Legislators work to close loophole in internet tax policy
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Legislators work to close loophole in internet tax policy

Date: February 16, 2011
By: Matthew Patane
State Capitol Bureau
Links: HB 278, HB 52

JEFFERSON CITY - As state lawmakers look for areas to deal with an expected budget shortfall, a couple legislators are pushing legislation that would go after taxes that are not being collected from Internet sales.

The proposal would have Missouri join 24 other states, such as Kansas and Iowa, in a "compact" or agreement to assure that the state collects taxes from Internet sales with merchants in other states.

Under the agreement, if a Missourian purchaser buys from an in-state online company, the revenue collected from the sales tax will go to the point of origin, or the local area in which the company is located. If a purchaser buys a product from an out-of-state Internet business, then the sales tax revenue collected goes to the point of delivery, or where the purchaser is located.

Currently, a Missourian purchasing a product on Internet is supposed to voluntarily pay sales taxes for purchases made on Internet -- a requirement lawmakers say the state has no practical means to enforce.

Legislative staff have not made an estimate of how much the state could gain, expect to report that it "should significantly increase sales tax collections and total state revenue."

One of the bills' sponsors, Rep. Margo McNeil, D-St. Louis County, cited a University of Tennessee study that Missouri would lose $187 million in 2011 from untaxed Internet sales.

McNeil called the streamlined sales tax a way to end the advantage that online retailers have over traditional brick-and-mortar businesses.

"The tax is a step in trying to even the playing field because right now we have a lot of people who are going in and using the stores as a showroom and then going home and buying on the Internet at anywhere from 7 to 10 percent of the cost," McNeil said.

Since Internet sales tax is not collected by the state, McNeil said, brick-and-mortar companies are being undercut and treated unfairly.

"It's not the Internet companies fault; it's the fact that Missouri does not have the mechanisms in place so that taxes can be collected," McNeil said. "We are trying to put mechanisms in place that would make it easier for the Internet companies to collect taxes and bring them to the proper place...This bill simplifies the tax code and makes it uniform with other states."

Internet companies are not required to cooperate with the state if the legislation is passed allowing smaller companies who cannot afford to pay the tax to still grow and conduct business, but companies that do work with the state would still collect 2 percent of the sales tax on any item sold.

"The tax will affect out-of-state companies that voluntarily decide to collect taxes," McNeil said. "I feel like the tax is a good way to support brick-and-mortar companies because it's pretty much a fairness issue."  

The Streamlined Sales Tax Governing Board, a group of state legislators and tax administrators, is in charge of the agreement and collaboration between the states, and wants the proposal to reform state tax policies so as to make these policies simpler and more uniform, Executive Director Scott Peterson said.

Peterson spoke in front of the House Tax Reform Committee Wednesday in support of the proposals and discussed the importance of streamlining tax policy language and definitions.

"While this is a big piece of legislation, there aren't really a lot of changes in it," Peterson said. "There are a lot of businesses in this country that benefit from these practices and they are the reason why we came up with them."

If Missouri signed on with the agreement, legislatures would need to hire certified service providers, such as the Federal Tax Authority,a private company involved with Internet-based services, in order to keep a record of Internet sales.

In addition to other supporters, such as the Missouri Retailers Association, the former Iowa Speaker of the House Christopher Rants, promoted the Internet sales tax in front of the committee.

"We have come together to essentially agree on what our definitions are," Rants said. "The authority still resides with the state government on what they want their language to be, on whether they want to make something taxable or not."

Rep. Rory Ellinger, D-St. Louis County, proposed a similar bill on this matter, but during the hearing Ellinger said that he would vote for McNeil's bill over his own since her bill is more "encompassing" and up-to-date. McNeil said that she and Ellinger are "in sync" about their efforts to reform tax policy regarding electronic sales.

The proposal to join the multi-state compact has been floating around Missouri's legislature for the last few years.  Last year, the measure cleared both House and Senate committees, but did not get a full chamber vote.  Both this year and last, no organization spoke in opposition to the idea to the House committee.