Will internet tax pay off?
JANESVILLE — Local business owners said a federal bill to limit tax-free shopping on the Internet would complicate their businesses, but the law could mean extra revenue for Rock County government.
The U.S. Senate has OK'd the Marketplace Fairness Act, and President Barack Obama has said he supports it.
Only the U.S. House of Representatives stands in the way of the bill, which would allow states to require out-of-state retailers to collect sales taxes on products sold over the Internet, in catalogs, and through radio and TV ads and send those taxes back to the states where a shopper lives.
Traditional retailers and cash-strapped states support the legislation, arguing that the bill is not a tax increase. In many states, shoppers are required to pay unpaid sales tax when they file their state income tax returns, but states complain that few taxpayers comply.
Internet giant eBay led the fight against the bill in the Senate, along with lawmakers from states with no sales tax and several prominent anti-tax groups. Opponents say it would put an expensive obligation on small businesses because they are not as equipped as national merchandisers to collect and remit sales taxes at the multitude of state rates.
For the most part, shoppers have been able to buy items from Internet sites because laws require stores to collect sales tax only on goods shipped to states where they have a physical presence.
Here are questions and answers about the bill:
Q: How would such a law affect local companies that sell online?
A: Businesses with less than $1 million in online sales would be exempt, but the rest would be forced to sort out, collect and return sales taxes to roughly 9,600 taxing jurisdictions across the country.
Gil Lyne owns Kryptonite Kollectibles in Janesville. He also sells merchandise through websites.
“I'm not really sure, yet, how this is going to affect us,” Lyne said in an email. “I haven't seen how they are going to break out the sales figures for what we have to report. We also sell on Marketplace sites, like Sears and Amazon, and I have read that they might do it for us and we just have to pay them a processing fee.
“I look at it as just another headache and another tax that will eat into the time of small business owners to actually work on their businesses.”
MacFarlane Pheasants raises and sells birds from its farm on Janesville's south side. It also operates the pheasant.com website, which primarily sells two products: gift boxes of smoked and dressed pheasants and day-old live pheasant chicks.
One is a food item, and the other is a live animal, and states tax each differently, said Bill MacFarlane.
“Some states tax food, others don't,” MacFarlane said. “Some states treat live animal sales one way, others do it a different way.
“Even in Wisconsin, some of our chick sales are taxed while others are not if there's a reseller's permit involved.”
MacFarlane said passage of the bill certainly would complicate his business. In addition to product-related tax issues, he would have to decide whether it would be worth the effort to sell in states where he may only have one or two customers.
“A lot of companies are upset, and so are we,” he said.
Grainger operates a massive distribution center in Janesville that fulfills orders for products from its Ben Meadows, Gempler's, AW Direct, McFeely's, Grainger, Professional Equipment and Zoro divisions.
Joe Micucci, Grainger's director of media relations, said the company is aware of the proposal.
“As it stands, it will not have tax implications to Grainger,” he said in an email. “We have a physical presence in every state and therefore already collect tax on our sales.”
Andrew Reschovsky, a professor of public affairs and applied economics at UW-Madison's La Follette School of Public Affairs, said online businesses argue that collecting taxes for so many jurisdictions would be burdensome.
“A decade ago, this would have been a big problem,” he said. “But now with technology, there are companies and software that can easily do this.”
Q: If the proposal becomes law as written, would Rock County, which collects a half-percent sales tax on purchases made in Rock County, see an increase in sales tax revenues?
A: Most likely, but the amount of new revenue for Rock County would—at this point—be only an estimate, said Kyle Christianson, a legislative and research associate with the Wisconsin Counties Association.
“If the Marketplace Fairness Act is approved by Congress and becomes law, we would expect counties to collect additional sales tax revenues,” he said in an email. “This is because nearly all online retailers would be required to collect and remit both the state and local (county) sales tax for all purchases.”
Wisconsin officials estimated the law would generate between $70 million and $100 million annually for the state and its taxing jurisdictions.
Using a common estimate of $78 million, Christianson did a rough calculation that indicates Rock County could collect more than $1 million in additional sales tax revenue each year.
Q: If I live in Janesville and buy a product online from an Illinois retailer, what claim would Wisconsin have on the new sales tax? If I drive to the retailer's store in Rockford, Ill., I would pay a sales tax that would be kept by Illinois.
A: Reschovsky said Wisconsin's justification for collecting taxes on Internet transactions with out-of-state venders is rooted in the state's use tax, which is a counterpart of the state's sales tax.
Use tax must be paid when Wisconsin sales tax is not charged and no exemptions apply. Use tax is what most taxpayers do not report and pay in their annual tax filings.
“If you are a completely law-abiding citizen, you report and pay that use tax,” Reschovsky said. “It's a tax, however, that's way underpaid.”
The use tax is basically unenforceable, he said, which is one reason Wisconsin wants a federal law mandating sales tax collections on out-of-state Internet purchases that are currently untaxed.
Another reason for the tax collection push, he said, is to level the playing field between out-of-state Internet retailers and local bricks and mortar stores that must collect sales taxes and therefore charge more for a product.
Reschovsky said customers often visit local stores and then buy the same product online to avoid paying sales or use taxes.
“They try the stuff out and use a salesperson's time,” he said. “It really is unfair to the bricks and mortar retailer.”
Perhaps the most fundamental reason for the state's interest in collecting the tax is the fact that it has much to pay for.
“The state has a big problem when its sales tax base drops,” he said.
Q: What's the prognosis for this bill?
A: Having blown through the Senate, the bill faces a tougher road in the House, where Speaker John Boehner has said he “probably” would not support it because it puts too much of a burden on online merchants.
Rep. Paul Ryan, R-Wis., has said he supports the idea of leveling the playing field, but he doesn't support the Senate bill as written because it leaves the door open for other forms of taxation.
“The question is, is it fair for a local brick and mortar sales person—an Ace Hardware, a Tru Value, a grocer, a whatever—to collect a tax and then their online competitor doesn't?” Ryan said earlier this month. “That is not fair.
“So I'd like to think there's a way to address this inequity without giving the government power to expand taxing authority beyond that intent. You've got to do it the right way,” Ryan said.
Material from Gazette wire services was used in this story.