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Lawmakers eye tax on Internet sales
[April 19, 2009]

Lawmakers eye tax on Internet sales

BOSTON, Apr 19, 2009 (The Sun - McClatchy-Tribune Information Services via COMTEX) -- As state politicians ponder raising the sales tax, gas tax or income tax to counter a deepening financial crisis, hundreds of millions in revenue are disappearing into cyberspace each year.

Bay State consumers typically pay a 5 percent sales tax on most purchases made in the Commonwealth, be it a new plasma television or a set of golf clubs. But as lawmakers consider raising this to 6 percent to generate an extra $750 million, more than $500 million could be going uncollected on items bought online by residents at sites like

Changing the way retailers tax online purchases will require action at both the state and federal level. Faced with bleak alternatives, however, state lawmakers are being forced to look closely at Internet sales and are calling on their colleagues in Washington to do the same.

Online retailers are exempt from charging sales taxes in states where they do not have a physical presence, thanks to a 1967 U.S. Supreme Court ruling known as Bellas Hess v. Illinois.

The ruling was later upheld in 1992 in a similar case, Quill Corp. v. North Dakota. The court cited the burden on mail and Internet companies of having to comply with complex, varied tax codes from state to state.

"Our members, Massachusetts brick-and-mortar retailers, compete every day with both the Internet and New Hampshire. We're not ones to go out and advocate for more taxes, but if we're going to tax a product, we want to see a level playing field," said Bill Rennie, vice president of the Retailers Association of Massachusetts.

At least seven states, including California, Indiana and Minnesota, have challenged this by passing laws requiring national chains like Border Books that operate both online and brick-and-mortar stores to charge sales tax online. Courts in Ohio, Pennsylvania and Connecticut, however, have ruled against such laws in those states.

The Center for Business and Economic Research at the University of Tennessee has estimated that states lost as much as $30 billion in 2008 because they were not able to collect taxes on remote sales, with Massachusetts losing as much as $539 million.

New York became the first state in 2008 to take on Internet-only companies like Amazon, passing a law that says Web retailers must collect taxes if they have sales affiliates in the state who generate at least $10,000 from the retailer. Affiliates are defined as individuals or companies who are paid a commission for linking to the retailer's Web site. New York's law is being challenged in court.

Technically, Massachusetts residents are required to pay "use taxes" on purchases made online at the end of the year, but forcing people to comply with this statute has proven difficult.

"You just can't collect use taxes. It's impossible," said Scott Peterson, executive director of the Streamlined Sales Tax Project.

The Streamlined Sales Tax Project is a multi-state compact, organized through the National Governor's Association and the National Conference of State Legislatures. It seeks to get states to create uniform sales tax codes, to spur Congress to pass a law overturning the Supreme Court and requiring all retailers to collect and remit sales taxes to the state's where their products are delivered.

The compact does not specify tax rates, but requires states to agree on reporting methods and definitions, such as whether a marshmallow is a general food or candy. It also prohibits price thresholds like the one Massachusetts uses on clothing, when the tax is only applied to clothing costing more than $175.

So far, 22 states have reformed tax codes and joined the compact, with Wisconsin on track to join next month.

In Massachusetts, lawmakers have shown interest in joining the compact and even participated in drafting the regulations of the SSTP, but have yet make the necessary reforms to the state's tax codes. A special corporate tax committee that studied the issue voted 14-1 in 2007 to support implementation here.

"It's really not going to work unless it's uniform and the federal government takes action. But I would expect a vote to join sometimes this year," said Sen. Steve Panagiotakos, a Lowell Democrat who chairs Senate Ways and Means.

The Department of Revenue estimates that the state could collect up to $15 million more in sales taxes immediately. DOR Commissioner Navjeet Bal has drafted a report for the Legislature to consider this year.

"It can be implemented if the Legislature wants to do it," said Robert Bliss, a spokesman for the DOR.

Sen. Richard Moore, an Uxbridge Democrat, and Rep. Mark Falzone, a Saugus Democrat, are leading the charge on Beacon Hill, where momentum seems to gaining as lawmakers look to squeeze every penny out of the current tax system.

Moore introduced and helped pass a resolution in the Senate earlier this calling on Congress and the state's 12-member delegation to support the Main Street Fairness Act, a federal law that would require the all online retailers to collect sales taxes.

The lead sponsor of the bill in the U.S. House of Representatives has been Rep. William Delahunt, a Quincy Democrat.

Moore has also filed legislation to bring Massachusetts in line with the regulations agree upon in the SSTP, and Falzone has done the same in the House.

Nine state lawmakers signed on to Moore's resolution this session, including Rep. Cory Atkins, a Concord Democrat. Many more interviewed support the idea.

House Ways and Means Chairman Charlie Murphy, a Burlington Democrat, signaled his willingness to study the issue just this week in an editorial board meeting with Sun reporters and editors.

"We want Massachusetts to become a member because they will have a better sales tax system, and all Congress has to do is say these state's have done enough work to require retailers to collect sales taxes," Peterson said.

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