Minnesota is facing a $4.8 billion dollar deficit in 2009 according to a recent MPR article released on January 5th. This is a huge number, but by looking at just Minnesota, we are missing the bigger picture. Indeed, in an article on the National Council of State Legislatures website, the fifty states are expected to have a combined budget gap of $97 billion in the next 18-24 months.
Starting with Governor Schwarzenegger in California, leaders of several states are already getting in line behind the financial firms and automakers to request bailout-style relief from their ballooning budget deficits. Why do the states need help? Many states are constitutionally required to balance their budgets and unlike the federal government, states cannot print more money. The options that are left to states are raising taxes or dramatically cutting spending, both terrible ideas in a deep and potentially long-lasting recession. Unfortunately for the states, the U.S. congress has a trillion dollar a year deficit issue of its own and it is doubtful that they can afford to give money to the states.
There is no “silver bullet” solution to economic problems this complex. However, there is one thing that Congress can do immediately to help the states begin to get their financial houses in order and it doesn’t involve spending a dime of federal money. Congress could pass a bill requiring internet companies to collect state and local sales taxes. That would force Amazon.com to collect Minnesota state sales tax the same way that Borders.com and Target.com must, since Borders and Target have physical stores in Minnesota.
Why don’t internet-only companies have to collect sales tax? A 1992 Supreme Court decision stated that companies that do not have a physical presence in a state would suffer an undue hardship to collect tax for all of the states in which they do business. Case closed right? Wrong! The decision also said that Congress has the authority to change that decision through legislation.
Aren’t you suggesting a tax increase (which you said was bad in a recession)? This proposed legislation is not a tax increase. It will come as a surprise to many people, but even though Amazon.com is not required to collect the tax, by Minnesota law you are supposed to be paying the tax yourself. This proposal is really just closing a loophole in the existing tax laws.
Are the internet-only companies really helped by this? Even in a Christmas season where there were decreases in retail spending, Amazon set a record for best single-day sales ever on December 15th, when it shipped over 6 million items on a single day. An Amazon spokesperson said this was there best Christmas ever. Just on sales tax alone, the internet-only companies are at a 6.5% advantage over retail outlets with a presence in Minnesota.
What is the cost of leaving things just as they are? Today we may be buying books or iPods online, but tomorrow we may be buying cars online. This is a pretty scary thought for our state future if you do the math. If a $25000 car is purchased online and the dealer does not collect tax, that is $1625 that the state did not receive. Since almost half of that money goes for local schools, schools just took a $650 hit from that one purchase. If you think buying big ticket items online is far fetched then you have not been out to Ebay lately searching for a car on Ebay motors.
Is there another way without involving the federal government? Maybe. In 2008, New York state tried a different option. The state passed legislation saying that a retailer had a presence (called a nexus) if they have sales affiliates generated over $10,000 in sales within the state. Based on statistics from the website newrules.org, New York anticipated this change alone would mean an additional $73 million in revenue in the 2009-2010 fiscal year. Minnesota should look at this approach as a last resort. First, a law this new is sure to received court challenges to ensure its constitutionality. Secondly, this approach still causes companies to be treated in a different fashion based on their size. When does the company start to collect the tax, in January or when they reach $10,000 in affiliate sales for the year?
How often have shoppers gone to Best Buy or the local mall to look at an item and then gone home to check the price for the same item on Amazon? Not only is this a sales tax loss for the state, but if this causes Best Buy to close some stores, then local property taxes and income tax collections suffer as well. This would lead to a vicious cycle where a great tax burden would fall on the remaining Minnesota employees and companies. If we want strong local retailers and a more stable sales tax revenue stream for Minnesota, then we need to get our financial house in order and urge our congressional representatives to make a vote for tax fairness and require internet retailers to collect Minnesota taxes on Minnesota sales.
Author’s note: If you are interested in learning more, I suggest going to the website e-fairness.org. Also, the Start Tribune came out with an article since I wrote my original draft and it was well done. Click here to see the article.
Minnesota is facing a $4.8 billion dollar deficit in 2009 according to a recent MPR article released on January 5th. This is a huge number, but by looking at just Minnesota, we are missing the bigger picture. Indeed, in an article on the National Council of State Legislatures website, the fifty states are expected to have a combined budget gap of $97 billion in the next 18-24 months.
