Michigan legislators are considering a bill introduced in September that would force online retailers to collect the state’s 6 percent sales tax from Internet customers. The bill has elicited concerns Internet retailers may remove warehouses and other physical facilities in the state rather than incur the additional costs of collecting the tax.
Michigan’s proposed law would move online-only retailers under the same sales tax laws the state’s bricks-and-mortar businesses are subject to, according to a press release by the Michigan Retailers Association. The law would also expand the definition of “physical presence” or “nexus” to include retailers who conduct business through in-state affiliates or who operate subsidiary companies in an attempt to avoid paying sales tax.
Michigan House Bill 5004, introduced by Rep. Eileen Kowall (R-White Lake), is modeled after similar so-called “Amazon tax” laws passed recently in such states as Texas, California, and Illinois. The state laws circumvent a 1992 U.S. Supreme Court ruling that a business must have a physical presence, such as a store or office, in a state for that state to require its sales tax be added to the sale.
Implementation of the Internet tax in Illinois prompted major online retailers such as Overstock.com and FatWallet to sever relationships with brick-and-mortar affiliates in the state and relocate the company’s Illinois offices to neighboring Indiana and Wisconsin to avoid collecting the tax.
More Money for Government
“I introduced legislation for the Main Street Fairness Act to end a loophole that places an unfair burden on our local Michigan businesses,” said Rep. Kowall in an email. “It’s a simple issue of fairness, and in the best interest of everyone for government to end practices that pick winners and losers.”
Jack McHugh, a legislative analyst for the Mackinac Center for Public Policy, a Michigan-based free-market research and education institution, argues HB 5004 is just another way for governments to collect taxes. McHugh suggests the law might be unfair to online retailers.
“Maybe the Legislature should prohibit taking local purchases home and instead mandate they be shipped, to ‘level the playing field’ for online merchants,” McHugh said. “I’m being facetious, but that absurdity illustrates how misguided legislators are in their focus here. Their proper concern should be that this would take more money from the pockets of struggling Michigan families and give it to the government.”
‘Unconsitutional . . . Just Plain Foolish’
Steven Titch, a telecom and information technology policy analyst for the California-based Reason Foundation, says the proposed Michigan law is unconstitutional.
“The courts have been clear that forcing out-of-state retailers to collect state and local sales taxes imposes an undue burden on them and thereby violates the Commerce Clause of the U.S. Constitution,” Titch said. “Until a court determines otherwise, the Michigan law demanding out-of-state online retailers collect sales tax is unconstitutional. It risks being challenged on those grounds,” he said.
“The second action, declaring that an in-state affiliate is a physical ‘nexus,’ is just plain foolish,” Titch continued. “In other states that have attempted this, online retailers simply drop affiliates in those states and continue selling through their own Web sites or out-of-state affiliates. It’s a lose-lose proposition. The state doesn’t collect the tax, and any affiliates among its residents lose a revenue source.”
Tom Gantert ([email protected]) is senior capitol correspondent for the Mackinac Center for Public Policy in Midland, Michigan.
House Bill 5004, Rep. Eileen Kowall, September 22, 2011: http://www.legislature.mi.gov/%28S%28hfof20b030yogvvqd43v3jvg%29%29/mileg.aspx?page=getobject&objectname=2011-HB-5004&query=on