House kills plan that could have led to Web taxes

BOISE – The House voted 37-33 Wednesday to rebuff a move making Idaho a greater participant in a multistate sales tax simplification project that might have eventually forced residents to pay taxes on online purchases.

Advocates said the legislation would increase fairness for small businesses and could allow the state to collect an estimated additional $50 million or more yearly. But many legislators, including Panhandle Republicans, said streamlining the tax with other states raises constitutional questions and would be a “backdoor” tax increase.

The legislation “reaches the tentacles of government where it isn’t right now,” said Rep. Phil Hart, R-Athol.

“This is a scheme, in my opinion, to drain money from the pockets of the people,” he said.

HB 7, sponsored by the Idaho Tax Commission, would make Idaho active in the Streamlined Sales Tax Project. The agreement simplifies and aligns sales state tax codes so that retailers can voluntarily use software to collect taxes and pay them to states where their customers live.

The legislation would not have caused immediate change in Idaho law, but instead would have required tax officials to return to the Legislature next year with potential tax code changes. The state law would not have needed many tweaks, said proponent Rep. Leon Smith, R-Twin Falls.

While Idahoans are already required to pay use tax on online and catalog purchases, few do, Smith said.

“The trouble is that no one in Idaho seems to know about this,” he said.

Not collecting taxes online puts every business in Idaho at a 6 percent price disadvantage, Smith said.

“Naturally, every small retailer is behind this, and if you ask anyone on your Main Street, they will tell you it’s not fair,” he said.

Gov. Dirk Kempthorne issued an executive order in July 2005 authorizing Idaho to participate in the Streamlined Sales Tax Project, but legislators have been reluctant to become more active.

States currently rely on voluntary business participation because the U.S. Supreme Court has held that it would be too complex for them to enforce taxes outside of their borders.

Rep. Jim Clark, R-Hayden Lake, asked lawmakers, “What’s the hurry?” Idaho should hang back and see how other states react, Clark said.

“Why do we want to form into a quasi-compact with other states to convince Congress that they need to get in front of a decision that has case law as long as my arm on it?” Clark asked.

“Historically, Idaho has always waited until the last minute to watch everybody make all the mistakes they could possibly make.”

Smith, however, said streamlining is a “morass” that Congress doesn’t want to address.

Hart said the tax project allows for unconstitutional taxation of goods exchanged across state lines.

“One of the reasons that we left the Articles of Confederation and we have the Constitution is that states were impeding commerce between themselves,” Hart said.

Rep. George Sayler, D-Coeur d’Alene, said the bill would have allowed legislators to make final decisions about tax law changes later. It’s an important step, he said.

The money Idaho gains could have helped offset tax relief, such as the $30-a-year increase in the state’s grocery tax credit the House approved Feb. 8, said Rep. Bill Killen, D-Boise.