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Tax Law

State Net Capitol Journal – May 7, 2012

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SNCJ Spotlight

With Congress stalled, states work their own "Amazon tax" deals

Like millions of Americans these days, Dena Davidson buys a lot of products online. From birthday gifts to home furnishings, she eschews crowded malls at every opportunity, preferring the comfort of shopping directly from her own living room. About half the time, she says, the final bill includes sales tax.

This is where Davidson, who lives in California, diverges from most online shoppers. If the company she buys a product from doesn't charge her sales tax, Davidson keeps a copy of her receipt to submit with her state tax return, along with the taxes due on those purchases.

Consumers in all but the five states without a sales tax - Alaska, Oregon, Montana, Delaware and New Hampshire - are required to make the same payments, officially dubbed a "use tax." (Sales taxes are collected and remitted to the government by the retailer; a use tax is remitted directly by the consumer.) But the reality is that most consumers simply do not do so. And because states rarely make an effort to track down individuals who don't report and pay the tax, those funds largely go uncollected each year. That, however, is beginning to change.

States have for years aggressively lobbied Congress to force remote retailers to collect sales taxes. Bills have appeared in each of the last several Congresses, including at least three this year, but none have made it very far. This year's group has actually received rare bipartisan support - most notably US SB 1832, the Marketplace Fairness Act, sponsored primarily by Sen. Mike Enzi (R-Wyoming) - but is still languishing. With this being an election year, few observers expect that to change.

"You might see hearings, but I don't think you will see anything substantive happen before the election," says Bill McClellan, Vice President of Government Affairs for the Electronic Retailers Association, which opposes the measures.

The issue is hardly new. States have been trying to get businesses to collect taxes on their out-of-state sales since the 1960s. Two of those efforts have made it to the U.S. Supreme Court, in 1967 (National Bellas Hess v. Illinois) and again in 1992 (Quill v. North Dakota), but neither was successful. In both cases, the high court ruled that states cannot compel a retailer without a "nexus," or a bricks-and-mortar presence, in their state to collect sales taxes, saying to do so would violate the U.S. Constitution's Commerce Clause.

Of course, in 1992 the current state of the Internet - and the e-commerce it has spawned - was only a dream. Most out-of-state sales were from catalogs, and massive online retailers like, the top e-commerce company in the nation, didn't even exist. Now, according to Internet Retailer magazine, e-commerce accounts for almost 8 percent of all U.S. retail sales (excluding items like cars and groceries not usually bought online). Online sales in 2010 hit $165.4 billion, up almost 15 percent from 2009. Amazon has done particularly well, spiking almost 40 percent in 2010. Sales figures released last week showed the company with $13.8 billion in sales for the first quarter of 2012, up 34 percent form the same quarter last year.

Such stellar sales figures would normally make state tax collectors giddy, but with so few states actually seeing sales tax from those sales, that joy is muted. Research conducted at the University of Tennessee using data from 2009 indicates that states will in fact lose out on over $23 billion in tax revenue in 2012, with over $11 billion of that coming directly from uncollected sales taxes on e-commerce (the balance coming from lost taxes on catalog and business-to-business transactions).

States have not taken all of this lying down. Their first major salvo came in 2000 with the Streamlined Sales and Use Tax Agreement, a joint product of the National Governors Association and the National Conference of State Legislatures. The agreement seeks to get states to simplify their tax codes, thus making out-of-state and online sales tax collection easier for all parties. The Supreme Court specifically noted the almost impossible complexity of maneuvering the thousands of state and local tax codes in its 1992 decision in Quill v. North Dakota. To date, 24 states have signed on to the compact. Over 1,700 companies in those states have also signed on to voluntarily collect sales taxes from their out-of-state customers. In recent years, states have also been working feverishly on their own legislation to force online retailers in general and Amazon in particular to do the same.

Amazon and other online retailers have fought back, insisting that the figures in the University of Tennessee research are vastly overstated. Recent Congressional testimony by Steve DelBianco, the executive director of e-commerce advocacy group Net Choice, cites a study by economists Robert Litan and Jeffrey Eisenach that places uncollected e-commerce sales tax in 2012 at around $3 billion.

The Electronic Retailing Association also complains that states are themselves partly to blame for what the ERA says is a half-hearted effort at making sure their residents are aware of their sales tax obligations when buying products online. In a paper posted on the ERA web site, the organization claims this "suggests there may not be enough revenue involved" for the states to make a greater effort at getting consumers to pay up.

