by Joe Sullivan
Gov. Phil Bredesen's budget-cutting cleaver keeps slicing deeper and deeper with what promises to be draconian consequences for state services in general and higher education in particular. Yet given Bredesen's campaign commitment not to raise taxes during his first term, along with all of the Murphy's Law manifestations that have beset the state in recent months, the Legislature's only apparent recourse is to ratify deep spending cuts.
There is, however, one step the Legislature can take that holds promise of yielding big revenue increases in future years without raising taxes. That step is to get the state into position to start collecting sales taxes on e-commerce, catalog, and other so-called remote sales that presently escape taxation. While the positioning process isn't likely to come to fruition within the fiscal year ahead, revenue gains in subsequent years could outstrip the $780 million deficit the state is now facing.
UT's Center for Business and Economic Research projects that by 2006, Tennessee will be losing more than $1.2 billion in sales taxes on transactions that take place outside its borders. A 1992 U.S. Supreme Court decision held that sellers are not subject to taxation unless they have a physical presence in a state. But that decision also made it clear that Congress has the authority to extend the state's sales tax reach to cover them.
In Washington, legislation that provides a path for doing so has bipartisan sponsorship in both the House and Senate. But the path starts with adoption by the state of what's termed a "Streamlined Sales and Use Tax System." Uniformity is the word that recurs throughout the lengthy definition of such a system. A uniform sales tax rate within each state, uniform definitions of various categories of goods, and uniform collection procedures are among the prerequisites that states would have to satisfy in order to clear the way for imposing sales taxes on e-commerce and other remote transactions.
Delegates from 35 states, including Tennessee, took a first step down this path last November with the adoption of a 68-page "streamlined" agreement under the auspices of the National Conference of State Legislators. It now falls to each of their legislatures to conform their sales tax laws to the terms of the agreement, and that will be no easy task.
Sen. Bill Clabough of Maryville and Rep. Tommy Head of Clarksville are sponsoring a bill to do so, but Clabough acknowledges that, "the guts of it are still to be worked out." The state Department of Revenue is addressing them, but Revenue Commissioner Loren Chumley is cautious about the prospects. Her prime concerns: the need to get rid of multiple rates and non-conforming definitions—each of which has its own constituency.
As one example, Chumley cites the state's reduced, 4 1/2 percent sales tax rate on aviation fuel, an accommodation made primarily to secure Federal Express' hub in Memphis. Illustrative of a host of incongruities on a smaller scale, she points to the sales tax on charges for grooming and bathing animals which presently applies to only 15 percent of the charge. "We will either have to go to 100 percent or else exempt them altogether," Chumley says.
Another sticky issue is the $1,600 per item cap on which local option sales taxes are imposed. The multi-state agreement allows each locality to impose a uniform rate of its own atop a uniform state rate. And it also permits exceptions from the uniformity requirement for food, drugs, motor vehicles, aircraft, watercraft, and manufactured homes. But the $1,600 cap would leave big ticket items such as jewelry and furs subject to an impermissible rate differential.
Even if Tennessee conforms to the multi-state agreement, there's no guarantee that the ability to start taxing remote sales will follow. Under the congressional bill around which the states have rallied in Washington, at least 20 states would have to conform before those states (and those states only) could start collecting. Even then it would take further triggering action on Congress' part—action that the likes of Amazon, eBay, L.L. Bean, and Orvis might be able to block.
Just getting action in 20 states this year "would be very ambitious" in the view of the NCSL's point person on the legislation, Neil Osten. But he stresses that, "there's movement in about 30 states" and professes optimism that the goal will be achieved even though "it may take two to three years to become effective."
One reason for optimism on the congressional front is that the states are by no means alone in pressing to make remote transactions subject to sales tax. Also behind the effort is an e-fairness coalition whose ranks encompass just about every trade association with a stake in what the coalition terms "brick-and-mortar" commerce. The list includes the International Council of Shopping Centers, the National Association of Realtors, the National Association of Real Estate Investment Trusts, and the American Booksellers Association. Big box retailers such as Home Depot, Lowe's, Target, and Wal-Mart are also much involved.
The coalition's watchword is "a level playing field for the new economy," and its website asserts that, "The absence of sales tax collection on internet sales risks eroding the sales tax base of the states and providing internet retailers with unfair tax advantages."
Enacting legislation to conform Tennessee's sales tax to the multi-state standard is bound to be contentious. But as painful as the process may become, failure to enable the state to capture $1.2 billion in revenue that's eluding us is going to hurt much worse.
February 27, 2003 * Vol. 13, No. 9
© 2003 Metro Pulse
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