Michigan lawmakers target Internet sales taxes

Story originally appeared on the Detroit News.

Lansing — Michigan lawmakers are pushing measures aimed at going after the hundreds of millions of dollars in outstanding taxes each year from sales over the Internet, but they may have to wait for a federal measure to pass for the dollars to really start rolling into the state.

Under bipartisan bills being debated in the state House, Internet retailers like Amazon or eBay would have to charge sales tax if they have distribution centers or warehouses in Michigan or are affiliated with in-state businesses whose websites steer customers to the larger retailer.

Supporters — like the Michigan Retailers Association — say the bills taken up by the House Tax Policy committee will bring in revenue and help level the playing field for local businesses that must collect sales taxes.

But Michigan's Treasury Department, while supporting the bills, estimates that the proposed law won't generate much revenue — unless the federal government takes action.

The U.S. Senate is expected to vote on legislation this week that would give states power to compel online retailers to collect state and local taxes for purchases made over the Internet.

States now can only require stores to collect taxes if the store has a physical presence in the state. Consumers are supposed to declare all remote sales — which includes items bought over the phone and on the Internet — when they complete tax returns and pay a 6 percent use tax. But since that isn't enforced, it rarely happens.

Tom Scott, spokesman for the Michigan Retailers Association, said the competitive advantage for online retailers hurts brick-and-mortar business' cash registers every week.

"This is a huge challenge for them," he said.

The Treasury Department estimates that $460 million in taxes from remote sales is due in Michigan this fiscal year and most of that will go uncollected.

While Michigan's proposed law would allow some of that to be collected, it doesn't apply to all Internet retailers and they can get around the law by breaking ties with their in-state partners or moving their warehouses to other states, House Fiscal Agency said in its analysis.

Scott said that while the bill won't bring in all of the uncollected revenue, it would require some of the largest online retailers, like Amazon, to start charging sales tax, which could have a huge impact on the state's small businesses.

Even if federal legislation gets through the U.S. Senate this week, it likely has a long road ahead of it in the House.

"Everybody would like a federal solution, but we can't sit around and wait. We have to start doing something as a state," said Republican Rep. Eileen Kowall of White Lake, who is sponsoring one of the bills.

Other states like New York and Illinois have passed similar legislation. Kowall said that if more states follow, it will encourage Congress to finish the job.

Republican Gov. Rick Snyder has also called on Congress to take action. In a letter to the U.S. Senate last year, Snyder said "it's time for Congress to grant states the authority to enforce sales tax and use laws on all retailers in their state."

Others contend that the Michigan legislation could hurt the affiliate marketers, the small online-based businesses that have advertising agreements with larger Internet retailers, like Amazon.

Under the bills as introduced, online retailers would have to charge sales tax if they advertise on websites owned by these in-state businesses, said Rebecca Madigan, executive director of the Performance Marketing Association.

In states where similar legislation has passed, Internet retailers have cut advertising relationships with these businesses to avoid collecting the tax, which in-turn hurts those businesses, she said.

But James Hallan, president and CEO of the Michigan Retailers Association, said in his written testimony to the committee that "in other states where affiliates have been terminated by Internet-only retailers, like Amazon and Overstock, the companies have often reinstated those agreements."

The Michigan bill is likely to advance soon to the House floor.

Republican Rep. Jeff Farrington of Utica, chairman of the Tax Policy Committee, said it has broad support in the committee and members plan to vote on it in two weeks.

Majority Republicans in the House have suggested that they may want to see action on the issue this year. Their legislative agenda for this session includes closing the Internet tax loophole.

Scott said it is far from certain that the U.S. House will take up the measure once it passes the Senate and — if it does — it likely won't be for a while. In the meantime, Michigan must ease the burden on brick-and-mortar businesses, he said.

"It ends up costing them sales it ends up costing our state jobs and the problem keeps getting worse," Scott said, "which is why we are going to get action, it's just a matter of how soon."