Monday, October 3, 2011

Editorial: Get online retailers to collect state sales tax

Editorial: Get online retailers to collect state sales tax

It is praiseworthy that a bipartisan duo of state House members has decided to take on the issue of getting more out-of-state retailers to collect Michigan taxes when they sell to Michigan residents. It's worth pushing, even if it seems like an exercise in futility.

California earlier this year faced down over this same issue, and after some serious scuffling -- including a threat from Amazon to lead a petition drive against the law the California Legislature passed -- Amazon agreed to start collecting sales taxes from its California customers next year.

The Michigan bill, proposed by Reps. Eileen Kowall, R-White Lake Township, and Jim Ananich, D-Flint, is similar to California's in requiring companies with affiliates and subsidiaries in Michigan to collect the tax.

Amazon, perhaps the chief online retailer affected by such moves, has retaliated against similar steps in other states, most often simply ending its affiliate agreements and, in a couple of cases, canceling plans for distribution centers. But California had the advantage of hosting several Amazon subsidiaries, and Michigan has one, too: Brilliance Audio in Grand Haven, which produces audiobooks.

Amazon is hardly alone among online and catalog retailers that skip sales tax collections when they have no physical presence in a state. They have that right, based on a U.S. Supreme Court ruling that says a state's ability to enforce sales tax collections doesn't extend beyond its own borders; if a company has no connection to a given state, that state can't order the company to do anything. (Instead, customers are supposed to cough up the equivalent amount, known as a use tax, on their income tax forms.)

That has led the states to broaden the definition of a company's presence, as the Michigan bill would -- a move that may lead to another round of legal battles.

But the Supreme Court decision also leaves room for a federal solution, with Congress ordering companies to collect the appropriate state and local sales taxes from customers. That is the ultimate and best solution, and U.S. Rep. John Conyers, D-Detroit, has already introduced a bill to do so.

In the age of computers and geographic information systems, this is no longer a complex task; big retailers that have both stores and online operations, such as Sears and Target, do it every day.

In the meantime, Michigan could reap about $36 million in taxes under the affiliates and subsidies provisions in this bill. That, however, represents only a slice of the $289 million in forgone sales taxes from all out-of-state companies that refuse to collect them, according to a recent study by Public Sector Consultants in Lansing.

It's important to note that sales and use taxes are paid by customers, not the businesses that sell to them. As Kowall and members of the Michigan Retailers Association stress, the failure to force this issue has become a tacit subsidy for online-only companies, no longer a fledgling industry. "It puts local retailers at a competitive disadvantage," Kowall said, and that is her primary motivation in pushing the bill.

Whether, and if so how, Amazon or any other out-of-state companies will fight Michigan's effort remains unknown. In an e-mail, Amazon spokesperson Mary Osako only said: "We believe this needs to be solved at the federal level, and we're working with the states, retailers and Congress to get federal legislation passed as soon as possible."

The reason to take this bill seriously is not the money involved, which is relatively small as the bill is written, but the pressure it will bring on Congress. Michigan is still a big enough state to make a difference, and on this issue, the Legislature should follow through.

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