PPF Pearls: Wisconsin and the Internet sales tax

Yesterday the Wall Street Journal reported that tight state budgets have resulted in several governors adopting Internet sales tax agreements with online retailers that require these sellers to collect state sales taxes at the time of purchase, even if they do not have a “brick-and-mortar” presence in the state.

Such agreements ensure these states receive the sales tax they are due; relying on each consumer to report and pay the sales tax owed often leaves state coffers short. For example, self-reported taxes on online purchases (use taxes) were collected from just 29,200 Wisconsin tax filers in 2009, totaling $1.72 million. This represents less than one percent of the total sales and use tax paid in that year. A 2009 University of Tennessee study projected Wisconsin would lose $126.1 million in state and local sales taxes in 2011 and $142.1 million this year from unpaid sales taxes on Internet purchases. Wisconsin’s 5% state sales tax totaled $4.1 billion in 2011, making up one-third of the state’s general purpose revenues, second only to the personal income tax.

While the recent agreements forged by governors help bolster the revenues of individual states, they result in a patchwork of policies across the country. This patchwork complicates business practices for online retailers and puts them in a different competitive stance with physically-present retailers in each state. The result is that a Wisconsin customer of Amazon.com, for example, would not have the state sales tax added to the cost of his or her purchase, but a resident of Kansas, Kentucky, Texas, or any other state with a collection agreement would. In addition, it means an item sold in a physical store in Wisconsin costs more at the time of purchase than the same item sold online, even if they are priced the same.

Instead of seeking tax collection agreements with individual Internet retailers, Wisconsin has joined several other states in looking to Congress to pass legislation allowing states to require online sellers to collect state sales tax. In 1992, the Supreme Court ruled in Quill Corporation v. North Dakota that retailers must have some sort of physical presence in a state before they can be required to collect state sales tax on behalf of that state. Three bills currently under consideration in Congress would tackle Quill’s prohibition by voiding the requirement of a physical nexus.

The Main Street Fairness Act, proposed by Democrats, would allow states that have joined the Streamlined Sales and Use Tax Agreement (SSUTA) to require online retailers to collect state sales tax at the time of purchase. The SSUTA, which seeks uniformity among states by standardizing the definitions of products and taxable items, as well as standardizing and simplifying tax calculations and collection procedures, has a long history in Wisconsin. In our 2000 white paper on tax policy for the new economy, the Forum noted that Wisconsin served as a co-chair of the effort, which began in 1999 with the help of the National Governors’ Association and the National Conference of State Legislators. It wasn’t until 2009, however, that Wisconsin passed the state legislation adopting the standardized definitions required to become a SSUTA member.

The second bill, the Marketplace Equity Act, will be the subject of a hearing in the House Judiciary Committee on July 24. It has been introduced in both the House and Senate with bi-partisan support and appears to be gaining momentum. This act proposes that states wishing to require online tax collection adopt a set of simplified tax rules that are somewhat similar to the SSUTA standards. Some online business groups are worried, however, that by not aligning directly with the SSUTA, the standardization and simplification goals will not be met, as the 22 SSUTA states will be reluctant to pass new and different standards. These states could choose to continue to seek agreements with individual retailers, causing big headaches for national online retailers who would be subject to many differing state tax rules if the act were to pass.

In response to these critiques, a third bill, the Marketplace Fairness Act, has been introduced in the Senate with bi-partisan sponsors. This bill would allow states who are members of the SSUTA to require online sales tax collection, but would also allow non-member states to do so as well, as long as they adopt an alternative set of simplified taxation standards.

Opponents of all three bills argue that by eliminating the nexus requirement for sales and use taxes, Congress would be at the precipice of a slippery slope that could result in all types of new taxes far removed from the activities being taxed. There is also an argument that the requiring sales tax collection by online retailers, even if simplified and standardized, would be so burdensome that it would stifle Internet entrepreneurship.

