Internet, Enter Not: How the Online Sales Tax Break is Depleting State Budgets

With the popularity of internet sales increasing every year, it is time that Congress acts to level the playing field and require state sales tax collection from online retailers.  Currently, online retailers that do not have a “physical presence” within a state are not required to collect sales tax for that state, even when they make sales to residents of the state.  A physical presence typically means a “bricks and mortar” store or office within the state. 

If an online retailer has a physical presence within the state, they are required to collect sales tax even on purchases made online.  For instance, Target.com collects sales taxes in Colorado because they have Target stores throughout the state, whereas Amazon.com does not collect sales tax on their online purchases made by Colorado consumers.  This creates a competitive disadvantage for retailers that have stores in the states. 

In a recent Wall Street Journal article, Lowe’s president, Scott Mason stated that they have a 5 percent to 10 percent price disadvantage compared to online retailers as a result of the sales tax collection inequity.  The result is a competitive disadvantage for retailers that are putting roots down in the states and are making an economic contribution to local communities. 

If a retailer does not have a presence in the state, consumers are still required to pay their sales, or “consumer use” tax on their online purchases.  Sales and use tax are ultimately paid by the consumer and businesses with a local presence are merely required to collect and remit the sales the tax on behalf of the consumer.  When sales tax is not collected by the retailer, it is still owed by the consumer and should be paid by them directly to the local taxing entity.  However, the payment of the consumer use tax is rarely enforced.

With online shopping totals topping $200 billion annually, this loophole for online retailers resulted in more than $23 billion in forgone state tax revenue nationally.   In a time when budget deficits are stripping services and jobs throughout the states, sacrificing state tax revenue has a more devastating result than ever before. 

The National Conference of State Legislatures estimates that Colorado lost more than $352 million last year to uncollected online sales taxes.  This amount is 16.9 percent of the budget deficit that Colorado faced in 2012.  Therefore, if sales tax had been collected, or paid by consumers, Colorado would have had $352 million more dollars to offset cuts in schools, health care, higher education and the public infrastructure. 

Many states have tried to repair this issue legislatively.  States such as North Carolina, Rhode Island and New York attempted to force online retailers to collect sales tax by claiming that their “affiliates” within the state gave the online retailer a physical presence.  Affiliates are typically small bloggers and online retailers that are paid for promoting products of large online corporations, such as Amazon.com and Ebay.com.  This effort was somewhat successful in New York, where Amazon.com has begun to collect sales tax. However, the result was different in Rhode Island and North Carolina, where instead of complying with the state laws, online retailers simply fired all of their in-state affiliates, thus removing their “physical presence” and leaving many state residents without a job. 

In 2009, Colorado took a different approach to enforcing online sales tax collections.  Colorado passed legislation that would require online retailers to provide an online sales tax invoice to shoppers residing in Colorado.  A copy of this invoice would be sent to the Colorado Department of Revenue and then Coloradans would have to pay their invoice on their own, similar to their state income taxes.  Yet Amazon.com was still unhappy.  After unnecessarily firing all of their local affiliates, the online sales giant challenged the law and won, allowing them to continue to refrain from collecting or providing an invoice for online sales taxes in Colorado.

Fortunately, these efforts by states have illuminated the problem, gaining national attention and traction with Congressional leaders.  Sen. Lamar Alexander (R-TN) and bipartisan co-sponsors are working on passing a bill that would give states the authority to compel online sales tax collection.  As a result, online retailers are beginning to collect sales tax in some states.  Amazon.com has planned collection in at least 13 states by 2016.   Thus far, Colorado is not one of these states.

Recently bankrupt, Blockbuster gets tax credit for growth in Colorado

Blockbuster is growing. Really?  I know I’ve seen more than one store close. But the Colorado Economic Development Commission concluded that Blockbuster is a job creator when it agreed to grant the shrinking company a jobs growth tax credit.

Blockbuster, the movie-rental company that is closing stores and laying off employees all over the country, was recently awarded  a $2.5 million “jobs growth” tax credit for relocating positions to its corporate headquarters in Colorado.

The company announced April 23 that it will move its corporate headquarters from McKinney, Texas to the campus of its parent-company, Dish Network, in Douglas County. The announcement came the same day that the EDC approved the tax credit. The move comes on the heels of the Dish Network purchasing Blockbuster out of bankruptcy last year as Blockbuster struggled to compete with relative newcomers Redbox and Netflix in the movie rental industry. Along the way, Blockbuster closed more 1,500 retail stores throughout the country, including an unknown number in Colorado. In Texas alone, the company laid off 567 people this year, according to the Texas Workforce Commission. Blockbuster now plans to relocate 150 of those Texas-based positions to Colorado.

