Legislators, retailers work to close online sales tax loopholeby Martin Moylan, Minnesota Public Radio
St. Paul, Minn. — If you buy a book, TV, computer or some other taxable item at the Mall of America, you're going to pay about a 7 percent sales tax.
But shop for the same item online, and you can readily find a merchant that lets you avoid sales taxes and charges little or nothing for shipping.
That could change soon, now that an alliance of cash-strapped states and angry brick-and-mortar retailers like Best Buy, may finally prod Congress to close a loophole that lets online sales escape state sales taxes. After this holiday shopping season, the tax dodge could be on its way out.
Having to pay taxes on online purchases would be a change for shoppers like Tim McKinney of St. Paul. He believes it's only fair he can get out of paying sales taxes on his occasional, modest online purchases.
"I tend to get around them most of the time," McKinney said. "Since a lot of people do not have to usually pay the sales tax, I prefer not to."
The state of Minnesota would prefer folks like McKinney have no choice but to pay sales taxes online, just as they do at stores.
Lost sales tax revenue amounts to as much as $400 million a year, said state Revenue Commissioner Myron Frans, Minnesota's chief tax collector. That's about as much as the Vikings say they'll pay towards a new stadium.
Frans said Minnesota probably faces another big budget deficit and can't afford to let so much tax revenue get away.
"We clearly have needs at the state and local level to fund government and we need to collect the revenue where it is due," he said.
The problem is that under current laws, retailers that aren't physically present in a state don't have to collect that state's sales taxes. It's up to buyers to pay any sales tax owed on their purchases — and states haven't had much luck with that.
About eight years ago, Michigan spent $10 million to educate residents about their obligation to pay sales taxes on catalog and online purchases. The following year, Michigan collected $1 million in taxes from online sales, according to the National Conference of State Legislatures.
Minnesota isn't trying to collect sales taxes from every resident who buys online. That would be too much trouble. But Frans said the state does want tax payments from relatively big spenders.
"If you buy something that is over $770, wherever it comes from you owe a tax," he said.
Last year, only 734 individuals paid the state of Minnesota for uncollected sales taxes, putting a mere $371,000 in the state's coffers.
What about the folks who didn't pay up? Frans thinks many, if not most, are not deliberate tax cheats.
"I've been surprised by how many people simply are not aware of the tax obligation," he said.
Best Buy, Target and other big retailers with stores across the country collect sales taxes on both in-store and online sale. They're legally bound to collect sales taxes on an online purchase if they have a store in the buyer's home state.
But online-only competitors often skip collecting sales taxes in which they have no stores, warehouses or other physical presence.
Earlier this year, Laura Bishop, Best Buy's senior director of government relations, told the state Senate Taxes Committee that the sales tax loophole gives online-only merchants a significant edge by letting them sell at a lower total cost to the consumer.
"This isn't a free market right now," she said. "There's a clear advantage that online sellers have over the brick-and-mortar retailers — seven percent, eight percent. Some states, 10 percent."
Although Best Buy might match an online competitor's price on, say, an expensive big-screen TV, the company could lose the sale because it has to tack on perhaps $50 or more in taxes.
Best Buy, Target and other big brick-and-mortar retailers are lining up behind a congressional bill that would allow states to require all retailers to collect sales taxes due. Minnesota and other states are joining retailers in backing the legislation, hoping to recover an estimated $23 billion in sales taxes that now go uncollected.
Neal Osten, Washington director for the National Conference of State Legislatures, said states have never had a greater need for more power to collect sales taxes.
"Probably half the states will face budget gaps in the coming fiscal year for 2012 and then for 2013,'' he said. "And with the deficit reduction efforts in Congress at the federal level, we anticipate states are going to lose hundreds of billions of dollars in state-federal programs."
But Osten said there's never been as much support for legislation to close the sales tax loophole.
"For the first time, you have all the state and local government groups," he said. "The National Retail Federation, major department stores. So, it has the whole spectrum of sellers supporting the legislation."
That includes the online-only giant Amazon.com.
"They've always said that they would be willing to collect when everybody has to collect," Osten said.
If every retailer collects sales taxes from every shopper, online shopping won't be quite the bargain it often is now.
- Morning Edition, 11/17/2011, 6:55 a.m.