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Washington Accepts Justice Kennedy’s Invitation: On-line sales taxes

May 23, 2015

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The most effective state tax system would be low rates, broadly applied with few carve outs and exemptions.  As Finance chair that continues to be the policy framework through which I evaluate legislation, issues and ideas. Unfortunately, as we all know, Washington has the categorical opposite on every front.

With a reliance on sales tax and a gross business tax created 83 years ago as a temporary measure, we rely upon the whims of consumer spending to fund public education and other vital services.  Add to the mix 650 tax preferences for virtually every major industry and you are left with a economically inefficient patchwork of unfairness.

While big picture tax reform is elusive, we can improve the clunky system we have today, broaden the base and make it more fair and efficient.

A prime example is on line sales taxes.

Every year we lose hundreds of millions in uncollected revenue on consumer purchases that remain untaxed due to the unwillingness of Congress to pass the Marketplace Fairness Act, a bill that would update our nation’s tax code to essentially include–get ready for it–the Internet. It says that ‘a sales is a sale’ regardless of where it’s purchased or the vendor selling it.

Chances are a large percentage of your shopping these days is done online, at home or the office, on your computer, tablet or phone.

For many of those transactions you pay a sales tax at the same rate you would at any brick-and-mortar store in Walla Walla or Bellingham or Seattle. But because of a U.S. Supreme Court ruling from 1992 — when the Internet was hardly a whisper to most people — transactions with some online retail giants go untaxed.

That hurts Washington to the tune of hundreds of millions in lost revenue, and it hurts local companies in the state that do pay their taxes.  The politics are ugly as companies jockey and lobby to protect their interests.

The responsible answer is to level the playing field and make sales taxes apply to all equally.

And, whether you like or hate our reliance on the sales tax, we can all agree that if we have to do it we should at least do it right.  This is one of the reasons I serve on the Streamlined Sales Tax Governing Board, a national group of states and industries working together to coordinate complex sales tax policy.

And that’s why this year, I’ve introduced the Washington State Marketplace Fairness Act to establish nexus with online retailers, level the playing field for traditional brick-and-mortar businesses and collect critical revenue from existing sales.

Few realize that for every item you buy online that you don’t pay sales tax on, you technically are responsible for paying an equivalent use tax to the state of Washington. But every year, only 1 percent of residents who owe use taxes put it in an envelope and send it to the Department of Revenue for obvious reasons.

We could simplify the system and make it more fair simply by collecting our regular sales tax for all online sales.  A sale is a sale.

So what’s the problem?

In 1992, the U.S. Supreme Court ruled in Quill Corp. v. North Dakota that a state may collect sales and use taxes from a retailer only if the retailer has a physical presence such as a formal office or distributor in the state. This decision set a clunky precedent that online retailers could sell to customers in a state that collects sales taxes without charging sales tax.

But this year in an even rarer precedent, Justice Anthony Kennedy — who concurred with the 1992 decision — invited the states to petition the Supreme Court to overrule Quill and allow states to collect sales and use taxes from online retailers regardless of whether they have a building, office, distributor or physical presence in that individual state. To do that, we have to take a stand as a sales tax state and push the boundaries of the Court’s pre-Internet decision, and to do that we have to expand how we define nexus in state law.

Under our proposal, nexus would allow our state to collect sales and use taxes from online sales based on a retailer’s economic connection to Washington state, not just geographical offices. It would say, in effect, that a sale is a sale.  This proposal establishes new standards for nexus for out-of-state retail businesses by using a five-tiered approach which considers the seller, in-state affiliates, a retailers’ physical presence, and payment methods. For instance, PayPal has offices in Washington, so if PayPal is used for payment the seller will need to collect and send in sales tax. We can make it easy to administer for new sellers because we already to it today.

The Washington State Marketplace Fairness Act is about more than revenue — it’s about establishing fairness for Washington businesses. If you were given a choice at checkout whether or not to pay sales tax, you’d likely choose the latter. But when a competitor can offer the same product without charging sales tax, that puts our local neighborhood businesses at a competitive disadvantage. In his unprecedented invitation to the states, Justice Kennedy even acknowledged the “extreme harm and unfairness” the Quill decision has caused on states like Washington.

How will this affect you as a consumer? Probably not that much. Many online shoppers don’t notice a difference between buying something at Amazon and buying something on Etsy — but you’ve already paid sales taxes on every item you’ve ever purchased from Amazon. The Washington State Marketplace Fairness Act would simply extend our existing system to sales to handful of other retail websites like Etsy, Overstock and eBay.

By passing the Washington State Marketplace Fairness Act, we can conservatively collect more than $240 million by the end of 2019 from sales into Washington by out-of-state businesses. That would be a large piece to the puzzle of fully funding basic education, mental health care and other critical investments. In addition, local governments would collect substantial new revenue from sales and use taxes.

I have the great honor of representing the legislative district that is home to Amazon and, as a technology entrepreneur in the wireless and software industries, I want to ensure that our state’s policies are aggressively technology neutral.  Our polices must be fair so that all on line sellers play by the same rules.

Amazon as a global company is extremely nervous that individual states will begin implementing their own sales tax collection policies, but in an era when Congress is both incompetent and irresponsible, states must lead.  Nothing can hide the fact that physical presence as a standard to collect taxes is outdated, inefficient and unfair.  As a leading sales tax state, our responsibility is to act decisively on this important national issue.

My plan is not a broad-based tax increase, it’s a smart change in our state’s tax collection approach that levels the playing field so everyone plays by the same rules regardless of politics.

In 1992 most folks didn’t yet know what the Internet was. Some universities, companies and agencies had email and tinkered with the coming wave.  It’s past time we updated our tax policies for the 21st Century.

We’ve been invited to challenge the Court’s old ruling and establish marketplace fairness for states like Washington that rely on the sales tax to survive, and we plan on accepting that gracious invitation.

Your partner in service,

Reuven.

 

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