The Jobs Growth income tax credit was the hallmark economic recovery legislation approved by the General
Assembly in 2009. That legislation said a company must prove four factors to qualify for the tax credit. First, the company could “reasonably and efficiently” locate the project in another state. Second, at least one other state is in consideration. Third, the tax credit is a “major factor” in the company’s decision. Fourth, without the tax credit the company “is not likely to commence the project” in Colorado.

It’s not clear how Blockbuster meets those four criteria. The staff for the commission, the Office of Economic Development and International Trade, made available portions of company’s tax credit application. Nowhere in the portion of the application that was available for public review did the company state that the merger of the two headquarters would not happen without assistance from the state of Colorado.

But in the May 3 edition of the Highlands Ranch Herald, a Blockbuster spokesman said the company made the move because of the tax credit as well as the opportunity to “take advantage of efficiencies” in the human resources, finance and marketing departments.

Given the limited facts made available — especially the company acknowledging that the move creates efficiency — it’s reasonable to believe that the Blockbuster decision to merge with the headquarters of its parent company, Dish Network, would have happened even without the tax break.

Regardless, this Blockbuster deal exposes the challenges associated with tax giveaways in the name of job creation.  It is hard to imagine that anyone would identify Blockbuster as the kind of growing company that deserves specialized tax treatment for its role in “creating jobs”. 

Terry Scanlon can be reached at 303-573-5669 ext 311, or by email at tscanlon@cclponline.org

Federal judge permanently enjoins Colorado’s “amazon tax” law

Federal judge permanently enjoins Colorado’s “amazon tax” law, calling the reporting requirements for online retailers with no other presence in the state overly “burdensome” and a violation of the commerce clause. Read the order here.

Colorado is far from closing the gap left by deep budget reductions in recent years

As lawmakers consider the latest state revenue estimates and how to balance providing services for Colorado families and the potential for tax breaks for some, it is important to note the state has a long way to go to make up for cuts to schools and other services in recent years:

• Public schools have been cut $419.4 million in the past three years
• Higher education has been cut $122.7 million in the past two years
• Temporary Assistance for Needy Families (TANF) faces a $23.9 million cut next year 

Colorado can and must do better to support families and communities. Before we celebrate potentially avoiding dramatic new cuts, we should strive to reduce the effect of past cuts. We need to stay focused on real solutions that balance our health and education needs and move Colorado forward. Colorado’s economic competitiveness depends on supporting working families and providing opportunities for children.

Listed below are details of some budget cuts already proposed. The reductions do not address rising student populations (except where noted) in kindergarten through 12th grade and higher education, rising caseloads in TANF, inflation, or other increases in demand for services that have occurred due to the recession. If those factors were considered, the size of the cuts would be much larger.

K-12 education

• Total program funding in Fiscal Year 2009-10 was $5.59 billion. In FY 2012-13, Joint Budget Committee (JBC) staff proposed $5.17 billion.
• General Fund spending for schools in FY 2009-10 was $3.08 billion. In FY 2012-13, JBC staff proposed $2.74 billion.
• The JBC staff proposal for FY 2012-13 is $753 per student less than FY 2009-10. The number of students increased 27,710 during that time. 

Higher education

• The College Opportunity Fund is down from $594.1 million in FY 2010-11 to $471.4 million in FY 2012-13. 

TANF

• Reduced federal aid and the loss of prior budget balancing measures might result in a $29.3 million cut to Temporary Assistance for Needy Families in FY 2012-13.

Suthers appeals 'Lobato' school funding decision

Read all about it, plus find links to all the day's public-policy news, at the weekday Colorado news roundup.

Sidebar newsletter: After the election, Colorado still needs more revenue

An article from the winter 2012 edition of Sidebar, CCLP's quarterly newsletter.

The Colorado Fiscal Policy Institute, a project of the Colorado Center on Law and Policy, was a leading proponent of Proposition 103 on the state’s Nov. 1 election ballot. It would have restored state sales and income tax rates to their levels in the late 1990s and used the revenue to support education. In an audio interview, Fiscal Policy Institute Director Carol Hedges discusses the reasons Proposition 103 failed, lessons learned from the effort, and where Colorado goes from here. Excerpts of Hedges’ remarks follow. To listen to the full interview, visit bit.ly/chinterview.


