A Step Closer to Sales Tax Collection for Online Purchases

The Indiana Chamber supports SB 545 (Sales Tax Collection by Remote Sellers).

This bill takes an important step toward the Legislature requiring online retailers who have no physical presence in Indiana to collect Indiana sales tax from their Indiana customers when they make online purchases. Ultimately, one of two things must happen for the requirement to go into full effect. Either the U.S. Supreme Court has to determine that states are allowed to impose this requirement based on their economic activity in the state (and the nominal burden associated with it), or Congress must pass legislation to authorize states to require the online sellers to collect a state’s sales tax.

The issue is pending before both bodies and several states are passing legislation to put pressure on one of the two entities to act and resolve the issue. Senate Bill 545 is modeled after a South Dakota law that is under review by the high court. It is designed to put Indiana in the position of making the requirement effective as soon as an Indiana court declares the collection valid under federal law. So this remains legally complicated, but SB 545 is a thoughtful and sound approach.

Senator Luke Kenley has pursued this issue diligently for many years – doing everything possible to address the problem of the sales and use tax on these transactions going uncollected. He is to be commended for his pursuit in the past and for formulating this legislation. In-state brick and mortar retailers are put in an unfair position when their online competitors are not required to collect and remit Indiana’s sales tax (as they are), effectively giving the “remote sellers” a 7% price advantage. Additionally, Indiana’s sales tax base is diminished each year as the online sales market continues to grow at rapid rates. What’s more, this is not a new tax since purchasers are already legally obligated to report their online purchases and pay the “use” tax when they file their income tax returns. But the reality is very few people comply with this law.

The Chamber supported the bill in committee this week and, in fact, has been working along with Sen. Kenley for years to achieve, by some means, state authorization for collecting these unpaid taxes. The objective is set forth in our Indiana Vision 2025 economic plan and we just might, after years of complications, be getting closer to obtaining this goal.

Amazon Deal a Step in Right Direction

We salute Gov. Mitch Daniels and Amazon.com for coming to a recent agreement, resulting in the company collecting Indiana sales tax, beginning in 2014. We think this is a step in the right direction to level the playing field for other businesses, but, like Daniels and Amazon.com, we believe there is a clear need for a federal solution to this matter.

Governor Mitch Daniels announced today that the state has reached an agreement with Indiana’s largest online retailer, Amazon.com, Inc., to begin collecting Indiana sales tax on internet purchases.

Indiana will become the fourth state to reach such an agreement with Amazon, but the governor said he will continue to push for federal action to fairly address the issue.

“The only complete answer to this problem is a federal solution that treats all retailers and all states the same. But for now, Amazon has helped us address the largest single piece of the shortfall, and we appreciate the company working with us to find a solution,” said Daniels.

According to the agreement between Amazon and the Department of Revenue (DOR), the company will voluntarily begin to collect and remit Indiana sales tax beginning January 1, 2014 or 90 days from the enactment of federal legislation, whichever is earlier. The state will not assess the company for sales tax for other periods.

Estimates of uncollected online sales taxes are about $75 million each year. Of that, the State Budget Agency and DOR estimate that revenue from sales tax remittal by Amazon would be approximately $20 million to $25 million per year.

Sales Tax Battles Growing Nastier

The call is growing louder (from the Indiana Chamber and others) for a federal solution to the online sales tax dilemma. But while that fight continues to be waged, Governing magazine looks at the individual state battles with Amazon. They only seem to add more fuel to the fire for a comprehensive national strategy.

States have been coming up with a variety of ploys — some conservative, others more radical — to get Internet retailers to collect the tax. Their efforts range from a handful of states claiming nexus via in-state affiliates that sell on the big-name websites to a 24-state compact to streamline sales tax systems. At the same time, states that levy sales taxes have come up with new allies in the fight to get the U.S. Congress to redress the collection issue and undo Quill. These allies include not just small mom-and-pop stores on Main Street but also giant retailers such as Target and Wal-Mart — retailers with robust Internet sites that do collect the sales tax because they have nexus in almost all states.

At every turn, Amazon has gone to great lengths to block state collection efforts. In states that claimed nexus because Amazon affiliates were located there, Amazon ended relationships with those businesses and, in turn, pursued litigation in the state. In states where it had facilities, it threatened to pull them out, thereby raising the specter of eliminating jobs. And where Amazon wanted to open facilities, it insisted on a free pass on tax collection. Amazon declined interview requests for this story.

Its pugnacious ways have paid off in some states, where the company was given the green light not to collect sales taxes for years — so long as it kept or built a facility in the state. But those ways have left bruised feelings, especially among legislators. In Tennessee, where legislators have been rethinking a deal Amazon struck last year to build distribution warehouses in return for not collecting the tax on goods shipped from those facilities, state Sen. Randy McNally likens Amazon lobbyists to take-your-lunch-money bullies. “They are making demands on the states that if a smaller business came in and tried to do, we’d laugh at ’em.”

