Editor’s note: This is the third article in a series about the Vermont Blue Ribbon Tax Structure Commission Report. In this story we analyze the commission’s Internet sales tax proposal. On Friday we examine its recommendations for income tax reforms (Part 4). On Feb. 14, we will report on tax expenditures (Part 5), and on Feb. 15, we will look at reform ideas that didn’t make the final cut (Part 6).
“Tax reform Part 1: Where policy meets politics” was an overview of the political context for the commission’s recommendations. In our second story in the series, we looked at the impact of the commission’s sales tax proposal,“Tax reform Part 2:Sales tax expansion would hit broad array of services.
Legislators come to the Statehouse prepared to solve problems and defend the interests of the people they represent – a cross-section of Vermonters in their home districts.
Though it’s impossible for lawmakers to please all people all the time, the last thing they intend to do is inflict pain on constituents.
That’s why budget reductions, program cuts and tax hikes are so difficult for the pols under the Golden Dome. Belt-tightening decisions and “revenue assessments” don’t necessarily enhance a lawmaker’s popularity with voters.
Painful choices, however, are inevitable this year as the General Assembly faces a $176 million shortfall. No one is enthusiastic about the austerity of the state budget proposed by the Shumlin administration, and there is also little appetite in Montpelier for tax increases (with the exception of the levies on hospitals, home health care providers, nursing homes, dentists and managed care organizations).
- Vermont Blue Ribbon Tax Structure Commission’s report
- STLToday – Illinois House sends Internet sales tax bill to Pat Quinn
- ABA – New York State: Court’s Sales Tax Ruling a “Major Victory” for Main Street
- ReadMedia.com – Tax Department Responds To Ruling On New York
State’s So-Called “Amazon Law”
- CBPP – Amazon’s Arguments Against Collecting Sales Taxes Do Not Withstand Scrutiny
- Vermont House Bill H.143 is based on H.611, which was introduced by Rep. Jeff Wilson last year
- Law and Legal Research – North Carolina General Statutes § 105-164.8 Retailer’s obligation to collect tax; mail order sales subject to tax
- CBPP – New York’s “Amazon Law”: An Important Tool for Collecting Taxes
Owed on Internet Purchases
- New York Court Case
Still, once in a while, an idea surfaces that causes little or no local discomfort — that raises money, for example, without hurting Vermont businesses.
This year one of the top winners in the bullet-dodged, money-raised category is one of the Vermont Blue Ribbon Tax Structure Commission’s recommendations, the so-called “Amazon tax,” a sales tax on online purchases.
A bill already in the works has broad support in the House. Rep. Jeff Wilson, D-Manchester, has proposed a bill, H.143, with 20 co-sponsors that would require out-of-state Internet giants like Overstocks and Amazon to collect sales taxes on the products they sell to Vermonters. (Wilson also proposed a similar bill last year.)
Of the Commission’s four major recommendations, it’s also the one least likely to produce revenues in the short term. That’s because the federal government has made it very difficult for states to enforce Internet sales tax laws.
If Vermont could require Internet retailers to collect sales taxes on items sold in cyberspace, the state could bring in an additional $30 million to $40 million, according to the Commission’s report released last month. Vermont’s residents are supposed to voluntarily pay a 6 percent sales tax on online purchases when they file annual income tax forms with the state Tax Department. In practice, however, the honor system hasn’t been particularly effective.
The “Amazon tax” is an easy sell, not only because it could bring in significant revenues to the state and stabilize the state’s sales tax revenues, which have remained flat, but also because it would help to level the playing field for brick-and-mortar retailers that offer the same products, but are required by law to collect the tax. These stores operate at a significant disadvantage compared with their online counterparts. (Why buy a camera at a local store and pay a 6 percent sales tax, when you can buy one online and pay nothing to the state?) Lastly, the failure to collect the tax on Internet purchases “makes the sales tax more regressive,” according to Michael Mazerov, of the Center for Budget and Policy Priorities.
“It’s relatively middle and upper income individuals who own computers and have high speed Internet service who can take advantage of that loophole,” Mazerov said. “It’s low-income people who are consigned to shop in stores.”
The legislation may be a no-brainer, but it’s also no-go for the foreseeable future. A 1992 U.S. Supreme Court decision allowed Internet and catalog companies to forgo the collection of sales taxes if they don’t have a “physical presence” in the state where the customer makes the purchase. For 10 years, Congress has toyed with legislation to remedy the problem, but little progress has been made.
While the Vermont bill appears to be a win-win for lawmakers who want to help local brick-and-mortar retailers, one might ask: What good is it, if it can’t be enforced?
Eventually, the courts may rule in states’ favor, according to Mazerov, especially if enough of them pass similar laws limiting a local company’s ability to market products sold by a national Internet retailer. The legislation could also pave the way for Vermont’s Attorney General to join with other states in a lawsuit.
Wilson’s bill is modeled after a 2008 New York law that shifts the understanding of what it means for a company to have a physical presence – employees or office or warehouse space — in a given state. In addition to these criteria, it says that if a third party entity in New York state is engaged in sales on behalf of another business, that counts as a physical presence, too.
Those third parties are known as “affiliate” websites. Typically, the affiliates are online community newspapers or blogs that post ads for Amazon.com or Overstocks in exchange for a commission for every sale the online retailer makes. Any time you see an ad for say a Kindle on an independent website, an “affiliate” vendor is attempting to make a little money in commission sales of that product, Mazerov said.
“The New York law is one of those alternatives for chipping away at the problem,” Mazerov said.
In response, the Internet superstore has threatened to pull its marketing efforts with local affiliates. Amazon has also challenged the New York statute in court. In November, an appellate court judge upheld the constitutionality of the new law.
So far, four states have passed similar laws, Mazerov said. If states “hang together,” they can chip away at this problem, he said. In addition to New York, Rhode Island, North Carolina and Illinois (the bill is on the governor’s desk) have enacted laws that force Internet sales tax collection; Arizona, California, Hawaii, Mississippi, Vermont and Connecticut are weighing legislation.
“I think if a sufficiently large number of states enacted these laws, the retailer would begin collecting the tax,” Mazerov said. “This is a critical and cost effective way to market. They can get affordable solicitations from businesses without paying anything until the sale – that’s pretty cost effective marketing.”
Mazerov said there is “no realistic prospect of Congress passing a Streamline Sales Tax Agreement in the near future.”
Editor’s note: Bill Schubart, a member of the Vermont Blue Ribbon Tax Structure Commission, is the president of the Vermont Journalism Trust, the umbrella organization for VTDigger.org.