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Analysis: Missouri Loses Out When Consumers Buy Online

March 19, 2003
By: Jason McLure
State Capital Bureau
Links: SB631

JEFFERSON CITY - If you've bought Pokemon cards, Michael Jackson memorabilia, or the latest Harry Potter book online, chances are you contributed to a phenomenon that's draining state coffers across the nation.

Most internet retailers do not charge state sales taxes, and that is costing state governments billions of dollars, according to a report from Professors Donald Bruce and William Fox of the University of Tennessee.

The report states that Missouri alone now misses out on nearly a half billion dollars a year in tax revenues due to internet sales. The figure is set to grow as more and more commerce shifts to the Web.

That half billion dollars would wipe out the ten percent cuts to Missouri's schools and colleges approved by Missouri's House this week, with money left over to build new prisons for Missouri's rapidly expanding prisoner population or to shore up the state's Medicaid program.

Revenue Department Director Carol Fischer said revenues from taxing internet sales would be welcome during the state's current fiscal crisis.

"If we had that half a billion dollars now, balancing [next year's] budget certainly would be a lot easier," Fischer said.

But taxing internet sales is not as simple as it sounds.

Part of the problem in taxing online transactions is the various ways sales taxes are collected. For example, if you sold a Michael Jackson t-shirt to a buyer in another state, the buyer could technically end up paying sales taxes twice -- once in Missouri and once in the buyer's state. That's because Missouri taxes sales based on the location of the seller, while most other states tax based on the buyer's location.

Taxing internet sales is complicated further by the myriad of city and county sales taxes. Thousands of local governments have individual sales taxes, and many differ on what goods and services are taxed.

In an effort to tap into the billions in potential online tax revenues, Missouri has joined a coalition of 34 other states seeking to reform the way sales taxes are collected.

As part of that effort, Sen. Joan Bray, D-St. Louis County, has introduced a bill that would harmonize Missouri's state and local tax laws with those in other states. Among other things, Bray's bill would change Missouri law so that sales tax would be collected based on the state where the buyer accepts delivery of the product.

Thus if you purchased a compact disc from Seattle, Wash.-based Amazon.com, Amazon would tax you on your purchase and send the money on to the Revenue Department in Jefferson City. However, Bray's bill would only ask for Amazon's voluntary compliance in collecting the tax. While the online divisions of Wal-Mart and Target have begun to voluntarily collect sales taxes, many retailers, including Amazon, do not.

That is because the U.S. Constitution states that regulation of interstate commerce is the job of the federal government, not the states.

So far the U.S. Congress has not laid the legal groundwork that would mandate e-businesses pay sales tax, but if Missouri and 34 other cash-hungry state governments can harmonize their tax laws, they may be able to convince Congress to take their side.

For Missouri consumers, this would mean that the new Harry Potter from Amazon could end up costing a few dollars more. But it would also help halt the erosion of one of state government's main sources of revenue, the sales tax base.

In spite of the higher costs to consumers, Bray said her bill shouldn't be viewed as an attempt to raise taxes.

"It just seems such an obvious way to collect what's [already] on the books," she said. "This isn't a tax increase for anybody. It's just what's on the books."

No doubt Missouri's brick and mortar retailers --who have been paying that sales tax all along-- will agree.