State officials hoping Internet sales tax will provide state windfall. But will it be enough?
by Tim Lockette
Feb 17, 2014 | 6074 views |  0 comments | 38 38 recommendations | email to a friend | print
Despite Alabama's reputation as an anti-tax state, leaders in the state capitol are sounding increasingly hopeful that Congress will pass the Marketplace Fairness Act -- a bill that would allow states to tax online purchases from out-of-state companies such as Amazon. 
Photo illustration by Trent Penny.
Despite Alabama's reputation as an anti-tax state, leaders in the state capitol are sounding increasingly hopeful that Congress will pass the Marketplace Fairness Act -- a bill that would allow states to tax online purchases from out-of-state companies such as Amazon. Photo illustration by Trent Penny.
MONTGOMERY -- If Robert Robicheaux is right, Alabamians may be clicking their state into the poorhouse.

Much of the time, when people buy products online, they're buying from a company that isn't paying Alabama any sales tax, Robicheaux said. And they're taking money away from local businesses that do.

"People will go into a camera shop, look at the merchandise, and ask all sorts of expert questions," said Robicheaux, a professor at the University of Alabama at Birmingham's Collat School of Business. "And then they say, thanks, I'll go buy it online."

Robicheaux estimates that the state is losing around $200 million per year in sales taxes to e-commerce. He's also an advocate for collecting that tax.

Lately, the mood in Montgomery has been swinging Robicheaux's way. Despite Alabama's reputation as an anti-tax state, leaders in the state capitol are sounding increasingly hopeful that Congress will pass the Marketplace Fairness Act, a bill that would allow states to tax online purchases from out-of-state companies such as Amazon.

The Alabama Legislature has already passed a bill to shunt most of the new tax money to the state's troubled General Fund -- assuming, of course, that Alabama gets to collect the tax. Gov. Robert Bentley has told the Associated Press that an online sales tax windfall, if it came, could pay for state employee pay raises he has proposed. And leaders in the Legislature increasingly mention the Marketplace Fairness Act first, when asked how to fix the state's budget woes.

"That could be something that would be very helpful to the General Fund," said House Speaker Mike Hubbard, R-Auburn, of the potential new tax revenue.

Tax myth

"The idea that you don't owe sales tax when you buy things online is a myth that has been around a long time," said William Fox, a University of Tennessee professor who studies online sales taxes.

States are allowed to charge sales tax to any online seller that has a physical presence in the state. That means you're likely paying sales tax when you order online from Walmart or similar retailers, even if that tax is folded in with shipping and other charges.

"If the site asks for your ZIP code, it's probably so they can calculate the tax," said UAB’s Robicheaux.

For businesses that don't have a physical store or warehouse in-state, there's a similar tax called the consumer use tax. That tax has been around since the days of mail-order catalogs, but for the past 20 years, states have had a hard time collecting it. A 1992 Supreme Court ruling banned states from collecting consumer use tax from out-of-state sellers.

Technically, online shoppers are supposed to report and pay their consumer use tax on their state income tax returns. Almost no one does that. According to figures from the Alabama Department of Revenue, about half of businesses report consumer use tax when they buy from out of state businesses -- and only 1 percent of consumers do.

"There's a reason we collect income tax through the employer," Fox said. "It's easier to enforce when you have fewer entities to deal with."

The Marketplace Fairness Act would change the landscape, allowing the states to collect the money directly from the sellers, potentially giving states a huge boost in tax revenues.

Filling a hole

If lawmakers in Alabama seem unusually eager to collect that tax, they may have a good reason. There will soon be a big hole in the one of the state's budgets.

Most state functions are paid for through the General Fund, which draws its money from a hodgepodge of taxes and fees. Sales and income taxes, which grow and shrink with the economy, go into a separate budget just for schools.

The General Fund has become the state's problem child. Prison populations and Medicaid enrollment have grown significantly in recent years, but the $1.8 billion General Fund doesn't grow as fast. Two years ago, the state's voters agreed to raid a state trust fund for $437 million to shore up the fund for three years.

That money will run out in the 2016 fiscal year, which starts next October. That gives the state about a year and a half to fill a hole of around $150 million.

The state has already passed a law that would direct 75 percent of new revenue from online sales to the General Fund if the Marketplace Fairness Act passes.

That’s a big “if.” The act passed the U.S. Senate last year, according to the Associated Press, and has the support of President Barack Obama. It needs approval in the House before it can become law.

For some of the state’s budget leaders, though, the bill's passage is tantalizingly close. the Marketplace Fairness Act is the first thing some lawmakers mention when asked how the state will deal with the 2016 budget hole.

"We're still keeping our fingers crossed that Internet sales tax will get through Congress," said Rep. Steve Clouse, R-Ozark, chairman of the state House committee that oversees the General Fund budget.

Clouse said he expected an Internet sales tax to bring in somewhere between $125 million and $150 million.

Unclear projections

Two years ago Robicheaux projected the state would lose between $176 million and $216 million in taxes to Internet sales in 2014. Today, thanks to the growth of e-commerce, he says the real numbers may exceed those projections. But there’s no guarantee that the Marketplace Fairness Act would bring all that money back to state governments.

Robicheaux said states would likely split some of the proceeds from the Marketplace Fairness Act with cities and counties, which are also losing tax money to the Internet. To keep online businesses from having to figure tax rates for every city, an Internet tax system would likely set up a single tax rate for each state, and would let the states work out formulas for dividing the money.

"If you order something in Montgomery, you might pay 8 percent, and the state and local governments would each take some of the money," Robicheaux said. Sales tax at brick-and-mortar retailers in Montgomery is 10 percent, including 4 percent statewide sales tax.

Fox, the University of Tennessee Internet tax expert, said collections under the Marketplace Fairness Act could fall significantly short of the amount of money the state is losing now.

In its current version, he said, the bill would exempt small retailers with revenues of less than $1 million each. Many large retailers, he said, are already paying sales tax because they have a physical presence in every state.

"We think this legislation applies to at most about 2,000 firms," Fox said.

The $1 million lower limit could help the bill get past critics who say that collecting consumer use tax would primarily be a burden on small businesses that rely on distant online sales to boost their business.

Cameron Smith, of the conservative Alabama Policy Institute, has been among those critics.

Smith said state officials are willing to support the tax because it’s a charge on out-of-state entities, not folks at home. He said supporters of the tax are not thinking about the other side of the issue -- web-based businesses here in Alabama, that could be paying more taxes to other states. While Alabama may not have as many large online retailers as other states, he said, that’s no reason to add a burden on the ones that exist.

"You could say that Alabama doesn't have as many online businesses," he said. "But why wouldn't we want more?"

Other plans

Sen. Arthur Orr, R-Decatur, was an early advocate of shifting potential Internet sales tax to the General Fund, but he's not counting on the tax to rescue the General Fund.

"I can't plan on that type of event happening," said Orr, chair of the Senate committee that oversees the General Fund.

Orr said he has come up with roughly half a dozen plans to deal with the projected 2016 shortfall, and has sent them to the Legislature's fiscal office for review.

"They're going to have a busy summer," he said.

Orr wouldn't discuss his plans in detail, but said some would involve consolidation of agencies.

Clouse, the House General Fund chairman, doesn't see how agencies can be cut more than they are.

He said lawmakers might consider eliminating some tax exemptions to raise more revenue if there's no other solution.

"We're past the bone now," he said.

Capitol and statewide reporter Tim Lockette: 258-294-4193. On Twitter: @TLockette_Star.
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