A May survey by the International Council of Shopping Centers found that 62% of Wisconsin residents polled understand they are supposed to pay a tax on items purchased online, even if the tax was not collected by the retailer at the time of purchase, and that 72% feel having the retailer collect the tax would be easier. In addition, 65% of respondents say they would support a federal law allowing retailers to collect the tax. Until Congress acts, count on Wisconsin’s Department of Revenue to continue to aggressively remind taxpayers that their online shopping sprees are not duty-free.

UPDATE 7/24: More coverage of this issue in the Milwaukee Journal Sentinel http://www.jsonline.com/business/online-retailers-might-have-to-collect-sales-tax-a766ati-163483146.html

Regional identity could help Great Lakes cities leverage their assets

We’ve all heard of the brain drain—that powerful vacuum sucking all of the college-educated young professionals out of cities like Milwaukee. More recent reporting suggests that many who leave later return to the Milwaukee area. What do these returned brain drainers like myself have to say about their beloved but struggling Midwestern cities? Detroit’s Sarah Szurpicki and Abby Wilson of Pittsburgh have the answer. After stints in New York City and South Africa, the duo returned to their hometowns to co-found GLUE (Great Lakes Urban Exchange), an organization seeking to bolster regional identity among older industrial cities.

GLUE just completed its second annual conference in Milwaukee, featuring an inspirational mix of post-boomer urbanites from rust-belt cities like Buffalo and Cleveland sharing ideas about urban renewal, the green economy, sustainability, transit, community journalism and more. Following tours of the Growing Power urban farm, Menomonee Valley’s sustainable redevelopment, and the Great Lakes Water Institute, I’m still on a high from hearing so many people call Milwaukee a beautiful and impressive city. One participant from St. Louis commented, only partially joking, that he was now deciding between Paris and Milwaukee for his honeymoon.

If that didn’t warm my Milwaukee-loving heart enough, there was also serious information about how the Midwest can leverage its assets to compete in the post-industrial economy (covered locally here and here). Conference speaker Richard Longworth, senior fellow at the Chicago Council on Global Affairs, first laid out some bad news: the Midwest has in some ways lost its embrace of change and its former knack for innovation and creativity. Moreover, independent-minded Midwesterners are not accustomed to working across borders to create regional, shared solutions. No Midwestern university teaches even one course on the Midwest. Fragmented efforts, such as the fact that each state has its own separate bioscience organization, lead to duplication and competition. Longworth didn’t mince words. “The good news is this era is so new. The bad news,” he said, “is that so much of the Midwest is already behind.”

The advantages that Great Lakes cities share include having existing infrastructure and appealing street grids, a density that can support development, an intense work ethic, access to bioscience raw materials, and, of course, plentiful fresh water. Opportunities exist if the region plays its cards right, in industries of the future such as clean water technology, bioscience, nanotechnology, green industry, and transit.

But how can the Midwest and its Great Lakes cities maximize assets? Multiple speakers at the GLUE conference stressed the need for regional planning and geographic unity (as did this recent local editorial), what Longworth characterized as a need for a Midwestern Marshall Plan. Tom Wolfe of the Northeast Midwest Institute described how sustainability should be a principle criterion for the distribution of federal dollars. Kate Rube of Smart Growth America showed how current zoning and land growth laws need to be revised because they often make “smart growth” sustainable development illegal. John Austin of the New Economy Institute highlighted affirmative, targeted immigration policies as a promising strategy for bringing innovation back to the Midwest, an especially important approach for Midwestern cities that are losing population.

The winds of change blowing off the lake appear to suggest that Great Lakes cities would do well to adopt an open attitude toward regionalism, the new green economy, and the feedback of young professionals who are reversing the brain drain in their post-industrial Midwestern cities and beginning to speak with a unified voice through organizations like Great Lakes Urban Exchange.

