Meadville Tribune

October 24, 2011

Conflicted politics deter sales tax reform

by Maureen Hayden
CNHI News Service

CORSICANA , Texas — Byron Cook doesn't like the smell of taxes any more than his fellow Republican conservatives in the Texas Legislature. But he drew the line this summer on allowing millions of dollars in sales taxes to go uncollected.

Cook voted for a bill that requires online retailers like the electronic commerce giant Amazon to start collecting Texas sales taxes from their customers and remit the revenue to the state and local governments – just like bricks-and-mortar stores have always been obligated to do.

It was a polar opposite move to the tax-averse stance of conservative Republican lawmakers on the national stage, who view such legislation as a form of new taxation. But Cook and the GOP super-majority in the Texas Statehouse saw it as a fairness issue as well as a necessary measure to cope with the state’s $15 billion budget deficit.

At least eight other cash-strapped states this year have pushed similar bills to close a legal loophole that lets online retailers off the hook for sales tax collections unless they have a physical presence, such as a store, in the states where they do business.

Cyberspace doesn’t count. So Amazon, based in Seattle, doesn’t collect sales taxes in Texas or most other sales tax states, making their prices even more attractive to consumers there and putting traditional retailers at a disadvantage.

The common fear among sales tax states: A continued rapid rise of e-commerce and the associated reduction in sales tax revenues that pay for schools, police, parks, pensions and other basic public services.

“We're grappling with an issue that is extraordinarily important,” said Cook. “The way people make purchases is changing dramatically. If online retailers aren't made to collect the sales tax, we're talking about a revenue source that's going to disappear.”

Billions of dollars already have. The Center for Business and Economic Research at the University of Tennessee estimates uncollected sales taxes will amount to $12 billion this year in the 45 states and hundreds of municipalities that impose them.

It is not known exactly how many brick-and-mortar businesses have closed because of tax-free online competition but the recent demise of the Borders bookstore chain is cited as a prime case of lost jobs and community presence by proponents of closing the tax loophole.

The U.S. Supreme Court in 1992 exempted online retailers from having to collect sales taxes under the physical-presence principle, shifting the burden to pay them onto consumers through the so-called “use tax” requirement in sales tax laws. But that’s an honor system few consumers comply with and is also difficult to police.

Online retailers contend there’s a very practical reason they should not be required to collect and remit sales taxes – the 9,600 sales tax jurisdictions in the U.S. and their varied tax rates, exemptions and other special provisions. They argue the issue requires a national resolution.

Efforts are underway to get Congress to close the tax exemption for online retailers and to streamline and simplify the various sales tax codes to make collection easier. Yet it is in the idea-only phase of consideration and no candidate is talking about the issue on the presidential campaign circuit.

Supporters of federal legislation say that while the numbers add up, the politicians won’t own up, fearful of offending voters who don’t like paying sales taxes.

Meanwhile, bricks-and-mortar retailers say they’re stuck with having to tag on the sales tax, putting them at a price disadvantage with their online competitors.

At the Two Doors Coffee Shop in Cook's hometown of Corsicana, Tex., owner Todd Jones says the unfairness unfolds almost daily at his business. He said customers who stop by for a bowl of potato soup or a piece of his buttermilk pie pull out their smart phones and snap a picture of the fancy tins of tea on display. “They tell me, 'I can get it cheaper if I order it online' '' and avoid the 8.25 percent combined local and state sales tax, he said.

“I'm happy to collect it because I know it is money that’s going to pay for things that make life better for this community,” Jones said. “But is it fair that I have to collect it and other people (online competitors) don't?”

That argument has yet to yield widespread support. Anti-tax advocate Grover Norquist, head of the Americans for Tax Reform and creator of the “taxpayer-protection” pledge that all but six Republicans in Congress have signed, calls the proposed Main Street Fairness Act in Congress a “massive...Internet tax hike that is dead on arrival for any fiscally responsible lawmaker.”

University of Tennessee economist William Fox, who's been monitoring online sales tax collections for a decade, said some Democrats may shun the bill as well. “You've got federal lawmakers who know they'd be taking all the heat for expanding compliance on tax collections,” said Fox. “But they'd get none of the revenue.”

Yet Fox also believes the impact of the recession and tax-free online e-commerce on state revenues, along with a building coalition of bricks-and-mortar businesses that want fairness, may make it harder for Congress to ignore the issue.

Through the Alliance for Main Street Fairness, retail advocates representing big-box and small-store merchants have mobilized their members to speak up. The Alliance's website is filled with video testimonies of small business owners – typically averse to big-government regulation – calling for federal intervention.

That message connects with retailers like Jacques and Ruth van der Plas, who opened a home décor store in Gun Barrel City, Texas, after they couldn't find jobs. They didn't know why online retailers weren't required to collect the sales tax until an Alliance member told them. Ruth's response: “Well that's not fair.”

Advocates for change say the fairness mantra on its own may not be enough to push Congress into action, but it's an argument that helps define the issue and cut through the clutter of complicated legislation.

The Main Street Fairness Act, introduced by Sen. Dick Durbin, D-Ill., doesn't impose a national sales tax, but sets into motion a process to streamline the mess of local and state sales tax rules, making it easier for online retailers to collect and remit the tax.

“We're finally getting Congress's attention,” said Jason Brewer, vice president of the Retail Industry Leaders Association, which has partnered with the Alliance in the push for a federal fix. “We're not asking them to impose a new tax. We're asking them for fairness in how an existing tax is collected.”

That's the theme that resonated in Texas with lawmakers like Cook. The bill he backed was primarily aimed at Amazon. Supporters argued that because Amazon had a distribution warehouse in the state – and therefore a physical presence – it had to start collecting taxes on purchases made by Texans.

The measure passed by a huge margin, but was vetoed by Republican Gov. Rick Perry after Amazon offered Texas a sweet deal to back off. In exchange for a moratorium on sales tax collection, Amazon promised to bring 5,000 jobs to the state and spend $300 million to open distribution centers where those employees would work.

The Texas legislature turned down the deal. Then, in an end-run around Perry, GOP leaders slipped the online sales tax language into a budget bill the governor had to sign.

Online consumer Samantha Katsounas, a sophomore at the University of Texas, wasn’t amused. She penned an editorial decrying the Texas vote as misguided and said it would harm students like her who'd been skirting the sales tax by buying their textbooks from online retailers.

“All it means for me,” said Katsounas, “is that prices are going up.”

Perry defended his veto at the time and issued a press release calling for “a thorough policy discussion with ... other states and even the federal government about interstate commerce and the structure of state sales taxes in the 21st century.”

For its part, Amazon argues the same thing. While the company has been locked in legal and political battles with states over the issue, it's offered conditional support for the Main Street Fairness Act. In a deal struck with California this fall, Amazon pledged to lobby Congress for a national solution in exchange for the state's agreement to suspend enforcement of its new online sales tax until September 2012.

“We believe this needs to be solved at the federal level and we’re working with the states, retailers and Congress to get federal legislation passed as soon as possible,” said Amazon spokeswoman Mary Osako.

Brewer, of the Alliance for Main Street, is skeptical.

“That's like Miss America saying she's for world peace,” he said. “It sounds good but it doesn't mean much.”

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Maureen Hayden is the Indiana State Reporter for CNHI. Contact her at Maureen.Hayden@indianamediagroup.com.