No Tax on Internet Sales Hurts Michigan Retailers
Like many Michigan retailers, Bill Golden knows competition from Internet sellers.
He remembers when a customer last December came into Golden Shoes, which he co-owns with his brother Craig, and bought $300 worth of winter boots, only to return them the next day and purchase them from online retailer Amazon, which was not charging sales tax.
"That was a tough one to swallow," Golden said. "We were out a $300 sale, and the state was out $18" in sales tax.
What he and other retailers want is a level playing field when it comes to sales taxes.
The issue is this: Michigan retailers have to add on Michigan's 6 percent sales tax, while Internet, mail order and catalog retailers that lack physical presence in Michigan, do not.
Addressing that inequity is the Michigan Retailers Association's top legislative priority and the group is hoping for action in the state Legislature's upcoming post-election "lame duck" session.
The group says bipartisan-sponsored bills introduced a little over a year ago would move most online-only retailers under the same sales tax collection laws as Michigan-based businesses, by requiring remote vendors that have what are called affiliate relationships in the state to collect sales taxes.
"We will press hard in the lame duck to have the issue addressed, and if not, we'll have the bills reintroduced next year and continue the drumbeat as loudly as we can," said Jim Hallan, president and CEO of the retailers' association.
Beyond the lost sales that in-state businesses say they increasingly face with the growth of e-commerce, is the issue of lost revenue to the state. An August 2011 Michigan Department of Treasury report shows a steady rise of estimated revenue loss due to consumer e-commerce purchases, reaching $241.7 million in fiscal 2013. Total projected tax revenue losses, covering both mail order sales and e-commerce, is estimated at $451 million in 2013.
And just a fraction of Michigan taxpayers report on their personal income tax forms the corresponding 6 percent use tax that can be due from their remote purchases when the seller does not collect sales tax. For the 2011 tax year, Treasury through Sept. 30, 2012 had received 107,000 taxpayer returns that reported $5.66 million in use tax that was due.
Gov. Rick Snyder, writing to U.S. Senate leaders in May in support of federal legislation that he said "would enable states to collect sales taxes evenly and fairly across the retail spectrum," noted estimated revenue losses in Michigan and said that "as we continue to work to improve the quality and efficiency of services throughout the state, it is crucial that the state has the tools to fairly collect the revenue that is owed."
Snyder said that allowing remote sellers to not collect taxes "provides them an unfair competitive advantage and threatens the viability of retailers throughout our communities, many of which are locally-owned small businesses that reflect the unique character and culture of the Great Lakes State."
But while several bills have been introduced in Congress, a federal solution has thus far not occurred.
"In a perfect world, Congress should address the issue. But they've been reluctant to do so," said Hallan. "So what you have is a number of states that have decided to address the issue.
"Our concern is that if we wait for Congress to solve Michigan's problem, we're going to be waiting for a very long time."
As of a May 2012 report prepared for the retailers by nonpartisan Lansing thinktank Public Sector Consultants, 11 states had enacted affiliate laws that require remote sellers to collect sales tax in states where they have an affiliate relationship with smaller vendors in the state. An additional three states had passed laws requiring remote vendors that don't collect and remit sales taxes to warn customers that it is the customer's responsibility to remit sales tax to the state.
The report also noted that Internet retailer Amazon has agreed to collect and remit sales tax in several states.
Under U.S. Supreme Court rulings, a remote seller can't be required to collect and remit sales tax in a state unless they have a physical presence or link, known as nexus.
Michigan House Bills 5004 and 5005, sponsored respectively by Rep. Eileen Kowall, R-White Lake Township, and Rep. Jim Ananich, D-Flint, would expand the definition of nexus or physical presence to include retailers that conduct business through affiliate businesses in the state or that own subsidiary companies. For example, an affiliate might be an in-state business that refers customers to the Internet vendor's website.
The bills have had hearings but not yet a vote. Kowall said the legislation is being looked at in conjunction with other tax issues and she did not know if it would move in the Legislature's lame duck session. "I am going to be promoting it most certainly," she said.
Hallan said some lawmakers have been reluctant to address the issue prior to the November elections "because people are concerned that this could be seen as a tax increase, when in reality it's a tax enforcement issue."
Americans for Prosperity – Michigan opposes the legislation. "We believe in Lansing they have a spending problem, and don't need more revenue," said state director Scott Hagerstrom. "We believe they don't need to be taking more money out of the private sector economy."
He said the group would be supportive if the revenue gained from the legislation was "applied to an overall broad-based tax cut for everybody." But he also said the "Supreme Court was very clear that this is something that should be left to Congress to define."
Meanwhile, Internet sales continue to grow.
The Public Sector Consultants report said that based on U.S. Bureau of Census data, electronic sales – orders placed over the Internet or other electronic e-mail types of systems – rose 50.5 percent from 2009 through 2011, while total retail sales overall grew just 19.7 percent.
"The issue is not going to go away," Hallan said. "Internet continues to become a significant part of the economy and the discrepancy will continue to widen.
"This really goes to the core survival of retail in Michigan. Whether you're big or small, we're giving favored treatment to favored retailers."
Amy Lane is a freelance reporter covering public policy for Crain's Detroit Business and other publications.