Cooper: Level the sales tax playing field

Cooper: Level the sales tax playing field

June 28th, 2016 by Clint Cooper in Opinion Free Press

Gov. Bill Haslam (Erik Schelzig/Associated Press)

Photo by Associated Press /Times Free Press.

Tennessee is a sales tax-driven state and would like to remain one. To help do so, to keep from ever considering other legal forms of taxes, it wants to collect sales tax from out-of-state online companies which do more than $500,000 in sales in the state but are currently paying no sales tax.

We'd all like to pretend these are still the early wild, wild west days of the internet, when sales tax was not collected on almost anything bought online, but they're not.

Supreme Court rulings mandate that companies with an in-state physical presence must collect sales tax from customers. Anything beyond that, the justices have said, is too burdensome.

But Justice Anthony Kennedy, in a 2015 decision, wrote that "dramatic technological and social changes" have changed the landscape such that states may want to find the right case to try the argument again.

It shouldn't be too difficult for today's software, after all, to handle multi-jurisdictional tax rates.

The Haslam administration's Department of Revenue will hold a rulemaking hearing on the idea in August. The proposal, sure to be challenged in court if attempted, would require out-of-state companies to start paying sales to Tennessee on July 1, 2017.

Several states, such as Alabama and South Dakota, have sought to take similar measures.

What the Tennessee proposal does is ask retailers with an already significant online presence in the state to pay in the same way as brick-and-mortar retailers do. Currently, the state's top sales tax rate gives online retailers an almost 10 percent advantage over those who have a physical presence.

And by setting a $500,000 threshold, it does not hit small retailers who do business over the internet or innovative start-ups that one day may reach the half million mark but could use the early freedom of not paying while getting off the ground.

Importantly, Gov. Bill Haslam also would look at reducing the tax on food if the out-of-state internet sales tax collection — estimated to be $300 million to $450 million annually — is approved.

Predictably, industry groups for brick-and-mortar retailers and online retailers have come down on opposite sides of the issue.

Even if the state Revenue Department decides to go ahead with the idea, though, the state is unlikely to see any new revenue come next July. In between are lawsuits, congressional action, Supreme Court decisions or some kind of combination of the three.

But we believe the proposal, should it go forward, is fair because it helps level the tax playing field with physical retailers, doesn't hit all online retailers and could increase — depending on the food tax reduction — the state's coffers to pay for the likes of public education, health care and roads.

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