Lawmakers work to allow Internet sales taxation
NASHVILLE — Tennesseans who shop on the Internet should pay sales tax when they purchase an item, but most don’t.
The state doesn’t enforce the law and the federal government doesn’t require online retailers to collect the tax.
But at a time when Tennessee is raiding its reserves to resolve a $370 million shortfall in the current budget and making spending cuts to prevent a $629 million deficit next year, some lawmakers are looking for ways to capture those lost taxes.
In 2001, state and local governments lost about $362 million in Internet sales taxes, according to a University of Tennessee study, and researchers project the losses to grow to $1.2 billion within three years.
Nationally, the study found that governments lost $13.3 billion in so-called e-taxes, with losses estimated at $45 billion by 2006.
A multistate effort, known as the streamlined sales tax project, seeks to create a national standard for collecting taxes owed on Internet and mail-order sales. Thirty-seven of the 45 states that impose a sales tax are seeking to participate, including Tennessee.
‘We’re trying to level the playing field between brick-and-mortar businesses in this state and those on the ‘Net, and to ask people to pay taxes they already owe,’ said Sen. Bill Clabough, R-Maryville, who is helping lead Tennessee’s effort.
It won’t be easy.
The state’s tax code must be simplified without significantly changing the amount of money paid by businesses or collected by cities, counties and the state.
Lawmakers will also have to overcome the lack of overt support by Gov. Phil Bredesen, convince tax opponents that they’re not trying to enact a new tax and remove the ‘single-article cap’ — a limit on the amount of sales tax paid on a big-ticket item.
Under state law, someone who buys a $5,000 Rolex watch, for example, must pay the 7 percent state tax on the entire purchase, but local governments can charge their additional rate of up to 2.75 percent only on the first $1,600 of the price of the timepiece.
And as a result of last year’s hodgepodge of tax increases, there’s an additional levy on the second $1,600 that the state keeps.
The streamlined tax initiative prohibits states from having caps on any purchases except cars, motor homes, aircraft, motorcraft and manufactured houses.
To simply do away with the cap would cost Tennessee businesses millions of dollars, because they would have to pay taxes on the full amount on many large purchases.
‘As much as we spend each year on capital maintenance items, it’s probably a half million dollars to us,’ said Gary Poe, director of corporate taxation for Eastman Chemical Co. in Kingsport.
Under the streamlined project, states must adopt a uniform set of definitions and rules for their sales tax system. States aren’t required to set particular rates or tax certain items, but if a state decides to tax or exempt an item, it must use that set of definitions and rules.
Several thousand local governments impose sales taxes. All have different rates, different rules, and different definitions of what’s taxed and what’s exempted.
Because of that complexity, the U.S. Supreme Court ruled in 1967 that businesses don’t have to collect taxes for states unless they have a physical presence in the state.
At the time of that decision, most ‘remote’ sales were catalog orders. The landscape was similar when the nation’s high court upheld the ruling in a second case a decade ago. However, Internet sales have changed all that.
Seven states have already streamlined their tax systems — Minnesota, North Carolina, South Dakota, Kentucky, West Virginia, Utah and Wyoming — but they’re small and don’t come near the required population threshold.
Retailers won’t start collecting the taxes until at least 10 of the 45 states streamline their systems to make it easier to calculate taxes on customers’ purchases. The states must represent 20 percent of the 45 states’ population, or about 55 million people.
Like Tennessee, California and New York are grappling with budget deficits and need a new source of money, and are among several states working to streamline their tax systems. The addition of those three states could mean the collection of Internet taxes starts soon.
The system would be voluntary for retailers and states — unless Congress is persuaded to impose the standard code nationally.
Clabough said U.S. House Speaker Dennis Hastert has promised to move such legislation quickly, and he plans to ask Senate Republican Leader Bill Frist of Tennessee for a similar vow.
Clabough will meet Monday with House Finance Committee Chairman Tommy Head, Comptroller John Morgan and Revenue Commissioner Loren Chumley in hopes of reaching a compromise that will allow him to move forward with legislation.
The bill could be presented as early as this week, Clabough said, and he remains optimistic it could be approved before the legislative session ends this spring.
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On the Net:
Tennessee General Assembly: http://www.legislature.state.tn.us.