This fall, however, there was what may be the biggest breakthrough on the Amazon tax front: California’s settlement with the company. After fighting legislation that would require out-of-state online retailers to collect sales taxes if they had affiliates, offices, workers or other ties to the state, the company ponied up millions of dollars to put the issue to taxpayers via a ballot referendum. It also cleansed its website of California-based affiliates. Then, the company suddenly backed down — in part because the damage to its reputation was growing. The online retailer struck a deal with the state that will require it to begin collecting sales taxes in California after a one-year grace period. In September, Gov. Jerry Brown signed the agreement into law.

The California deal suggests that Amazon may be changing its game plan. If that’s so, it would probably bring the rest of the Internet retailers into the fold as well. (Amazon recently made a similar deal with Tennessee.) Meanwhile, the states battle on, with legislators contending with the lobbying power of a giant — juggling the need for revenue versus promises to bring a few jobs to the state.

Indiana’s Business Tax Climate: Not a Perfect One, But a Good 10

We’re No. 10! We’re No. 10! Not exactly the rallying cry one is used to hearing, but a refrain that deserves more plaudits than usual. Here’s why Indiana’s ranking in the Tax Foundation’s 2011 State Business Tax Climate Index is noteworthy:

  • It’s not easy to make substantial improvements in this area. Indiana has ranged between No.12 and No. 14 over the last five years
  • The top eight seemingly head the list by default as they do not impose one of the big three taxes (sales, income or corporate income). So, without too much of a stretch, you could say Indiana is second on the list
  • We’re far away from the bottom 10; in order from No. 50, that’s New York, California, New Jersey, Connecticut, Ohio, Iowa, Maryland, Minnesota, Rhode Island and North Carolina

The Indiana Chamber’s advocacy efforts certainly are contributing factors to the state ranking. Historic tax restructuring in 2002 (including elimination of the inventory and corporate gross receipts levies) is among the Decade of Policy Victories document reflecting major legislative accomplishments from 2000-2009. The Chamber has also achieved success in general property tax reductions and an expansion of a variety of tax credits (good for business, but not earning high marks in this report).

According to the Tax Foundation, the worst tax codes tend to have:

  • Complex, multi-rate corporate and individual income taxes with above-average tax rates
  • Above-average sales tax rates that don’t exempt business-to-business purchases
  • Complex, high-rate unemployment tax systems
  • High property tax collections as a percentage of personal income

Indiana’s rankings in the five categories are: corporate tax index, 21st; individual income tax index, 11th; sales tax index, 20th; unemployment insurance tax index, 12th; and property index, 4th.

Since this tax analysis game is not for the faint of heart, a little more from the Tax Foundation on how it all works.

The methodology of the State Business Tax Climate Index is centered on the idea of economic neutrality. If a state’s tax system maintains a “level playing field” for businesses, the index considers it neutral and ranks it highly. However, each state’s final score depends on a comparison with the other 49 states.

The overall index is composed of five specific indexes devoted to major features of a state’s tax system. Each of these five indexes is composed of several sub-indexes.

Each state’s laws and tax collections were assessed as of July 1, 2010, the first day of the 2011 fiscal year. Newer tax changes are the subject of commentary in an appendix but are not tallied in the scores and rankings.

The Tax Foundation has data charts, further analysis and a full 60-page report. By the way, you have to go west for most of the rest of the top 10 (in order): South Dakota, Alaska, Wyoming, Nevada, Florida, Montana, New Hampshire, Delaware and Utah.

And finally, going into a state budget year that will bring pressure to raise revenues, let’s all keep the vital importance of the tax climate in mind on business attraction and expansion decisions.

Not Many Smiling About This Potential Service Addition

It’s come up a few times over the years, and the Indiana Chamber has been successful in helping to swiftly swat it away. It is becoming a common topic in many states as revenues have continued to plummet. It is … a sales tax on services.

The list of services is long and varied — from hair cuts and funerals to accounting and legal help. When it’s businesses working with other businesses, it gets even more complicated. Yes, states want more tax revenue, but do they benefit from putting policies in place that hurt companies and, in many cases, individual consumers.

Other questions — if states wish to opt for any additional taxes at all: What services are exempted? Do you lower the overall tax rate and, if so, how much? Will such taxes send people over state lines where the same services may be tax-free?

