t, she wouldn’t have to work to avoid hurting them.

We’re glad to see that word is getting out: when online retailers don’t have to collect sales tax, it hurts local retailers who do. Let’s level the playing field and require all retailers, online and off, to collect sales tax.


Chicago Tribune Article Gets it Right

November 10, 2010

Yesterday’s article in the Chicago Tribune by Columnist Eric Zorn covers all the issues related to sales tax collection by internet merchants.  The article starts by highlighting a local retailer who has been steadily losing business on price to internet retailers.  Mr. Zorn goes on to explain the finer points of use tax reporting and remittance (even helpfully including links to the tax forms that need to be completed for out-of-state sales), and goes on to say that use tax collection “…has a low compliance rate…[f]ewer than 5,000 taxpayers filed ST-44s in fiscal 2010, according to the revenue department, leaving an estimated $163 million in online Illinois sales taxes unpaid.”

The article wraps up with a discussion of why Internet companies have escaped sales tax collection thus far (Quill and Bellas Hess Supreme Court decisions) and why that view is outdated: “It wasn’t a particularly urgent question when the Web was young and e-tailers argued successfully that taxing Internet purchases would strangle the baby of e-commerce in its crib.  But now that e-commerce is an obstreperous adolescent, conventional small businesses are gasping for air and cash-strapped states are eyeing all this lost revenue hungrily.”

Good points, great article, thanks Mr. Zorn.


Response: “States consider taxing Internet sales to help boost revenues” from The Dallas Morning News

April 14, 2010

The Dallas Morning News has an informative article today about the question of internet sales tax.
We felt the need to clarify the Supreme Court cases that Amazon.com mentions. Scroll down to the comment sections.