January 25, 2010

State could lose revenues in multi-state tax compact

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By Andy Rosen
Andy@MarylandReporter.com

Maryland would forgo millions of dollars in tax revenue if it joined a 23-state compact aimed at collecting sales tax from “remote sellers” like Amazon.com, according to a report issued to lawmakers.

The report from Comptroller Peter Franchot’s office said the state would be short by up to $66.3 million next year if it put in place measures that would make it comply with a “streamlined sales tax” standard.

The report to the House Ways and Means Committee says changes to local taxes for fuels, utilities and space rentals could cost Maryland’s jurisdictions nearly $337 million next year.

Maryland has been waiting on federal action before it changes the way it collects the sales tax, largely because states can’t uniformly charge tax on Internet and mail-order transactions without a broad legal authorization by Congress.

Without the money that would come in through taxes on remote retailers, though, the prospect of changing the tax appears dim for Maryland even among staunch advocates. But lawmakers who support the change say they are hopeful that Maryland could start moving toward membership in the pact.

“I think it would bring in an awful lot of money,” said Ways and Means Committee Chair Sheila Hixson, D-Montgomery. “It’s the internet taxation and I know that’s not always pleasant for people to see but it’s bricks and mortars versus the air.

Hixson was a sponsor last year of a bill that would have required the state to join the compact if Congress enacted the rule change, but it died in committee.

Some revenue comes in through companies that voluntarily decide to pay sales tax on remote transactions, according to the Streamlined Sales Tax Governing Board. So far, the organization estimates that states have brought in nearly $500 million through such agreements since 2000. Most of that money comes from settlements involving other tax debt that organizations owe states.

Still, Scott Peterson, executive director of the governing board, said he doesn’t expect Maryland to bring in enough revenue to make it worthwhile.

“No amount of good public policy can be used to sell losing money,” he said.

Peterson said Maryland could bring in $375 million in 2012 if it were collecting on all of the sales that are made in the state through online retail and other remote sales. However, Maryland’s conversion would not allow it to collect from sellers such as Amazon.com, because federal law still bars it.

Sen. Nancy King, D-Montgomery, was the sponsor of a similar bill to Hixson’s last year in the Senate. She thinks there is a good chance that the state will enact at least part of the streamlined sales tax requirements regardless of action by the federal government.

“I think it makes a statement that Maryland is ready to move on this issue,” King said. “This is not a new issue. It’s been talked about for years.”

One of the factors that has made Maryland such a tough sell is the state’s arcane way of rounding tax liability. In calculating Maryland sales tax, payers must round up to the next cent whenever the third decimal place is greater than four. That’s different from most states, which round up if the first decimal place is five or higher and round down if it is four or lower.

A change to the rounding rule, which would be a part of the sales tax shift, would cost the state $16.8 million, compared to $15.6 million the state expects in possible benefits from the shift.

Hixson said she thought Maryland could make some changes without changing the rounding rule, which would allow the state partial membership in the tax group.

Ron Wineholt, vice president of government affairs for the Maryland Chamber of Commerce, said it would be a positive step to put pressure on Congress if Maryland adopted the streamlined rules. The chamber pushed for adoption of the tax change last year.

“It would create a more favorable climate for businesses to compete and collect a sales tax in all jurisdictions,” he said.