Vote on Non-binding Resolution Shows Bipartisan Support to Require Internet Retailers to Collect Sales Taxes
Increasingly in recent years, there seem to be few tax issues on which liberals and conservatives can agree. So it was refreshing last Friday when there was strong bipartisan support for requiring large Internet merchants to collect state and local sales taxes – just as Main Street retailers do.
Perhaps the bipartisan support shouldn’t come as a surprise because the proposal isn’t primarily about taxes; it’s about fairness. People with a broad spectrum of views about taxes and spending agree that it’s unfair for our local businesses and bad for the Wisconsin economy to allow large Internet retailers like Amazon and Overstock to put their local competitors at a huge competitive disadvantage by not collecting sales taxes.
The 75-24 vote last Friday was on an amendment to add the Marketplace Fairness Act to the Senate’s 2014 budget resolution. That resolution isn’t going to be approved in the House, and in any case it is only intended to be a budget outline, not a piece of binding legislation. However, the lopsided vote for the Marketplace Fairness Act strongly suggests that when the act comes to the Senate floor it is very likely to have enough votes to overcome a filibuster.
A blog post yesterday by Michael Mazerov of the Center on Budget and Policy Priorities explains the legal history of the current exemption for interstate commerce, and the need for the proposed legislation. He notes that an estimated $11 billion per year in taxes on Internet Sales is uncollected each year. Read more
11-11-11 – No, that isn’t a new alternative to Herman Cain’s tax plan (at least not that I know of); it’s merely today’s date. But in addition to being Veterans Day, today seems to be a good time to note that the tide continues to be turning slowly in favor of applying sales taxes directly to online sales. The latest evidence of that tidal shift came Wednesday, when Amazon announced its support for a new bill that would allow states to require online and catalog retailers to collect sales taxes from their customers.
Until recently, Amazon vigorously fought efforts to tax online sales. Its position began to soften a bit after a heated battle with California over a law there that endeavors to force online sales tax collection. In early August, Amazon came out in favor of a bill introduced in Congress by Democrats authorizing states to collect taxes on online sales. Read more
The new Legislature has approved or proposed a variety of sales tax exemptions. The exemptions give favored tax status to certain purchases, result in similar goods being treated differently for tax purposes, and add complexity to a sales tax system already rife with exemptions. While each individual sales tax exemption is not going to break the budget, when taken as a whole, the exemptions drain much-needed revenue out of the state’s coffers.
The sales tax in Wisconsin already includes several dozen exemptions. Some exemptions represent a significant amount of lost tax revenue. For example, the exemption for food reduced state sales tax revenue by $534 million in 2010. Other sales tax exemptions represent a very minor amount of lost revenue, like the exemption for live game birds and clay pigeons, which reduced state revenue by $200,000 last year.
Since the new Legislature took office at the beginning of this year, it has been working to carve out additional sales tax exemptions. Read more
California and Amazon.com have reached an agreement on the collection of sales tax that may lay the groundwork for significant changes in other states as well. As part of the agreement, Amazon will collect sales tax on purchases made in California starting in July 2012, unless there is federal legislation enacted before then that would supersede state law.
California’s agreement with Amazon comes after years of states trying, without success, to force online retailers to collect sales tax. Sales tax is owed on purchases whether those purchases are made online or in physical stores, but states are on shaky legal ground when they try to force online retailers to collect the tax. And big online retailers such as Amazon have devoted significant resources to thwarting states’ collection efforts. (You can read a more thorough analysis of this issue in our 2010 analysis, “Examining Wisconsin’s Progress in Leveling the Tax System for Retailers.”)
California’s agreement with Amazon requires the retailer to start collecting sales tax, but not until the middle of 2012. Read more
For years now, states and online-only retailers (like Amazon.com) have locked horns over the issue of sales tax. There have been several new developments in this battle, but at this point it’s hard to tell whether the states or the retailers have the advantage.
Amazon, like other on-line only retailers, is only required to collect sales tax in the states in which it has a physical presence. Amazon has warehouses and other facilities in dozens of states (including Wisconsin), but those facilities are technically owned by subsidiary corporations. As a result, Amazon is able to avoid imposing a sales tax on its customers in most states, costing states billions in revenue and giving online retailers an advantage over similar Main Street businesses.
Keep in mind, sales tax is still owed on purchases made online. But instead of being collected by the retailer, customers are supposed to submit the sales tax as part on their income tax return. Read more
Recently, a number of states have turned their focus to collecting sales tax owed on purchases made from internet retailers. This may be because state tax revenues have been slow to recover from the effects of the recession, leading states to make a renewed emphasis on collecting tax revenues that are owed to the state but are not collected.
This uncollected sales tax can add up quickly. A recent Associated Press article estimated that each year, uncollected sales tax on internet purchases total more than $23 billion nationally. In Wisconsin, the state loses $127 million each year in uncollected sales tax revenue for purchases made online, according to a University of Tennessee study.
When a customer makes a purchase from an online-only retailer that does not have a significant physical presence in the state, such as Amazon.com, sales tax is owed on the transaction just as if the purchase were made at a bricks-and-mortar store. Read more
It’s taking longer than we would like for the state’s tax revenue to recover from the effects of the recession, and a provision in the Governor’s executive budget would further slow the growth of tax revenue deposited in the General Fund.
Tax revenue to the general fund took a hit in the national recession, which is one of the main factors underlying the state’s significant budget deficit. The Wisconsin Budget Project recently released an analysis showing that state revenue in Wisconsin was growing at a moderate, sustained pace in the middle of the decade. Then the national recession occurred, with devastating effects on the state’s tax revenue. The economy has started to recover, but revenues to the general fund are still down for fiscal year 2011. In fact, when inflation is taken into account, the state is on track to collect less in revenue than it did in 2001.
Revenue to the state’s general fund would taker a further hit with Governor Walker’s proposal, which would move a percentage of the sales tax generated from motor vehicles and motor vehicle parts to the transportation fund. Read more
The Wisconsin Budget Project has released new analysis of state tax revenue showing that a decrease in state tax revenues played a major role in contributing to the budget gap.
State tax revenue in Wisconsin was growing at a moderate, sustained pace before the national recession hit. Between 2004 and 2007, the tax revenue going into the General Fund increased by seven percent (adjusted for inflation). This increase (and more) was wiped out by the national recession, which had a devastating impact on state tax revenues. The state collected over a billion dollars less in GPR tax revenue in 2010 than in 2007, as shown in the chart below, which is taken from the analysis.
State tax revenue was further decreased when the Legislature approved $117 million in new tax breaks for businesses and higher-income residents during the Special Session. In addition, the Governor’s budget bill proposes another $83 million in tax breaks for multistate corporations and investors. Read more
Governor Scott Walker has asked the Legislature to focus on a handful of proposals in the special session, including a bill (SS SB and AB 5) that would require the Legislature to have a two-thirds majority to increase individual income, corporate income, and sales tax rates. The supermajority requirement would not apply if a statewide referendum approved the tax hike. Click here to see the Fiscal Bureau analysis of the bill.
The Wisconsin Council on Children and Families (WCCF) has issued a statement describing how the supermajority proposal would tie legislators’ hands in a time when we desperately need flexibility to deal with the state’s revenue shortfall. The size of the budget hole demands we take a balanced and responsible approach to budgeting, rather than limiting the state’s options for climbing out of the hole.
The Governor’s proposal is in the form of a bill, which at least is preferable to a constitutional amendment requiring a supermajority vote for tax increases. Read more