The battle has produced mixed results, though of late the tide seems to be turning toward a brokered peace - at least with Amazon - that will ultimately give states what they want. Faced with approved legislation like California's 2010 AB x1 28, which expanded the definition of what constitutes a retailer's physical presence in the Golden State, Amazon has taken to cutting its own deals with individual states while continuing to also push for federal legislation that will apply nationwide.

Although today Amazon still collects sales taxes in only five states, it will begin collecting those levies in at least seven more by 2016 (see Bird's eye view), including California. In at least three of those states, Virginia, South Carolina and Tennessee, deals were reached only after Amazon threatened to leave the state or forgo plans to build new warehouses or distribution centers in those locales. Several more states, including population-heavy Florida and New Jersey, have pending legislation that will likely spark similar deals in the near future.

State efforts have also not been without setbacks. Courts have overturned so-called "Amazon tax" laws in Colorado and Illinois. Lawmakers have rejected similar proposals in Georgia and Arizona, among others. The issue has also created a bit of a quandary for Republican governors like Bill Haslam of Tennessee, who fended off complaints that the agreement he worked out with Amazon constitutes a new tax on Volunteer State consumers.

"This isn't a new tax, this tax was already due," he told reporters in announcing the deal last October. "This was just a question of Amazon collecting it themselves."

The two most recent states to reach a tax collection deal with Amazon, Texas and Nevada, are also governed by Republicans, Texas Gov. Rick Perry and Nevada Gov. Brian Sandoval. Overall, six of the seven states to reach sales tax deals with Amazon have GOP governors.

Although Republican-dominated states have in recent years generally resisted most Congressional actions, there is also growing support among some GOP governors, including conservative stalwarts like Alabama Gov. Robert Bentley and Maine Gov. Paul LePage, for a national e-commerce sales tax policy.

That concerns industry advocates like ERA's McClellan, who accuses states and Congress of "trying to steamroll the online community." Even so, like many e-commerce advocates he also contends that in spite of states' claims they are only after taxes already on the books, those levies actually do constitute a new tax. That, he says, will be a hard sell for any Congressional lawmaker in an election year.

"It really doesn't matter who is right or wrong in this debate," he says. "The public, the voters, think of this as a new tax, and I think there is recognition of that in Congress."

That stance is part and parcel to the long-running debate between e-commerce companies like Amazon and eBay and more "traditional" retailers like Wal-Mart, Target and Best Buy. The line, however, is blurrier than ever. While Amazon is still the undisputed king, Wal-mart, Target, Office Max, Staples and Sears are also among the top 10 e-commerce retailers in the country.

That, says University of Tennessee professor William Fox, who co-authored the research that quantified the states' lost sales tax revenue, is one reason why Congress might actually get legislation through this time around.

"These state deals are a collection of Band-Aids that address only a small part of the problem," he says. "Short of Congress allowing states to require remote retailers to collect sales taxes, there is no real fix to this."

It remains to be seen if that will happen. Back in California, Dena Davidson is philosophical about the possibility.

"As a consumer, I don't like having the responsibility," she says of figuring out her tax obligations when a company fails to charge her up front. "I think it is asking a bit much of us. But while I like not paying the tax at all...if online retailers have to start charging tax, so it goes."



Online Retailing

Budget & Taxes

BILLIONS IN STATE SPENDING RELATIVELY UNSCRUTINIZED: Tax exemptions, deductions, credits and other diversions of tax revenues don't receive the same degree of scrutiny from lawmakers that spending programs do. That's because while budgets are rewritten every year or two, tax expenditures generally remain in effect considerably longer.

"When you make a commitment for a tax credit, that tax credit may extend over several fiscal years," said Jim Reardon, commissioner of the Vermont Department of Finance and Management.

But groups across the ideological spectrum have begun to cast a critical eye on such expenditures. Some on the left argue the foregone revenue should be used to restore funding for core government services cut during the recession.

"Funding for education and health care and other priorities was slashed heavily," said Andy Nicholas, a policy analyst for the Budget and Policy Center in Washington State, "while tax breaks remain unscathed."

Some on the right, meanwhile, maintain that overall tax rates can be lowered and the tax code simplified by eliminating tax expenditures. Kansas Governor Sam Brownback (R) pitched his tax cut plan this year on that idea.

