Declaring it “unfair” that out-of-state online retailers don’t collect sales tax from every customer in each state where they conduct business, a bipartisan coalition of Michigan Representatives want to force such companies as Amazon.com and Overstock.com to collect Michigan’s 6 percent sales tax for every item sold to state residents.
Michigan joins a plethora of states seeking to implement the so-called “Amazon tax” (named for the mega-Internet retailer) to add revenues to government coffers under the guise of leveling the playing field between bricks-and-mortar and cyber enterprises. The former collect the taxes, but the latter do not – as determined by the 1992 Quill v. North Dakota U.S. Supreme Court ruling, which holds that Internet retailers need not collect taxes in states where they possess no physical presence or “nexus.”
The SCOTUS rationale was simple: there exist approximately 7,500 different sales-and-use tax jurisdictions in the nation, and establishing mechanisms to collect the taxes would prove burdensomely expensive.
States persisted, however, and Amazon responded by closing warehouses and severing relationships with affiliate retailers in those states as it did in Illinois earlier this year after the state passed its own Internet retail tax. Amazon and Overstock both threatened to cut ties with Illinois affiliates FatWallet.com and CouponCabin.com, and the affiliates opted to move their nexuses to, respectively, Wisconsin and Indiana. Crain’s Chicago Businessreports that CouponCabin says the Illinois Amazon tax jeopardized the company’s relationships with more than 1,500 online retailers, and that “staying in Illinois would have cost CouponCabin upwards of 45 percent of our annual revenue.”
A deal cut earlier this month between Amazon and California will force the former to collect taxes, but with a one-year grace period in exchange for Amazon’s promise to create jobs in California as well as dropping a state ballot referendum against the tax-collection mandate. A half-measure win for Amazon, to be sure, but less so for other online retailers not granted the same one-year amnesty.
But what about those lost tax revenues to the state?
According to the Detroit Free Press’s Dawson Bell, this tax could net Michigan more than $35 million a year, and a Michigan Retail Association study reported unpaid sales taxes for online purchases could be as high as $289 million a year.
Big money, right? Well, not exactly. When one looks at the Senate Fiscal Agency numbers, which project that current sales-tax income will net $6.5 billion for 2011. Got that? If one adheres to the legislators’ $35 million claim, the Amazon tax would add one-half of one percent to state tax revenues for fiscal year 2011, or a mere 3.8 percent if the MRA figure is accurate.
This bar-napkin analysis is supported by a 2010 study conducted by Jeffrey Eisenach and Robert Litan, which concluded that uncollected 2008 sales tax revenues from online retailers amounted to “approximately $3.9 billion, or less than three-tenths of one percent of state and local tax revenues.” Eisenach and Litan also say that additional administrative costs for businesses to collect the taxes can add up to 13.5 percent of each dollar earned: “If the resulting tax collections would be too small to materially affect state and local government finances, then governments arguably should look elsewhere for a solution to their financial difficulties.”
But, you ask, what about charges of the unfairness inherent in allowing out-of-state Internet retailers to forego the additional costs of collecting sales tax from customers unwilling to perform the task on their own? I would say there has there ever been a “level playing field” in the retail market to begin with.
Customers make their purchases based on the type of buying experience they prefer, and many continue to desire personal interaction with friendly, knowledgeable sales representatives and merchandise they can experience tactilely before purchasing. Whether this will be true in the future remains to be seen, but bricks-and-mortar retailers should focus more on upping their competitive game before enlisting legislators to enact laws effectively bouncing current and potential Internet nexuses and affiliates from Michigan.
Bruce Edward Walker ([email protected]) is a research fellow and managing editor of The Heartland Institute’s InfoTech & Telecom News.