As Joan reported in September, a number of Michigan officials are working to change state sales tax law. In that September 12 article, Joan warned about legislation with the word “Fairness” in the title because she wasn’t the least bit wooed by the transparently emotional label attached to the “Main Street Fairness” package. She saw another layer of laws aimed at grabbing for tax revenues. But, yes, there are more problems than “just” elected officials’ and bureaucrats’ perpetually insatiable appetites for tax revenues. Since it will take a series of articles to explain all that I’ve uncovered – it’s beyond one package of legislative bills and not limited to Michigan – I’ll start by giving an overall assessment of the issues and briefly go over basics about the Michigan legislation.
Advocates argue that Michigan’s sales and use tax code must be changed in order to “level the playing field” for the sort of “Main Street”, “Mom and Pop” stores hurt by the “competitive advantage” internet retailers get in not collecting and paying sales tax.
It turns out that some of the most recognizable names in big box chain retailing – not Mom & Pop – along with a taxpayer-funded lobbying organization most Americans know nothing about – are the driving forces behind legislation introduced in the Michigan Legislature, in many other states, and in the U.S. Congress.
That taxpayer-funded lobbying organization seems to have provided the legislative fodder 1 and state-level connections to trade and retail lobbying organizations and politicians; the big box retailers have provided the large campaign contributions to federal and state politicians, created or taken over an organization purportedly representing “Main Street”, and provided a seemingly endless P.R. and marketing budget.
Big box retailers are motivated primarily by growing fears. They’re looking for some advantage over competitors in an area where they’re all flailing: online retail sales. The chief concern is Amazon.com, which dominates through its efficient presentation and delivery of products with very attractive pricing. There are fears of growing competition from other online retailers, both large and small, who, along with Amazon, are now chipping away at the big retailers’ in-store sales, too. “Main Street Fairness” then, is really just protectionist legislation for big box retailers who apparently fear some or all of their business models may become irrelevant.
Politicians don’t need much prodding to support contributors’ desired legislation and an internet sales tax wrapped with a “Main Street” message – promises of more tax revenues isn’t a hard sell. Drivers of the policy, the retailers, and the lobbyists know just what buttons to push: huge projections of potential sales tax revenues and warm, fuzzy talking points. For politicians, it’s a win-win: more revenues are supposed to flow in and their big contributors will be happy. Subject, inquiries, and minds…closed.
Ironically, while advocates tout benefits of “leveling the playing field” for LOCAL businesses and out of state retailers are cast as villains, legislators and local lobbying groups are embracing legislation, resources, and talking points from OUTSIDE influences.
In the end, it’s the very Mom and Pop, Main Street folks with small and medium sized businesses, both with real brick and mortar stores and virtual ones, average Joe shoppers, and low to middle income taxpayers who stand to be harmed by so-called “Main Street Fairness” legislation.
Increasing costs for everyone isn’t the way to “level the playing field”, reducing costs is.
Big box retailers are advocating for increased tax collections and “sameness” among states. Political advocacy monies could be better spent working to reduce government regulation wherever they do business. Instead, they are greasing wheels by making large contributions to politicians to get laws passed to raise costs they can more readily absorb that their smaller competitors can’t. While providing funding for deceptive marketing and P.R., their advocacy means higher prices and fewer choices for customers and, the evidence actually shows, overall less tax revenue to state governments.
Over the past dozen years, a number of politicians in many states and at the federal level have been engaged in an effort to provide desired protection to these retailers – their contributors – in collusion with an organization taxpayers unwittingly fund. The evidence about the “Main Street Fairness” effort clearly shows that supportive elected officials are either corrupt or ignorant…or both.
The real bottom line is that not only is “Main Street Fairness” legislation bad public policy, it should be scrapped on principle, because it’s provably tainted by cronyism and a lack of due diligence by our elected officials.
On September 12, Joan reported that the House Tax Policy Committee voted to approve the “Main Street Fairness package”, H.B. 4202 and H.B. 4203. Both bills have been idling on the House agenda since the beginning of September and it’s difficult to say if or when they will hit the floor.
The two-bill package, in general terms, aims to further the objective of collecting taxes from “all persons ‘engaged in the business of making sales at retail” within Michigan, whether they have a physical presence or employees within the state 2, or not.
A summary of the package:
- HB 4202 would add language to existing state tax law which defines new “presumptions” about remote sellers of goods and their business relationships with companies or individuals within Michigan: 3.
- Such relationships are expanded to include affiliations or referral agreements a remote seller of goods may have with anyone in Michigan, including advertising (links) on a website.