Stateline.org has a look at the latest. Full story here, and some excerpts below:

With tax revenues at a historic low and federal stimulus dollars drying up, states like Michigan and Pennsylvania are eying adding a sales tax to some of the 180 services that states could be taxing, ranging from pet grooming and dating services to dental and legal services. The change would be a fundamental shift in states’ tax systems, but the proposals are already running into stiff opposition from the business community.
States have long taxed goods, like cars and appliances, since the 1930s, bringing in nearly 35 percent of the general revenue for the 45 states that have a sales tax. (Alaska, Delaware, Montana, New Hampshire and Oregon don’t have one.)
But the shift in the U.S. economy from producing goods to services has meant fewer tax dollars flowing into states that have been slow to tap the service pool. Hawaii, New Mexico, South Dakota and Washington state tax more services than other states, according to the most recent data available.
California, Illinois, Massachusetts and Virginia probably could increase their sales tax revenue by more than a third if they broadly taxed services purchased by households, such as landscaping services, health club memberships and car washes, according to Michael Mazerov, a senior fellow at the Center on Budget and Policy Priorities, a Washington, D.C., group that examined states’ options for expanding sales taxes on services in a 2009 report.

A handful of states, among them Arkansas, Connecticut, Ohio and Nebraska, did levy sales taxes on additional services as they began to recover from the 2001 recession, but the changes were largely incremental, not comprehensive like the plans in Michigan and Pennsylvania.
States back then took the slow approach because taxing services is politically explosive and a few well-publicized debacles have made others leery of trying. Florida, for example, passed a far-reaching tax on most personal and business services in 1987 only to repeal it the following year because of intense business opposition. Massachusetts approved a sales tax on certain services in the summer of 1990, and it was canned by the following spring. And more recently, Maryland in 2007 added what was dubbed the “tech tax,” which was rescinded before it took effect after the computer industry mounted an aggressive campaign against it.

What to Do About Online Sales and Sales Tax

What should be done with online retailers and sales tax? The story is the same in most states – they’re not required to pay and most consumers don’t volunteer for the "use tax" in place in many areas. With state fiscal challenges and online sales both growing, don’t expect this issue to go away soon. The Pittsburgh Post-Gazette writes:

If you buy Christmas gifts online this year, you may be saving money on your end, but you might also be costing the state treasury its fair share of sales tax revenue.

State revenue departments across the country have complained for years that big online retailers aren’t remitting their share of sales taxes. At stake are the hundreds of millions of dollars that Pennsylvania and other states are losing when a shopper buys a CD, book or television online, instead of in a bricks-and-mortar store.

In Pennsylvania, the Department of Revenue estimates that the state is missing out on nearly $300 million in sales tax every year.

"Pennsylvania is not the only state in this boat," said Stephanie Weyant, spokeswoman for the revenue department.

Every year since Internet shopping began being measured, the amount spent online has increased annually. On Cyber Monday alone — the Monday after Thanksgiving — about $900 million was spent online this year, either at stores that operate exclusively in the cybersphere, such as Amazon.com, or at the online divisions of actual stores, such as Best Buy.

Online retailers that do not maintain a physical presence in Pennsylvania are not required to remit a sales tax (though some do so voluntarily), thanks to a 1992 court decision that predates the era of Internet shopping. In Quill Corp. v. North Dakota, the Supreme Court ruled that a retailer or purveyor of goods couldn’t be forced to remit sales taxes to another state unless it had some kind of "nexus" there, a physical presence such as a store or warehouse.

For years, Congress has been debating federal legislation requiring all retailers to figure out how to remit the sales tax to the appropriate state, but so far, the law has gained little traction and has been opposed by Amazon.com, considered to be the biggest cyber-fish out there.

While Congress has been inactive on the issue, New York has been proactive, passing a law that requires Amazon.com and other Internet retailers to collect sales taxes on transactions with New York customers. Amazon challenged the law, lost in January, and now a New York appeals court is expected to issue its own ruling soon, according to a report in The New York Times. If the law stands, other state legislatures would be tempted to follow the same legislative path, especially given the depleted condition of many state treasuries.

Massachusetts Still Not Getting It

Hate to pick on the state that saw many great years with our own Larry Legend, but…

The Small Business & Entrepreneurship Council is taking Massachusetts to task for some questionable tax-related decisions as of late. Here’s the skinny:

According to a recent story in the Boston Herald, Governor Deval Patrick wants to do the following:

  • Extend the state’s 5 percent sales tax to alcohol sales in package stores. Bars and restaurants already pay the tax.
  • Extend the 5 percent sales tax to candy sales.
  • Extend the 5 percent sales tax to soda sales.
  • Impose $75 million in new motor vehicles taxes.
  • Increase the meal and hotel taxes by one percentage point.

What will these tax hikes actually accomplish? Consumers will face higher prices, and businesses will face higher costs and lost business. So, in the end, it will be bad news for an economy that’s already badly beaten and bruised.

For good measure, keep in mind that Massachusetts is not exactly sitting pretty in terms of its competitive position with other states.