Taxing online sales likely brings more hassle than revenues, Franchot study says

By Megan Poinski box. Photo by soumit. box. Photo by soumit.

While passing state legislation taxing online merchandise has the possibility of netting Maryland up to $40 million in additional revenues, Comptroller Peter Franchot said in a study released Friday that it would more likely raise much less and embroil the state in a long legal battle.

“Remote sellers have shown a determination to minimize their tax-collection obligations in response to actions of other states,” Franchot wrote in a letter to Gov. Martin O’Malley. “In the absence of federal legislation that would authorize states to require online sellers to collect taxes, it is obvious they will continue to do so, and the amount of revenue that would be accessible to the State is modest, if not minimal.”

O’Malley asked Franchot’s office in May to study how much the state could gain if it taxed online sales. The state currently collects sales tax from online sales made from companies with a physical presence in the state, such as Target or Sears. It cannot collect sales tax from online-only companies that are not based in Maryland, like or

Maryland residents are supposed to report and pay a “use” tax on out-of-state sales, but most do not.

Despite the fact that taxing sales from online retailers is more fair, Franchot said the lack of federal laws on the issue and the deep pockets of e-commerce giants could cause the states several problems.

Expanding sales tax to online sales has been a popular topic throughout the economic slowdown, with a presentation about it made in July by legislative analysts.

About $198 million in taxes lost

According to the study done under the direction of David Roose from the Bureau of Revenue Estimates, Maryland lost about $198 million in sales taxes from orders placed with out-of-state companies in 2010. Online purchases represent about $97 million of that, the study says. And with the growth of the Internet and expansion of broadband access, the study states that the amount of lost taxes will only increase.

Maryland also cannot tax digital downloads – like songs, software or electronic books purchased online. If they were taxed, the study estimates revenues could grow by 5% annually.

Because there is no federal law governing taxing online purchases, several states have tried to enact their own laws and found limited success.
·      New York passed a law taxing affiliates of large companies, leading to a lawsuit still battling in court.
·      California passed a law doing the same thing, and in response e-commerce giant ended partnerships with thousands of California-based affiliates. Both sides are currently at a compromise: California will start collecting tax in September 2012, unless the federal government takes action first.
·      Colorado enacted a law that required all vendors who do not pay sales tax and have more than $100,000 in sales in the state report all customers and purchases to the state for tax bills. Colorado anticipates collecting $12.5 million from this law in the current fiscal year, the report states.

Federal proposals would require Maryland to change

Two pieces of federal legislation are pending that would give all states the authority to tax online merchants. However, the study states, one of them requires a uniform sales tax rate – meaning the new 9% alcohol tax would likely have to be repealed.

The other would mandate the adoption of the streamlined sales and use tax Proposed by the National Governors Association and the National Conference of State Legislatures, this law would simplify how sales taxes are collected across states. If this law passed, Maryland’s tax law would have to be significantly changed to conform to it.

In 2009 and 2010, bills that would require online merchants to collect sales taxes were proposed in the General Assembly. However, the study notes, the court cases involving New York law could render the proposals in those bills moot. The study says nobody has introduced a bill like Colorado’s, requiring online merchants to report information about customers to the state for tax purposes.

The study cautions that the current legal minefield and federal uncertainty could cause nothing but problems if Maryland decided to try to go after the money.

“While over $240 million of currently due use taxes go uncollected each year, the prospects of Maryland receiving even a small percentage of that revenue are remote unless and until Congress decides to act,” the study states.

About The Author

Len Lazarick

Len Lazarick was the founding editor and publisher of and is currently the president of its nonprofit corporation and chairman of its board He was formerly the State House bureau chief of the daily Baltimore Examiner from its start in April 2006 to its demise in February 2009. He was a copy editor on the national desk of the Washington Post for eight years before that, and has spent decades covering Maryland politics and government.

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