ANALYSIS

Are you cheating Maine out of sales tax revenues?

Christopher Cousins, Erin Rhoda, Andrew Catalina and Eric Zelz | BDN
Maine cannot presently compel out-of-state Internet retailers to collect sales tax owed by state residents and businesses making purchases online. Lawmakers believe Maine could benefit from the additional revenue and are considering bills to collect it. But Congress also must decide whether to require online sellers, regardless of location, to collect tax on retail sales. Whether the decision is made by the state or federal government, the continuing growth of Internet sales will have the greatest effect on states that rely on sales and use tax the most. SOURCE: Congressional Research Service
Posted March 15, 2013, at 3:57 p.m.
Last modified March 15, 2013, at 4:21 p.m.
A zoomed illustration image of a man looking at a computer monitor showing the logo of Amazon is seen Nov. 26, 2012.
LEONHARD FOEGER | REUTERS
A zoomed illustration image of a man looking at a computer monitor showing the logo of Amazon is seen Nov. 26, 2012.
Maine Gov. Paul LePage delivers his State of the State address in in the house chambers in Augusta Tuesday, Feb. 5, 2013.
Maine Gov. Paul LePage delivers his State of the State address in in the house chambers in Augusta Tuesday, Feb. 5, 2013. Buy Photo
Sen. Susan Collins speaks at the Maine GOP Convention in Augusta Saturday afternoon May 12, 2012.
Sen. Susan Collins speaks at the Maine GOP Convention in Augusta Saturday afternoon May 12, 2012. Buy Photo
Chellie Pingree declares victory in Portland Tuesday night Nov. 6, 2012.
Chellie Pingree declares victory in Portland Tuesday night Nov. 6, 2012. Buy Photo

AUGUSTA, Maine — Maine is losing as much as $28 million a year in uncollected sales tax revenues from residents who make online purchases from out-of-state retailers and don’t report them on their income tax returns.

But while many lawmakers believe the state could benefit from collecting the money, they have not yet determined how best to make the change or whether new rules should be crafted by the state or federal government.

A Maine Revenue Services spokesman said the agency can’t estimate how much Internet-based sales tax is collected in Maine, but lawmakers and advocates estimate far more people dodge that item on their Maine income tax returns than complete it. State law requires anyone who buys goods online to report those purchases and pay the equivalent of Maine’s 5 percent sales tax, known as a use tax. But that doesn’t happen all the time.

The issue has come up again this year as lawmakers search for funds to make up for diminishing state revenue streams.

Advocates supporting a handful of e-fairness bills set for public hearings Monday in Augusta, though, say their chief motivation is protecting brick-and-mortar businesses in Maine, not securing revenues for state government. In general, the bills would require out-of-state businesses that sell goods online to Mainers to charge sales tax and then turn it over to the state.

They argue that in addition to reducing the number of people who avoid sales taxes, the measure would help traditional Maine retailers — whose wares are subject to the state’s 5 percent sales tax — who believe they face a pricing disadvantage.

“A lot of our members are telling us this is their No. 1 issue,” said Curtis Picard, executive director of the Retail Association of Maine. “It’s something we’d like to see done as a way to level the playing field.”

There is little hard data to quantify how much Mainers buy online or how much they pay in sales taxes, or “use taxes,” as they are called, for those purchases. David Heidrich, a spokesman for Maine Revenue Services, said online sales are lumped in with many other out-of-state sales.

Most organizations lobbying in favor of the issue refer to the same March 2012 study by University of Maine economics professor Todd Gabe. Gabe based his study on extrapolations and estimates from U.S. Census data, the U.S. Bureau of Labor Statistics and Maine Revenue Services, as well as similar studies done in other states.

According to Gabe’s study, which was commissioned by the Retail Association of Maine and the Maine State Chamber of Commerce, the percentage of Mainers who pay the full use tax they owe could be in the single digits, if other states are any indication. In New Jersey, for example, a 2011 study found that less than 1 percent of taxes associated with online purchases were actually paid.

