What’s This All About Anyway?
Tuesday, September 25 marked the Alabama Retail Association’s annual Retail Day, held this year in Birmingham at The Club atop Red Mountain. Sponsored by the ARA and the University of Alabama at Birmingham, the clear goal of the event was to urge Alabama retailers to lobby their Congressional delegation for prompt passage of federal legislation allowing states to compel online retailers to collect and remit state and local sales tax on behalf of their customers.
Among the featured speakers on the morning panel were Governor Robert Bentley and Senate President Pro Tem Del Marsh. During the panel discussion Governor Bentley declared his continued support for the Marketplace Fairness Act (S. 1832) and the Marketplace Equity Act (H.R. 3179), the two bills pending in Congress that now stand a reasonable chance of passage, probably by next Spring. Jason Brewer of the Retail Industry Leaders Association (RILA) in Washington and ARA Vice-Chair George Wilder, owner of The Locker Room stores in Montgomery and Auburn, also served on the panel. Senator Marsh echoed the Governor’s comments but added that, without this legislation, Alabama’s loss of tax revenues will only get worse as the volume of electronic purchases increases. “If you think this is a problem now, wait until the next generation gets into full buying power.”
In response to a question from the audience regarding the unwillingness of some members of Congress to support the bills, Governor Bentley diplomatically stated that he believes the legislation has been delayed by a misunderstanding on the part of some Congressmen that they may be supporting a “new tax” if they vote in favor of either Marketplace bill. The Governor added, however, that House members are close to being “on board,” while Alabama’s two Senators and other members of the U.S. Senate need “encouragement from local people.” Mr. Brewer agreed.
Dr. Robert A. Robicheaux, Chair of the Department of Marketing, Industrial Distribution and Economics at UAB, and panel moderator, concluded that, based on the Governor’s, Senator Marsh’s, and House Speaker Mike Hubbard’s recent lobbying efforts in Washington, “Alabama has stepped to the forefront of the national push for marketplace fairness and equity.” Robicheaux added, however, that without prompt action by Congress, “states like Alabama will continue to forfeit many millions of dollars of tax revenues that are owed and lose thousands of jobs to out-of-state sellers.”
Although the Alabama sales and use tax has been in place for more than half a century, many Alabama residents apparently do not know they owe the tax on Internet or catalog purchases. As Governor Bentley stated twice during the panel discussion: “This is a tax that is already owed. It’s not a new tax.” Currently, Alabama can only force retailers with physical locations in (or perhaps deliveries in company trucks into) the state to collect and remit sales or seller’s use tax. However, unless federal legislation is passed, Alabama is unable to force internet retailers to do the same because they lack a taxable nexus with the state. Alabama and other states must therefore rely on individual and business consumers in the state to self-report and pay the consumer use tax. The recent landmark study authored by Dr. Robicheaux and staff suggests that far less than half of Alabama individuals remit their use tax.
As Dr. Robicheaux’s study points out, because of the jurisdictional limits on state and local taxation, remote sellers can charge less for their products, putting in-state retailers at a competitive disadvantage. The study adds that the sales tax price advantage (which can equate to 10%, based on the combined sales tax that purchasers must pay at stores in several Alabama municipalities) not only hurts small businesses, but also costs thousands of Alabama jobs.
As both Governor Bentley and Senator Marsh concluded, Alabama is much closer to a solution. Readers may recall that the Alabama Legislature passed in near record time and the Governor signed into law the so-called “ONE SPOT” bill in April, providing for a free, optional method of remitting both state and all local sales taxes to one source, instead of to each Alabama municipality and county or their contract auditing firm. That project should be on-line by next September. However, other legislation will be needed to implement the proposed federal legislation once it’s enacted. For example, state law must be amended to provide for a single, consolidated audit of the taxpayer. Remote sellers will then only be subject to the audits of the 45 or so states that levy a sales/use tax, instead of enduring audits by the country’s nearly 9,600 taxing jurisdictions. Additionally, and similar to the pending Streamlined Sales Tax legislation, the state and local governments must adopt uniform tax definitions and a uniform tax base. Thankfully, as a result of the 1998 Local Tax Simplification Act and Local Tax Conformity Act, the state is already very close to that goal.
