A news service for the people of Michigan from the Mackinac Center for Public Policy

Rep. Eileen Kowall, R-White Lake

A measure that's part of an effort to end the tax advantage customers enjoy when making purchases over the Internet has been introduced in Lansing. State Reps. Eileen Kowall, R-White Lake, and Jim Ananich, D-Flint, announced the legislation, which they call the “Michigan Main Street Fairness Act.”

According to the news release circulated about the measure, it would: “protect Michigan job makers” and close a “tax loophole.” In addition, it's being touted as legislation that would level the playing field between small businesses and out-of-state Internet retailers.

“For me this is really an issue of fairness,” said Michigan House Tax Policy Chair Jud Gilbert, R-Algonac. “This is not a new tax. It's about making sure people pay their fair share of the sales tax, which already exists.”

However, Rep. Dave Agema, R-Grandville, said he's not convinced that trying to find ways of collecting more taxes should be a high priority.

“Let me get this straight.” Rep. Agema said. “They're saying we need to find a way to get more taxes from people, so that government can spend more? Generally speaking, my instincts are to look first for more ways government could save money through efficiencies.”

The proposed legislation would:

 - Move Michigan's online-only retailers under the same sales tax collection laws that apply to Michigan brick-and-mortar businesses; and

 - Expand the definition of “nexus” or “physical presence” to include retailers who conduct business through affiliate businesses in Michigan or own subsidiary companies in an attempt to avoid paying the sales tax.

The new “physical presence” definition would be an attempt to get around a 1992 U.S. Supreme Court ruling that said a “physical presence” was required to compel retailers to collect a sales tax.

Although the legislation in Lansing would only apply to purchases where the seller was in Michigan, it's part of a larger national effort to collect all Internet sales taxes. So-called “big-box” stores are backing a coalition called the Alliance for Main Street Fairness, which is leading efforts to change state sales-tax laws.

Rep. Aric Nesbitt, R-Lawton, said his initial inclination would be to oppose the legislation, but he wants to study it more before finalizing his position. He said he just started researching the issue last weekend and he already has some reasons to be skeptical.

“Right off the top; I have four major concerns about this,” Rep. Nesbitt said. “First; do we really have the ability to do it? There was a U.S. Supreme Court ruling and regardless of how they talk about being able to enforce this; I'm not sure federal enabling legislation wouldn't be required.”

“There's also an issue of how we'd handle the various sales tax jurisdictions within Michigan,” Rep. Nesbitt continued. “Next, I'm concerned that if we did this, it would be counter-productive. We're supposed to be trying to encourage business in Michigan, but this could just send that business to other states. Also, studies I've seen haven't indicated that this would have the positive effects proponents of this legislation claim.”

About as soon as Internet commerce came into existence, states started searching for a way to collect their sales taxes on Internet transactions. Technically sales taxes do apply to Internet purchases. But whose sales tax?

Internet sales often involve people in two or more states. Under such circumstances, how is it to be determined which state's sales tax applies? This situation, coupled with the 1992 U.S. Supreme Court decision, has complicated efforts to find a way to collect these taxes.

Meanwhile, Internet customers have been shopping without fear of being hit with a sales tax on their purchases. In spite of the fact that these sales usually include additional costs for delivery and handling, Internet sales have continued to grow.

On Oct. 1, 2005, Michigan joined a compact of states that agreed to cooperate to eventually be able to collect sales tax on Internet purchases. This occurred after required legislation was passed by the state Legislature and signed by Gov. Jennifer Granholm. At the time, several other states chose not to join the compact; possibly because they had legislative majorities that either philosophically opposed the move as a de facto tax hike, or because they just didn't want to be labeled tax-hikers.

Another suggested reason some states decided not to join the compact was that they saw a potential competitive edge. If the overall market included a lot of states that taxed Internet sales, online retailers might flock to the states that did not.

At roughly the same time, an attempt to establish national rules on collecting Internet sales taxes failed in Congress, apparently for the same reasons that many states had balked at the idea.

“I supported it back then for the same reasons I support it now,” Rep. Gilbert said. “I know there are several issues we'll need to look at carefully, but I think this time it has a better chance of actually going into effect. We're talking about making changes within the state this time.”

In conjunction with the move at the state level, there is once again an effort to get Congress to set Internet sales tax collection rules. However, there is also federal legislation to make the current online tax advantage permanent.

Back in Lansing, the news release issued at this week's press conference explained the reason for the new legislation:

When consumers buy a product online, Michigan law says they must pay the same sales tax they would if they were to buy the product from a store in person.  Under Michigan’s current sales tax collection system, out-of-state, online-only retailers are exploiting the massive legal loophole, allowing them to forgo collecting sales tax at the point of sale. Online-only retailers use this loophole to attract shoppers away from brick-and-mortar businesses by using deceptively lower prices, since Michigan retailers must add — and collect — the 6-percent sales tax to the customer’s bill. As a result, Main Street businesses are put at a significant competitive disadvantage that puts Michigan’s business community at risk.

"I introduced the Main Street Fairness Act to level the playing field between local businesses and Internet retailers," Rep. Kowall said. "Closing this loophole will eliminate the competitive disadvantage that is holding back local businesses. State government is no longer picking winners and losers. Every business in Michigan should have the same opportunity to grow and create jobs."

Supporters of the proposed legislation point to a study released Sept. 15 by Lansing-based Public Sector Consultants to support their side of the issue. However, this study was paid for by the Michigan Retailers Association, the group that's spearheading the effort to the get the law changed.

According to the study, the “sales tax loophole” has a significant negative impact on job makers and the state’s economy. The study claims that “closing the loophole” would directly lead to the creation of as many as 1,600 new jobs, would increase investment in Michigan’s economy in the form of sales at brick-and-mortar retail outlets by as much as $126 million per year and would save the state as much as $141.5 million in otherwise lost sales tax revenue from electronic remote sales in 2012 alone.

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See also:

Return of the Internet Sales Tax

Facts for Tax Day in Michigan

Tax Hikes: Bad Policy and Bad Timing

 

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