June 3, 2013

Online taxes about fairness, not state revenue

Q&A talks about taxing online sales with Richard Pomp, Alva P. Loiselle Professor of Law at the University of Connecticut School of Law. He has served as a consultant to the California legislature and the government of Iceland on the Internet sales tax issue.

Q: Where do things stand with Congress and a sales tax on goods purchased on the Internet? If passed, what would the proposal permit?

A: The Connecticut sales tax has always been owed on Internet purchases and catalog purchases if the purchase would have been taxable had it occurred in the state. Individuals were expected to pay the tax (technically known as the use tax) on their income tax returns. The Marketplace Fairness Act, which passed the Senate but has not yet been voted on by the House, grants states the authority to compel online and catalog retailers (“remote sellers”), no matter where they are located, to collect sales tax at the time of a transaction — exactly like local retailers are already required to do. The act does not impose a new tax; it only affects the collection of an already owed tax.

For the states to force remote sellers to collect the use tax, they have to comply with one of two options. The first requires them to join the 24 states that have already voluntarily adopted the simplification measures of the Streamlined Sales and Use Tax Agreement (SSUTA), which has been developed over the last 11 years with the goal of making sales tax collection easy. In the past, Connecticut has shown no interest in adopting the SSUTA.

The second of the two options is for a state to meet five simplification mandates. Most of these affect states with local sales taxes, which we do not have in Connecticut. The one that affects us, however, would require the state to provide free software for managing sales tax compliance, and hold retailers harmless for any errors that result from relying on state-provided systems and data.

Q: How are the mechanics envisioned? Would the federal government be getting a share of Internet taxes?

A: The federal government does not get a share of the revenue that the states will be receiving from the collection by remote vendors. Many thought that this would doom the act: Congress would be viewed (improperly) as imposing a new tax and not even get any new revenue. Apparently, the Senate understood that it was not imposing a new tax but only improving the collection of an existing tax, much the way that, through withholding, an employer collects income taxes that are assumed will be owed by the employee.

Q: What's the potential for a state like Connecticut in terms of revenue if the online sales tax law passes?

A: The revenue estimates are very sketchy, especially because many of the “clicks and bricks,” i.e., those vendors that have a store or other physical presence in Connecticut as well as a dot.com, are already collecting the Connecticut sales tax. And Amazon will be collecting as of Nov. 1. The revenue likely to be collected will pale significantly compared to what the state receives from gaming. The act is more a matter of basic fairness than a pot of gold.

Q: Amazon is obviously the 800-pound gorilla in the online sales tax debate. It's severed affiliate relationships when taxed by states because it has a physical presence within their borders. Why does Amazon fight these initiatives so vigorously when a report by William Blair & Co. found Amazon's prices would remain competitive even when sales taxes are added?

A: Amazon changed its business model to one where goods purchased in the morning would be delivered the same day, but no later than the second day. That required that Amazon have distribution centers throughout the country. Those distribution centers would require Amazon to start collecting the sales tax. At that point, Amazon wanted to make sure that its competitors that had a pure Internet business model with very few physical locations would also have to collect the sales tax. The 800-pound gorilla became those selling on EBay, and Overstock. Ironically, Amazon stands to gain a revenue source because it will provide the new service of collecting the sales tax on behalf of those selling through the Amazon platform, who will now be covered by the act (assuming it passes the House). It will charge for doing so, which will offset any profit that Amazon might lose.

Q: There's a proposal before the CT General Assembly to tax iTunes downloads in an attempt to help “brick-and-mortar” retail outlets. Do taxes established to level the competitive playing field achieve that goal typically? Or do people just suck up the extra few pennies and keep on doing what they were doing?

A: It is a difficult empirical question to know whether taxing downloads will shift purchases from the Internet to local retail outlets. But local retailers have a powerful argument that they have become a display outlet for remote vendors. By that they mean that consumers come to the retailers, examine the inventory, pick the brains of the salespersons, and then purchase on the Internet and conveniently fail to pay the use tax. We owe it to our retailers to shut that down.

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