Here are ten frequently asked questions1 about the Streamlined Sales Tax/Marketplace Equity and Fairness Act efforts that may be helpful to our readers:
Do transactions over the internet account for a substantial amount of sales nationally? Yes. The U.S. Bureau of the Census estimated there were $4.1 trillion in retail and wholesale transactions over the internet in 2010, which is more than 16% of all U.S. shipments and sales.
How much money are state governments losing by not collecting these revenues? Some estimates place lost tax revenue around $11.4 billion in 2012. Certain states have even greater proportional losses. For example, California is expected to lose around $1.9 billion, while Texas and New York expect losses around $870 million.
How much money is Alabama losing by not collecting these revenues? The UAB/Robicheaux study estimates that sales and use tax noncompliance will cost Alabama and its localities more than one billion dollars over the next five years. The study also projects the loss of nearly 4,400 in-state jobs annually and related tax revenue.
Do state and local governments rely heavily on sales and use tax revenues? Yes, especially Alabama and its local governments. Generally, state governments rely on sales and use taxes for about 32% of their total tax revenue. Sales and use taxes are Alabama’s second largest source of revenue, next to the individual income tax. These taxes are usually the largest source of revenue for Alabama’s local governments, which may derive more than one-third of their annual tax revenue from these taxes.
Do other states impose a general sales tax? Yes. Mississippi was the first to impose a general state sales tax in 1932. Alabama enacted its law in 1939. Now, every state but Alaska, Delaware, Montana, New Hampshire, and Oregon has a state sales tax.
Is every purchase made in the state subject to sales tax? It depends. Groceries are exempt from state and local sales taxes or taxed at lower rates in 34 states. However, Alabama taxes groceries just like all other purchases. Most states (including Alabama) also exempt prescription drugs, and some other states exempt certain clothing and nonprescription drugs.
Does Alabama have a high sales tax rate? Yes. Alabama has the second highest rate in the U.S. when its state sales tax rate is combined with the local rates, which in a few jurisdictions can total 12%. The average combined tax rate in Alabama is almost 9% now.
Does the “Internet Tax Freedom Act” prohibit any of the pending federal legislation or the enabling legislation that Alabama and other states must pass? No. The Internet Tax moratorium prohibits new taxes on internet access services and multiple or discriminatory taxes on internet commerce. Congress extended this moratorium most recently until November 1, 2014. But the Internet Tax Freedom Act has nothing to do with enforcing existing sales and use taxes, and therefore nothing to do with the sales/use tax collection issues facing Congress or the Alabama legislature.
What is the collateral damage to Alabama as a result of not collecting sales taxes from remote sellers? As mentioned, the UAB/Robicheaux study projects roughly 4,400 jobs lost annually. It also estimates that in 2012 alone, $1.3 billion in household income and $433 million in additional retail sales to in-state businesses will be lost.
How is the issue solved? Alabama and many other states are waiting on Congress to pass legislation allowing states to force remote retailers to collect and remit the sales or use tax. Until authority is given to allow enforcement, Alabama can only continue to attempt to reform and align its tax laws with those of the Streamlined Sales and Use Tax (SST) Agreement and become a full member of the SST Compact. The Alabama Legislature could also enact a law that allows the Alabama Department of Revenue to collect both the state and local use tax on their individual income tax return and remit the local portion to the appropriate municipality and county annually. Currently only the state consumer use tax can be remitted on the Form 40 and 40A, resulting in a relatively small amount of revenue being collected, according to the ADOR.
1 Several of these FAQs were adapted from an article written by our friend, Robert W. Wood, 10 Surprising Facts About Online Sales Tax, Forbes (Sept. 11, 2012).
2 This study is available at Alabama Losses Due to E-Commerce.
NOTE: Bruce Ely serves periodically as tax counsel to the ARA. Justin Cureton contributed to this newsletter and is a third-year law student at Cumberland School of Law at Samford University in Birmingham.
© September 2012. Bruce P. Ely/William T. Thistle, II/Justin B. Cureton/ Bradley Arant Boult Cummings LLP. All rights reserved.