“The primary message I take away from the results of 103 is that it is much harder to build a coalition of people to vote in favor of something than it is to build a coalition to vote against something. We know that there were a lot of concerns about the actual specific measure itself that caused many people to decide to vote against more funding for schools. Not because they don’t support funding for schools, but there were people that were concerned about whether it was the right mechanism, whether we were taxing the right people, whether it was big enough, whether it addressed enough of the comprehensive fiscal problems that the state is facing.”

“We moved the conversation on a balanced approach to dealing with the state’s fiscal problems, we moved that forward in a meaningful way. 103 was an important next step in the work that CCLP and COFPI have been doing over the last 10 years to start and to keep a conversation alive about the role of the public sector in building strong communities and a strong economy. … People are beginning to sense the real costs of not making appropriate investments. They see what’s happening in their communities because our schools and other public services aren’t funded.”

“One of the other interesting and important things about 103 is it allowed us to create contacts and relationships and identify literally thousands of people statewide who understand the importance of public education, understand the importance of public investments in having a vital and strong economy. We’ve got to keep talking to those people. We’ve got to help them with tools to be the advocates in their communities, to say ‘Yes, taxes mean that each of us pay a little bit more, but think about the benefits for our communities.’”

Cutting red tape not tied to future tax proposal, governor says

Read about it, and find links to all the day's public-policy news, at the weekday Colorado news roundup.

Colorado GOP lawmakers plan push to redirect state spending to roads, buildings

It might sound benign, but according to the Denver Business Journal the idea would "overturn a 2009 state law that eliminated the 6 percent limit for increasing general fund spending, known as the Arveschoug-Bird rule." Not a good idea.

Follow Budget Works 2012 in a live chat on Jan. 13

We'll be hosting a live chat from Budget Works from 8 a.m. to 3:30 p.m. on Friday, Jan. 13. If you can't make it to the event in person, sign up for an e-mail reminder now and join us remotely.

How budget cuts lead to lost jobs, our most popular research of 2011

It probably surprises no one that the Colorado Center on Law and Policy's research around jobs generated the most interest during 2011, as measured by visits to our website. The most popular publication of the year, released March 7, examined how cuts to the state budget would result in job losses. The paper, by Fiscal Policy Analyst Terry Scanlon of the Colorado Fiscal Policy Institute, led off this way:

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Hickenlooper's proposed budget cuts would costs thousands of jobs; solution can come from voters
The budget-balancing plan offered by Gov. John Hickenlooper last month relies heavily on cuts to public schools and will result in the loss of more than 3,600 jobs as services in education, mental health, prisons, health care and parks are scaled back. Most of the lost jobs will come out of classrooms and schools throughout the state as school districts cope with a nearly $500 decline in spending per student.

Colorado lawmakers have no option but to balance the state budget, and that will mean painful service reductions affecting every resident of the state. Voters, though, have the authority to consider all options for maintaining and increasing investment in their communities – including increased revenue.

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Read the full issue brief on our website.

A study in public-policy tradeoffs, analysis of state budget our fifth-most popular research during 2011

Colorado continued to struggle with the disconnect between the revenue the state government collects and the services its residents need. A paper exploring those tradeoffs was the fifth-most popular reserach product issued by the Colorado Center on Law and Policy during 2011, as measured by website visits. It was written by Terry Scanlon, a fiscal policy analyst for the Colorado Fiscal Policy Institute, a project of CCLP.

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Proposed 2011-12 state budget contains deep cuts to services along with unwarranted tax giveaways
Public services across Colorado would be scaled back sharply under a plan to balance the state budget that legislative leaders proposed April 5. Some service reductions were inevitable, given restrictions on state lawmakers’ ability to raise revenue. But the plan cuts deeper than necessary because it also includes a number of measures that will reduce revenue that would otherwise be available to support services. The reductions will hurt vulnerable Coloradans as the resources available for child protection, health care, education and other services decline.

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Read the full report on our website.

State vows to appeal school finance ruling

Read about it, plus find links to all the day's public-policy news, at the weekday Colorado news roundup.

Online sales tax could be a boon, Post editorial board says

Read about it, plus find links to all the day's public-policy news, at the weekday Colorado news roundup.

Columnist notes facts about refusing to understand the value of taxes

Sharp words, but we think appropriate, from the editor of the Aurora Sentinel. Read the column, and find links to all the day's public-policy news, at the weekday Colorado news roundup.

Leading the way on Colorado budget fixes

The Denver Post editorial board knows Proposition 103 wasn't the end of the discussion on Colorado's fiscal policy. Read the Post's opinion, and find links to all the day's public-policy news, at the weekday Colorado news roundup.