Would presume remote sellers “engaged in business of making sales at retail” to be those with:
- Referral agreements resulting in gross receipts of more than $10,000 or more per year of sales to purchasers in the state.
- Total cumulative gross sales receipts to purchasers in the state exceeding $50,000 per year (direct sales of merchandise to customers in Michigan);
- HB 4203 would require all sellers of goods as defined in H.B. 4202 to register with the state’s Department of Treasury; to pay 6% sales tax* for each sale and remit it to the MI Dept. of Treasury.
*Obviously, when businesses are required to pay sales tax, they collect it directly from customers.
As noted, the “Main Street Fairness” package adds to existing tax collection law, including one provision, passed in 1999, aimed at collecting taxes from internet sales.
Most states (including Michigan) had provisions on their books which predate the 1999 law, which attempt to collect a tax on goods brought into the state for which purchasers didn’t pay state sales tax. This tax is called a use tax.
A very basic explanation of use and sales tax (although there’s no universal agreement)…
Use tax: Tax on the use, storage or consumption of tangible personal property.
Sales tax: Tax on sales of tangible personal property for the privilege of doing business in a state.
Individuals and Businesses – Use tax on tangible personal property is similar to sales tax, but applies to purchases when Michigan sales tax is not charged. Use tax of 6 percent must be paid on the total price (including shipping and handling charges) of all taxable items brought into Michigan or purchases by mail from out-of-state retailers. It applies to purchases made in foreign countries as well as other states.”
Michigan’s Dept. of Treasury provides a use tax form (48f) for individuals and businesses to report and send with payment any time throughout the year OR use tax can be reported on Line 23 of the MI-1040 form, which states, “USE TAX. Use tax due on Internet, mail order or other out-of-state purchases…”.
So, the State of Michigan already:
- Requires tax payments by residents for any/all “taxable” items and purchases, including for shipping and handling charges, if they were previously untaxed or came from outside of the state.
- Provides specialized forms and/or a line on the income tax form for reporting and collection.
According to the first House Fiscal Agency analysis of H.B. 4202 and H.B. 4203 (dated 4/30/13), 107,000 taxpayers reported and paid $5.68 million in use tax to the Michigan Treasury Department in 2011 4.
Obviously, the number of filers seems very low considering the state’s population, but those numbers aren’t surprising. Use tax laws, which rely on compliance by individual taxpayers, have always been notoriously difficult to enforce for a variety of reasons.
Past attempts by two states (Colorado, North Carolina) to increase compliance by individuals were stricken down in federal district courts 5 and specifically deemed unconstitutional because they required reporting of individual citizen’s purchases to those states’ governments.
But, states’ officials – along with certain businesses and lobbying groups – haven’t sat idly by regarding efforts to tax internet sales since before internet use by Americans became widespread. As noted earlier, tax laws were changed in 1999 in Michigan, when some estimates show only 24 out of every 100 people in the developing world were using the internet 6.
Remember that 1999 tax law in Michigan was aimed at individuals and collection of use tax, not retailers and sales tax. Michigan and other states didn’t target retailers and sales tax collection because two Supreme Court rulings, one in 1967, and the other in 1992, struck down state laws which attempted to collect taxes from businesses unless they have some presence within a state, such as physical location (store, warehouse) or sales representatives 7.
Such laws were stricken primarily because they are state government attempts to regulate interstate commerce, which is an enumerated power of Congress. There is firm constitutional foundation here, as illustrated in the 1992 ruling (Quill Corp. v. Heitkamp):
Under the Articles of Confederation, State taxes and duties hindered and suppressed interstate commerce; the Framers intended the Commerce Clause as a cure for these structural ills. See generally The Federalist Nos. 7, 11 (A. Hamilton).
Regardless of flaws or frustrations provoked by the 1992 opinion (see footnote 8), stopping state officials’ attempts to hinder or discriminate against competing (interstate) commerce is an originalist interpretation of the constitution.
But, despite Supreme Court rulings or other hindrances, some state officials and lobbyists in Michigan and many other states didn’t stop with use tax laws in the late 90′s, in fact, a coordinated project began immediately thereafter, in 2000. One reason why is simple – some elected officials have convinced themselves and attempt to convince others that there is a pot of tax revenue gold at the end of the e-commerce rainbow.
For instance, in its analyses of H.B. 4202 and H.B. 4203, the House Fiscal Agency included estimates of potential tax revenue from internet sales, repeating numbers used by proponents of such laws.
However, such projections are necessarily controversial because the data is questionable. Internet sales tax revenue projections aren’t reliable for a simple reason: it’s nearly impossible to get complete, accurate data regarding sales, particularly the details about the location of buyers, by state.
