January 9, 2007 in Business

Bert Caldwell: States are missing the online sales tax train

Bert Caldwell The Spokesman-Review
 

Washington legislators this year will again try to climb aboard the streamlined sales tax. This is a train worth catching.

Streamlining is an attempt by the states to stem the loss of sales tax revenues caused by the increasing popularity of Internet commerce. Sales during the holiday season alone were estimated at $25 billion. Except for the 1,000 or so companies that pay the tax voluntarily and the few consumers who own up to their Internet purchases, those sales go untaxed.

The revenue lost by states that have a sales tax easily runs into the billions, and many of those tax-free sales were taken off the counter of Main Street, brick-and-mortar merchants who see that the tax is paid.

A 1992 U.S. Supreme Court ruling barred the states from collecting sales tax on interstate sales because compliance would be just too complicated for merchants who could not possibly know tax rates in the 7,500 state and local jurisdictions around the country.

The states responded, in 2000, with the Simplified Sales Tax Initiative, or SST, an effort intended to develop common rules, definitions and administrative procedures, and the technology, to overcome the Supreme Court’s objections to the existing system.

About two-thirds of the 50 states have participated in the process, and 21 have adopted the new rules. Washington has been involved — the last meeting of the SST governing board was held in Seattle — but not an adopter.

The Legislature rejected a streamlining bill in 2006, but another measure will be teed up within days. Much has been done to address issues that derailed passage a year ago.

Foremost was the impact of “sourcing.” Now, the tax is collected where an item is shipped, usually from a warehouse. Streamlining shifts the tax revenues to the jurisdiction where it is received by the purchaser. Because the warehouses are concentrated in urban areas, they stand to lose revenues. Rural areas, with few if any warehouses but many an Internet shopper, would benefit.

About $28 million in revenues would be reshuffled the first year, $35 million the second, with the total expected to decline thereafter. Spokane could expect to lose about $2 million a year initially.

However, Washington already receives about $32 million in revenues from voluntary compliers with state sales tax laws. Those funds would be used to compensate Spokane and other cities.

The other concern was the potential shelving of zoning and other land-use measures intended to encourage the construction of factories and warehouses from which most goods are shipped. Without the payback from sales tax revenues, accommodative zoning makes a lot less sense even if manufacturing and warehousing generate new employment.

Warehouses are particularly important to a state that promotes trade. Why ship goods into the Puget Sound area if there is no place to store them?

But an analysis done by the Washington Department of Revenue found that less than 10 percent of warehouse space is dedicated to retail sales.

Whatever action the Legislature takes will affect only sales within the state. The federal government has power over interstate commerce, so SST cannot take effect nationally without the consent of Congress. With so many other issues on the priority list, it’s unclear this early in the session whether the streamlining of sales taxes will even come up. The Internet has powerful constituencies that will not like the idea of taxation.

The state governors and other groups that organized to create and support an SST will have to build a coalition large enough to overcome that resistance. With just the 21 states on board, many of them rural, the movement has a ways to go.

Streamlining has not yet been an issue in Idaho. Montana and Oregon, of course, have no sales tax.

Thanks to Washington’s budget surplus, there is no urgent need to tap potential revenues from the Internet. Congress may not be accommodating where interstate sales are concerned. But, in-state, it makes sense to match the nexus of sales taxation for Internet and brick-and-mortar retail sales.

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