Give state schools a funding bridge with Prop. 103

Check out the endorsement from the Glenwood Springs Post-Independent, plus find links to all the day's public-policy news, at the weekday Colorado news roundup.

Supporters, foes make cases on education-tax ballot issue

The Colorado Center on Law and Policy endorses Proposition 103. Read the latest developments, and find links to all the day's public-policy news, at the weekday Colorado news roundup.

Colorado's tax and budget policies hinder economic recovery and prudent planning

Colorado’s tax and budget policies have hindered the state’s economic recovery and make it difficult to prepare for the future, representatives of the Colorado Fiscal Policy Institute told a conference of city finance specialists Friday.

Carol Hedges, director of the Colorado Fiscal Policy Institute, noted unique constraints on Colorado’s public investments. One of the tightest constraints is the Taxpayer’s Bill of Rights (TABOR), an amendment to the state Constitution that sets arbitrary limits on public funds the government is allowed to collect and spend. TABOR is one of several measures that limit Colorado’s ability to respond to changing economic conditions, Hedges said.

“It’s important to see Colorado’s fiscal arc and understand that each policy is part of a continuum,” she said. “There are no independent or individual challenges.”

Hedges spoke at a meeting in Denver of the Society of Municipal Analysts.

Colorado Fiscal Policy Institute Rice Fellow Benjamin Felson discussed the rising need for public services in Colorado as fallout from the Great Recession continues.

“As poverty has increased across the board, so has the reliance on and need for public assistance,” Felson said. “Colorado has responded at a minimum level.”

Colorado’s spending on key public services ranks near the lowest among the states. Colorado ranks 49th in education spending, for example, yet it has the second-highest concentration of people educated with a bachelor’s degree or higher. One attendee suggested it is good Colorado can import an educated labor force, maximizing its resources.

“Yes. It is good. But is it sustainable?” Hedges asked. “How long will we be able to bring people to the state if we are unable to provide a quality education for their children?”

The Colorado Fiscal Policy Institute is a project of the Colorado Center on Law and Policy, a nonprofit, nonpartisan research and advocacy organization promoting justice and economic security for all Coloradans.

'Never a bad time to do the right thing' on Proposition 103

Some folks are worried it's a "bad time" for stopping the irresponsible cuts to state education funding. Colorado Fiscal Policy Institute Director Carol Hedges addresses that argument and more in an interview with the Vail Daily. Read the story, plus find links to all the day's public-policy news, at the weekday Colorado news roundup.

Colorado's tax code hinders people with lower incomes

Legislators and governors have several tools they can easily implement into state tax codes to help lift families out of poverty, new research from the Institute on Tax and Economic Policy shows.

Colorado's tax code includes many of the recommendations in some form: earned income tax credits, property tax “circuit breakers,” targeted low-income tax credits; and child-related tax credits. ITEP recommends redesigning those policies to improve the lives of Colorado’s lower-income constituents.

The federal Earned Income Tax Credit is widely recognized as an effective anti-poverty strategy, and 24 states have an EITC modeled after the federal policy. Colorado suspended its EITC in 2002 due to budget constraints. To help fight poverty, Colorado should re-enable and fully fund the state EITC, according to ITEP.

Property tax “circuit breakers” protect low-income residents from a property tax overload. Similar to an electrical circuit breaker, the tool rebates property taxes when a tax bill exceeds a certain percentage of a taxpayer’s income. Colorado has a quasi-circuit breaker for homeowners and renters who are age 65 and older or disabled. To provide a greater benefit to families and individuals with lower incomes, Colorado should consider raising the maximum benefits and expand the policy to include homeowners and renters of all ages, ITEP said.

Low- and middle-income working parents frequently spend a significant portion of their incomes
on child care. The federal government allows a nonrefundable income tax credit to help offset child care expenses. Colorado has a limited refundable child and dependant care credit available, and ITEP suggests it should increase the credit to help poorer families.

Additionally, Colorado should create a refundable low-income tax credit. Because the EITC is targeted to low-income working families with children, it is not always the best approach for reaching older adults and adults without children. Refundable low-income credits are a good complementary policy to state EITCs. The credits can also be used to mitigate the regressive nature of state sales taxes.

In 2010, the taxes as a share of income for Coloradans in the lowest 20 percent was more than double that of Coloradans in the top 1 percent. Implementing the recommendations would help ease the tax burden on the many Colorado families and individuals struggling with poverty.

“Lawmakers try to leverage the tax code to do all kinds of things – lure business, reduce health
costs,” said Matthew Gardner, ITEP’s executive director, “but too few use it to ease the effects of poverty.”