Such information is difficult to obtain for practical and understandable reasons. Some information is proprietary – detailed disclosure comes with potential for exploitation by competitors. In addition, businesses have natural incentives to avoid such disclosure – customers are less likely to do business with them and companies face obvious legal liability (remember the North Carolina and Colorado laws were stricken).
The House Fiscal Analyses of H.B. 4202 and H.B. 4203 (April and September) and two Congressional Research Service reports (April and May 2013) detail the history of internet retail sales and related tax policy efforts since 2000. A read of the four documents makes quite clear that enough people of influence in certain businesses, lobbying organizations, and state governments have had an almost singular focus on the subject.
Such focus is remarkable considering the turning over of legislative seats due to term limits, a couple of major political shift, and the passage of a dozen years. People of influence within state governments, then, necessarily means consistent pursuit of policy has been driven by bureaucrats and outside influences, who aren’t accountable to the people.
In the next article, I will begin to detail the history of the movement which spawned Michigan’s “Main Street Fairness” legislation – the Streamlined Sales and Use Tax Agreement (SSUTA) – and examine its impact 9
You can read Part 2 by clicking HERE.
Last updated: October 30, 2013
IMAGE COPYRIGHT & CREDIT NOTICE
Quaint little “Main Street” shops photo is actually a picture of shops on M Street in Georgetown. Released into public domain by “Bachrach44″.
“Fairness Legislation Delivery Truck” image by Shelli Dawdy. Permission to use, granted BUT only if attribution attached. Image created from photo of J.B. Hunt semi truck on Ohio Turnpike, street sign generator and original graphics.
Internet usage graph: International Telecommunication Union
“Tax revenue pot of gold” from Clker.com and edited
FOOTNOTES, REFERENCES & CITATIONS
- By “legislative fodder”, I mean the background information, legal language to structure legislative text, and likely, ‘cut and paste’ legislation to be introduced in state legislatures. ↩
- Note that the subject of whether or not and to what extent a business’ activities within a state subject them to particular laws, including taxation, is a complex issue. A read of the Supreme Court ruling in the 1992 case Quill Corp. v. Heitkamp, referred to in this article, amply demonstrates the complexity. I would describe the subject as an unnecessarily layered tangle caused by the expansion of government, specifically at the state and federal levels, and Supreme Court rulings regarding Congress’ “Commerce Clause” powers which perpetuate serious damage mostly begun in the 1930′s. ↩
- For additional details, see the House Fiscal Agency analyses of H.B. 4202 and H.B. 4203, dated April 30, 2013 and September 9, 2013 ↩
- The House Fiscal Agency analysis of H.B. 4202 and 4203 dated September 9, 2013 lists an amount of use taxes collected in 2013, but, I decided not to cite it as I’ve got a number of questions about it’s accuracy. ↩
- Both the North Carolina and Colorado laws included provisions requiring online retailers to turn state residents’ purchase records over to state governments. Both laws were stricken down in federal courts on the grounds they violated the customers’ First Amendment rights, but, litigation regarding the Colorado legislation is ongoing. North Carolina’s law wasn’t limited to attempts to increase individual tax payment compliance by individuals, so look for additional information in future articles. ↩
- As of the date this article was written, the best available statistics on internet usage in the United States weren’t available, ironically, due to the government shut down, so I’ve used the next best thing, which is the chart shown ↩
- The legal term used in debating whether or not an individual or business has adequate presence and activity in a state to be subject to particular laws, including taxation, is nexus, which literally means “link, connection”. ↩
- A read of Quill v. Heitkamp is a frustrating experience and not only for the reasons noted in footnote 1. In addition, it is revelatory on a number of subjects. Perhaps it is most revealing regarding the lack of rationale in the Court’s jurisprudence regarding the Article I, Section 8, Clause 3, a.k.a. “the Commerce Clause”.
A read of this case in particular also significantly undermines a consistent argument made in defense of damaging Supreme Court decisions, which is that precedent must followed. The history of decisions on Commerce power detailed in Quill seems meandering and incoherent to me. In short, the Court’s jurisprudence in this arena, over time, seems the opposite of consistent and predictable – it seems arbitrary. ↩
- The originally published version of this article stated that Part 2 would cover one of the outside influences on the policies since 2000 which created the SSUTA and led to the introduction of H.B. 4202 and H.B. 4203. A review of the research and series drafts dictated that changes to the series order be made. So, if you’re reading this footnote because you’re looking for evidence that you didn’t imagine what you’d read the first time through, rest assured, your recollection is correct! ↩