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One Moment Please.... Governor Dayton: Right idea, but not a state issue


Fri, Feb 22nd, 2013
Posted in All Commentary

By Jason Sethre

Publisher

Fillmore County Journal &

Olmsted County Journal

Cell: 507-251-5297

jason@fillmorecountyjournal.com

This may not be an exciting issue to talk about, but it is relevant to every business and consumer in the state of Minnesota. Among many tax policy changes proposed by Governor Dayton in his latest budget proposal, he is attempting to tackle the unrealized sales tax lost as a result of Internet transactions. Here’s how Dayton’s propaganda reads, relating to addressing this issue.

Affiliate Nexus – Minnesota E-Fairness

Minnesota and other states lose millions of dollars each year in tax that is owed on sales from out-of-state sellers, such as Amazon and other Internet or catalog retailers.

If the governor’s E-Fairness proposal is adopted, Amazon and other out-of-state retailers with affiliates or sponsors who sell on their behalf in Minnesota would have nexus here. As a result, they would have to collect and pay sales tax when they sell taxable items to Minnesota residents or businesses.

This proposal would generate about $5 million a year in revenue and take an important step toward a level playing field for Minnesota retailers. To fully address the issue, we need Congress to enact the Marketplace Fairness Act. This legislation would require all sellers in the U.S. to collect and pay sales tax based on the destination of the product.

What’s wrong with this?

Governor Dayton is attempting to push a national issue with the Minnesota state budget. This isn’t just a state issue. This is a national issue. We need someone like Congressman Tim Walz to step up to the plate and push this issue.

By now, a track record has been established that very clearly indicates that the Internet cheats the sales tax system. As a matter of fact, the Internet has been eroding the sales tax system since its inception.

It’s been researched and discussed in many states throughout the U.S. over and over again, but yet many online-based companies continue to be able to operate out of the realm of tax laws.

In a June 2011 Bloomberg Businessweek article, the Maryland Bureau of Revenue Estimates was recognized for utilizing a research methodology that brought to light a loss of more than $160 million per year from unpaid taxes related to Internet sales. This study was commissioned by the State of Maryland to identify how to cover the freight of a structural state budget deficit of roughly $1.1 billion.

In an August 2011 article published in The Bay Citizen, “when it comes to avoiding the requirement of collecting sales tax from its consumers, Amazon is not afraid to open its wallet.”

According to this particular article, the Seattle-based online retailer Amazon had already spent $5.25 million during the past decade in an effort to protect their business model from sales tax laws.

California, also facing a tremendous state budget deficit, estimates a loss of $200 million per year from uncollected online sales tax.

This was such a big issue with Amazon that they threatened, yes THREATENED, to layoff employees if a sales tax was imposed on their business model. Sorry, but excuse me?! Amazon has been provided an unfair competitive advantage that has forced many brick-and-mortar business owners to have to layoff employees and even close their stores. So, Amazon, quit crying in your soup if you don’t get things to go your way.

The circumvented online sales tax issue is often overlooked throughout the United States from our public officials. Nobody seems to really care, yet the impact is grand.

The competitive advantages of e-commerce will kill brick-and-mortar investments. Imagine towns full of warehouses with no storefronts. That’s the direction we’re heading as a nation if we allow this to continue.

Every retailer you can think of has become a showcase for people to test drive products before they buy them online. All retailers hire staff to be available to serve customers as they walk in the door. They provide staff and inventory for customers to get a glimpse of something before they drop some cash on some goods, but then the customer chooses to make their purchases online.

Why? Online-based retailers are often run out of warehouses with much lower overhead than physical retail space. Their staff is dedicated to inventory management, and shipping and receiving.

Then, add the advantage of avoiding online sales tax, and consumers are naturally going to flock to these companies to make purchases.

Compare Barnes & Noble with Amazon, and who is going to win this battle? In 2011, the bookshelves of Borders already collapsed with a loss of over 10,000 jobs nationwide as they closed more than 600 stores. How many people walk into a Barnes & Noble, find the book they want, and then order it online at Amazon?

Think of it this way: every dollar spent online with eBay.com, Amazon.com, Google.com, and many others will end up out in California. This means that we can take this issue one step further when we think about the fact that more online purchases outside of Minnesota also reduces our volume of state-wide gross domestic product. This means we are shifting sales and potential sales tax to states like California.

Reduced sales hurts our local retailers and reduced or uncollected sales tax hurts our state’s ability to support infrastructure like roads, healthcare and education.

Yes, consumers are supposed to report and account for unpaid sales tax on an individual basis. I find it hard to believe that people are voluntarily recognizing all out-of-state sales tax when it comes time to file each year.

And, I’m not alone in my thinking.

According to the Minnesota Sales Tax Gap study conducted in 2000, there was a $451 million gap between the amount of sales and use tax paid to Minnesota by businesses and individuals and the amount that should have been paid.

The study also showed that the gap would grow rapidly. Estimates showed the 2002 gap to be more than $500 million, costing each Minnesota resident about $100. Projections for the 2007 sales tax gap were nearly $700 million. Every year, the sales tax gap is increasing, which means the state of Minnesota is losing ground along with our long-time brick-and-mortar businesses.

The study, based on sales and use tax figures from 2000, indicated that the sales tax gap was attributed to:

• Underreporting by businesses that currently collect and pay Minnesota sales and use tax;

• Minnesota businesses that have not filed sales and use tax returns; and

• Minnesota households that owe use tax on out-of-state purchases – including Internet and catalog sales – when the seller does not collect sales tax on the item.

In 2000, about 28 percent of the sales tax gap was attributed to the out-of-state, Internet and catalog purchases of businesses and households.

Conclusion

The problem with Governor Mark Dayton’s plan is that Minnesota cannot do this alone. This is a national issue that needs Congressional attention. If Minnesota initiates this policy, and all other states are not on the same level playing field, consumer spending will simply shift elsewhere. Consumers are not dumb.

And, how is the state of Minnesota going to monitor and capture this sales tax lost to Internet transactions? I suppose the Minnesota Department of Revenue will have to hire more bean counters.

Yes, this issue needs to be addressed, but not at a state level. This is a national issue. I hope our representative Congressman Tim Walz is paying attention to this issue.

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