Gabe, who could not be reached for comment because he was traveling, estimated that Maine had about $561 million in online sales in 2011, with the potential to generate up to $28.1 million in sales tax revenue. Those numbers rose from 2010, when tax receipts were estimated to have totaled $24.4 million from about $489 million of total e-commerce.

Along with lost revenues for the state, online businesses that don’t have to charge sales tax have a pricing advantage over brick-and-mortar businesses in Maine. In fact, according to Picard, more and more customers are going to retail outlets and using cellphone technology to scan an item’s barcode so they can go online and purchase it without paying sales tax.

Based on what has happened in other states, Gabe said requiring online retailers to collect sales taxes could increase business for local stores. He said it could shift at least $62 million, and maybe closer to $100 million, in annual sales from online companies to brick-and-mortar retailers in Maine.

The Legislature’s Taxation Committee will hear testimony on Monday for three e-fairness bills.

Sen. Anne Haskell, D-Westbrook, who is Senate chairwoman of the committee, said determining online retailers’ sales to Mainers has always been elusive.

“Just about every state is wrestling with this issue,” Haskell said. “We’re not just thinking about what kind of revenues are there. This is a fairness issue.”

Committee member Sen. Doug Thomas, R-Ripley, said he wasn’t yet sure whether he’ll support any of the three bills before the Taxation Committee. On one hand Thomas said he is against most measures that would cost constituents more in taxes, though he said the direct correlation between the rise of e-commerce and the struggles of Maine businesses is compelling.

“The reason the Internet has expanded so fast is because people can avoid taxes,” Thomas said. “We all have to pay taxes. People expect these services and think government can do it for nothing. Money is not going to fall out of the sky to pay for good roads or police departments.”

Gov. Paul LePage is also supportive of the concept of collecting taxes from Internet sales. In June 2012, he signed an executive order creating The e-Fairness Task Force to “explore potential avenues for the collection of sales taxes at the point-of-sale.” The task force is due to report back to the Legislature this session.

Some question whether the better venue for the debate about taxing Internet sales is Congress, at least from the perspective of large-scale retailers who must grapple with different state laws. According to the Retail Association of Maine, 23 states have enacted laws on e-fairness, beginning with New York in 2008. Nine of those states require retailers to establish a Web presence in-state, and six states require retailers to merely notify customers that they owe sales tax in their own state.

But those state efforts could become irrelevant if Congress and the president approve the Marketplace Fairness Act of 2013, which was proposed last year but failed to make it to a vote. This year’s bill was amended to exempt online retailers that make up to $1 million in annual online sales; last year’s version set the threshold at $500,000.

U.S. Rep. Chellie Pingree, D-Maine, is a co-sponsor of the bill.

“This is an issue that has been coming up for many years,” Pingree said in an interview Thursday. “Finally there’s an increasing amount of interest in doing something. In rural states like Maine, the impact of big retailers is huge. You can walk down almost any Main Street in Maine and say, ‘What happened to the bookstore, the shoe store, or the clothing store?’”

Pingree said she favors a federal solution over state-by-state legislation.

Sen. Susan Collins, R-Maine, has also signed on.

“This bill would help level the playing field for the Main Street retailers and shops that invigorate our local town centers across the country,” Collins said in a written response to questions from the BDN. “It would eliminate an unfair competitive advantage that out-of-state online retailers have over Maine stores, but it would also include an important exemption to reduce the onerous burden on smaller business in Maine that, too, conduct their sales over the internet.”

Ben Gilman, senior government relations specialist for the Maine State Chamber of Commerce, said his organization supports the concept at the state level but prefers a federal response.

“We would love to see a federal solution,” said Gilman. “This is a tax that already exists but isn’t being paid by some people.”

LePage also favors a federal solution.

“From my experience in the retail world, I can assure you that Maine retailers love competition,” wrote LePage in a March 12, 2012, letter to Sens. Collins and Olympia Snowe. “They know competition sharpens their services and products, and keeps customers coming back. But the rules need to be fair and applied equally.”

Christopher Cousins is a reporter in the BDN’s State House bureau.

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