Maine losing millions without Net tax

AUGUSTA – A new study indicates Maine is losing more than $43 million in sales tax revenue this year because it does not tax sales made over the Internet. Nationally, state and local governments will lose $13.3 billion, the study says.

“This is a significant increase over the estimates from last spring,” said Tony Neves, executive director of Maine Revenue Services. “And we thought those estimates were significant.”

In 1998, the U.S. Supreme Court ruled the nation’s 7,600 separate tax jurisdictions could not impose burdensome taxes on Internet sales that already were illegal for other forms of interstate sales, such as out-of-state mail and phone order purchases. There are that many tax jurisdictions because many states allow county and municipal sales taxes.

The study, prepared by University of Tennessee researchers for the Institute for State Studies, indicates business-to-business transactions over the Internet have increased dramatically and consumer transactions have increased significantly. Researchers say the result is a 41 percent hike in estimated losses this year from a study released last April. The study was done by surveying thousands of companies and individuals around the country that buy items online. Those data were used to extrapolate revenue projections in all 50 states.

“We determined that, to make up for the revenue losses due to e-commerce, states and local governments would have to raise their sales tax rates between 0.83 and 1.73 percentage points by 2011,” said William Fox, co-author of the study and a professor at the University of Tennessee.

That translates to about a penny on the sales tax in Maine, Neves said.

Maine was projected to lose $40 million by 2003; the updated forecast is for a loss of $43.1 million this year, with a projected loss of $146.4 million in 2006 and $177.5 million in 2011.

In an effort to capture some of that tax revenue before it is lost, Maine has joined more than 30 other states in trying to draft model legislation to simplify definitions and create a more uniform method of assessing sales taxes on products sold online. Such standardization is needed to overcome the objections raised by the Supreme Court in the 1998 ruling.

“We will have legislation ready in January that will move Maine toward an agreement with other states,” Neves said. The states are having difficulty, however, in drafting the legislation because they all have very different definitions for items, including for something apparently as obvious as prepared food.

“And [the problems are] in other areas as well like, [are] shipping charges included in the price, and is the tax on the total paid including the shipping or not,” he said.

Sen. Ken Gagnon, D-Waterville, co-chairman of the Legislature’s Taxation Committee, said the states weren’t moving fast enough, however, and that Neves’ proposal wouldn’t allow the state to actually collect any money for a few years.

He has submitted a “concept” bill that will allow his committee to consider other ways to capture the lost revenue much sooner.

“I am not ready to say how to do that now,” he said. “But I would rather get back some of this revenue we are losing instead of looking at new taxes to balance the budget.”

A federal moratorium on Internet taxes runs out Oct. 21, but there are no measures now before Congress to specifically allow states to impose a sales tax on what is interstate commerce. Instead, a bill was introduced earlier this week extending the moratorium for another two years because of the current glut of emergency matters that need to be handled this fall.

“This is an emergency issue for the states,” Gagnon said. “If Congress does not allow some specific method, we may have to come up with our own and try it.”

The lead Republican on the Tax Committee, Rep. Eleanor Murphy, R-Berwick, agreed with Gagnon. She said state lawmakers are facing “a real mess” with state revenues below estimates and requests for more funding anticipated.

“I certainly hope Congress acts and allows the states to do this,” she said. “This is money we should be getting and we are not.

“Under current Maine law, the sales tax is really a sales and use tax. That means you owe the tax on that computer you bought from an Internet Web site. If that company has a place of business in Maine, it collected the tax when it sold you the computer. If it did not, you owe the tax anyway.”

“We collect somewhere around 3 [million] to 5 million [dollars] a year in sales taxes from use audits [of businesses],” Neves said. “Those are mostly from large transactions, it is just too expensive to audit for everything purchased and used in Maine.”

The state currently has a line on the personal income tax form aimed at collecting some of the taxes due on personal purchases made on the Internet, or when visiting a tax-free state such as New Hampshire. But, Neves said, not everyone fills in the form and pays the tax.

“That’s something we may have to look at,” Gagnon said. “Maybe there is a way, based on income, to estimate Internet purchases.”

If Congress does not create a uniform Internet taxing method, it will make it very difficult for the state to act alone, Neves said. He said without uniformity, Maine companies could be put at a competitive disadvantage.

“If L.L. Bean’s competitors are all collecting the same tax as Bean’s, than there is a level playing field,” he said. “That’s why we have so many states trying to work out a model bill to submit to Congress.”

Lawmakers will return for the second regular session of 120th Maine Legislature on Jan. 2, 2002.