idaho legislature

Taxing Internet Sales Could Raise $30 Million for Idaho

By Sharon Fisher, 2-03-10

Taxing Internet sales could bring in at least $30 million, Royce Chigbrow, Chairman of the State Tax Commission, told the Joint Finance-Appropriations Committee today.

That’s about 12 percent of the outstanding $250 million in tax revenue, pointed out Judy Brown, a Moscow economist who’s filling in for Representative Shirley Ringo (D-Moscow), who’s out for a few days for surgery.

Washington is in a similar position, except it expects $400 million in taxes.  Similarly, in South Dakota, it’s estimated that $18.1 million was lost to e-commerce last year—$12 million of which would have gone to the state, with the remaining $6 million to cities.

When the Internet first started becoming a commercial entity, Internet sales were exempted from sales taxes in order to help encourage new commercial companies to form on the Internet. But now, with Internet retail firmly established, legislators in a number of states are starting to say such protections are no longer needed.

Currently, the law—due to the 1992 Supreme Court ruling of Quill vs. North Dakota—is that an online retailer has to pay taxes on sales only if it has a physical presence in a state. The argument by opponents of such taxes is that, without such a physical presence, it isn’t using state services and so shouldn’t have to pay state taxes.

(Technically, according to that same ruling, it is not the seller that owes taxes, but the buyer. However, states don’t have an efficient mechanism for enforcing the collection of such taxes from the buyer, so they currently come from the seller.)

Moreover, some Internet retail companies, such as Amazon, have structured their companies in such a way as to avoid paying sales taxes as much as possible. “By creating wholly owned subsidiaries for the parts that are treated separately for tax matters, Amazon is under no obligation to collect sales tax,” read a recent article in the New York Times. This legal technique is called “entity isolation,” said Michael Mazerov, a senior fellow at the Center on Budget and Policy Priorities in Washington. Amazon has offices in four cities in California, for example, including those that are home to the subsidiary that developed the Kindle. “Because the subsidiary isn’t selling the Kindle directly to consumers, Amazon can drive a truck through the loophole,” Mr. Mazerov said.”

States such as New York have already made attempts to collect such taxes. Attempts have also been made on a national basis.

In addition to reducing local tax revenues, the inability to collect such taxes also is unfair to local businesses that have to pay the tax, and to people who can’t afford to buy products over the Internet, say proponents of such taxes. Last year, the National Conference of State Legislators estimated that such taxes could bring in $7.5 billion per year.

Opponents include online retailers such as Amazon and eBay, as well as Americans for Tax Reform, an organization that is against all new taxes on principle, which has set up a website against such efforts.

Sellers such as Amazon claim that paying state and local taxes—in as many as 7,500 jurisdictions in the U.S.—would be overly complicated. Critics of such arguments, however, point out that not only do vendors such as Walmart.com manage to do it, but so does Amazon, because it manages sales for Target.com.

In an attempt to defuse this argument, a number of states have joined the Streamlined Sales Tax project, which is intended to simplify sales taxes for Internet companies. Currently, an Internet sales tax is not allowed on a Federal level and would require Congressional legislation to change. The Streamlined Sales Tax proposal itself does not raise tax, but simplifies the process so that, should Congress pass such a law, it will be easier for retailers to comply. In addition, such an effort puts pressure on Congress to act.

44 states participate in the organization. Of those, 23—comprising 33 percent of the country’s population—have passed legislation conforming to the agreement. The states are Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming. Conforming legislation has been introduced in Texas, Massachusetts, Florida, Illinois, Virginia, Missouri, Maine, Wisconsin, California, and Hawaii.

Though former Governor Dirk Kempthorne issued an executive order in 2005 adding Idaho to the Streamlined Sales Tax project, it has expired and attempts to have the Legislature re-impose it have failed. In fact, outdoor retailer Cabela’s set up shop in northern Idaho only after setting up a deal where the store wouldn’t “count” as a physical presence, which would otherwise make it liable for such a tax.

Senator Mike Jorgensen (R-Hayden Lake) has proposed S1295 to have Idaho join the Streamlined Sales Tax project. However, it is running into some turf warfare.  Bills that raise revenue are only supposed to be introduced in the House, through the House Revenue and Taxation Committee. While his bill does not technically raise any revenue, the House would be “more comfortable” if the bill started there, Betsy Russell quoted him as saying in her blog.

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