A number of states have started looking at tax expenditures in a more systematic way. Arizona, Idaho, Iowa, Massachusetts, Missouri, Oklahoma and Washington have established commissions or committees to review such expenditures. Oregon already has a review process in place. Under a law passed in 2009, all state tax credits are on a six-year cycle, with one of three groups of credits "sunsetting" every two years. When the first group of credits expired last year, lawmakers opted not to extend those amounting to about $30 million over the subsequent biennium.

But Oregon's sunset law applies only to tax credits, leaving billions of dollars in tax expenditures untouched. A law that recently took effect in Vermont, however, lays the groundwork for a more ambitious review process. The law directs the governor to submit budget recommendations for tax expenditures along with the regular budget and directs the Legislature's finance committees to make their own recommendations on the tax expenditures "in bill form."

The law hasn't amounted to much yet. The budget Vermont Gov. Peter Shumlin (D) submitted this year addressed tax expenditures but recommended no changes to them, and the House Ways and Means Committee passed a bill simply affirming the existing expenditures.

But the law raises some questions about what would happen if expenditures actually expired with every budget and lawmakers had to take action to renew them.

Reardon said that would be a challenge with some expenditures, like the Economic Advancement Tax Incentive program, which Vermont stopped new companies from entering after 2006 but under which companies that enrolled in the program prior to that date will be eligible for tax breaks through 2015.

"The concept makes sense, but I'm not sure from an implementation standpoint it's quite that easy," he said.

Stephen Klein, chief fiscal officer for the Vermont Legislature, said constantly reviewing tax expenditures would also likely make individuals and businesses less confident that tax breaks one year would be around the next.

"A lot of the strength of a tax code," he said, "is one that's somewhat stable and things don't change all the time."

Klein added that while he thinks it's good that there's probably more conversation about the issue now, "I can't tell you we've found nirvana." (STATELINE.ORG)

PROPERTY TAX BATTLE UNDER WAY IN PA: A bill that would allow Pennsylvania counties to halt their property tax reassessments unanimously passed the House last month. But it is only the first of several bills in the state's legislative pipeline aimed at reducing or eliminating the property tax altogether.

"I believe that property taxes on our homes is immoral," said state Rep. Rick Saccone (R), who sponsored the reassessment moratorium bill. "It hurts seniors in their most vulnerable moment, when they're on a fixed income." But he added, "The cavalry is on the way."

Efforts to do away with the property tax have been pushed in the state for decades. But some lawmakers say there's more urgency for tax reform now.

"The constituents are starting to see the real impact on their property tax bills," said Sen. John Pippy (R).

The various proposals currently under consideration all look to other revenue sources - such as sales and income taxes - to replace the lost property tax revenues.

Bills from Sen. David Argall (R) (SB 1400) and Rep. Jim Cox (R) (HB 1776) would increase the personal income tax to 4 percent from its current rate of 3.07 percent, and hike the sales tax on candy, newspapers and some currently exempt services by a percentage point. Another from Rep. Seth Grove (R) would allow county voters to decide whether to enact local sales or income taxes to reduce the need for property taxes.

"There are a variety of proposals that are being presented," said House Majority Leader Mike Turzai (R), who has declined to back any one of them until House Republicans have an opportunity to discuss them in detail. "We're going to be taking them seriously." (PITTSBURGH POST-GAZETTE, STATE NET)

BUDGETS IN BRIEF: ARIZONA Gov. Jan Brewer (R) reached a budget agreement with lawmakers last month. Among other things, the deal calls for the deposit of $450 million into the rainy day fund and hundreds of millions of dollars in additional spending for mental health, prison construction and other programs (ARIZONA DAILY SUN [FLAGSTAFF]). • ILLINOIS sold $1.8 billion of debt last week in its biggest bond offering in over a year, but it had to offer particularly high yields to lure investors. Ten-year bonds were priced at a 3.62 percent yield, 1.75 percentage points over a standard municipal-bond benchmark (WALL STREET JOURNAL). • MetLife Inc., the nation's largest life insurer, has agreed to pay nearly $500 million to settle a multistate investigation into unpaid claims for deceased policy holders. The investigation centered around insurers' use of the Social Security "Death Master" file, a listing of people who have recently died, to stop making annuity payments to deceased customers but not to make payouts to the families of deceased policy holders (REUTERS). • WASHINGTON Gov. Chris Gregoire (D) has signed off on more than $1 billion in public works spending, including money to refurbish living quarters for the developmentally disabled that she had previously planned to veto (NEWS TRIBUNE [TACOMA]).

- Compiled by KOREY CLARK

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