Big in Japan

According to a recent The Wall Street Journal (WSJ) article, there are 92 skyscrapers under construction in Tokyo, Japan. Even at this pace of construction, it is reported that the supply of office space in Tokyo will not keep up with demand due to years of robust expansion in Japan's service sector.

With Milwaukee's downtown office vacancy rate hovering around a dismal 15%, it might be time to look to Japan for a quick lesson in downtown development.

The catalyst in Tokyo's office building boom, according to the WSJ article, is Japan's shift from a manufacturing economy to a high-end service economy built on marketing and finance jobs.

Milwaukee is going through a similar economic restructuring. But a recent report by The Brookings Institution highlights Milwaukee's inability to adequately replace lost manufacturing jobs with high-value service sector jobs. In other words, don't get caught up in the hype that blames Milwaukee's economic woes on manufacturing job losses. Instead, blame our economic malaise on the region's sluggish employment growth in its service economy (see below chart by Brookings).

The story is simple: Everyone is losing manufacturing jobs (yes, even China). Some regions are transitioning. Some are not.

Sure, we could subsidize developers in hopes of spurring new downtown construction. But, if the Tokyo boom teaches us anything, finding ways to bolster a high-end services economy may be a more efficient strategy in building a postcard-worthy skyline for Milwaukee's downtown.

Welcome to the new economy, 7 years late

Way back in 2000, the Forum wrote a white paper for the Governor's economic summit (remember those?), which found that while joining the "new economy" was necessary, it could actually harm our tax base in certain ways. We noted especially that our sales tax policies had not caught up to the new phenomenon of Internet sales. At the time, many people assumed that treating Internet stores like mail-order catalogues would suffice...if they had a physical presence in the state, then they would collect sales tax from customers in our state and, if not, then customers in the state would pay a use tax on the goods they purchased. The problem is that this assumed sophisticated retailers, compliant consumers, and tangible goods. And although we did not predict eBay auctions or iTunes (if only I had that kind of prognostication skill!), we concluded that using current sales tax policy to govern Internet sales would surely result in missed opportunity for a larger sales tax base.

Of course, Wisconsin was not the only state grappling with this issue at the time. The National Conference of State Legislatures' Executive Committee established in 1999 a Task Force on State and Local Taxation of Telecommunications and Electronic Commerce, which has resulted in the "Streamlined Sales and Use Tax Agreement" that will not only make collection of sales and use taxes on Internet transactions feasible, it may also make it constitutional. The agreement attempts to remove the burden of tax collections from retailers, level the playing field for bricks-and-mortar retailers vs. e-tailers, and retain states' sovereignty over their own tax policy.

The streamlined agreement is voluntary for both states and merchants and has the support of many retailers and their associations. The intention is for the agreement to serve as the basis for Congress to grant authority to states to require all sellers, regardless of location, to collect sales and use taxes. Currently, as stated in the Supreme Court's Quill case, under the Commerce Clause, unless Congress specifically provides as such, states cannot impose sales taxes on out-of-state merchants. According to NCSL:

The Streamlined Sales and Use Tax Agreement provides the states with a blueprint to create a simplified sales and use tax collection system that when implemented, provides justification for Congress to allow states to request remote sellers to collect sales taxes as was intended in the Quill decision.

Today, 21 states are full members to the agreement...but not Wisconsin. Wisconsin co-chaired the NCSL task force and was lauded by the Forum in our white paper for showing leadership and forward-thinking. But seven years later, we still haven't fully joined the agreement. Our state has debated the issue and did pass legislation in 2001 that got us part way there. Now Governor Doyle's budget proposal includes the necessary legislation to fully join the agreement. This is not a partisan issue; Wisconsin can either lose tax revenue (nationally, state and local tax losses to e-commerce in 2008 are estimated to range from $11.8 B to $17.8 B) or capture it via merchants who will collect it voluntarily. We, as consumers, are already supposed to be paying these taxes...we just aren't. It really doesn't seem like a hard choice.

Wisconsin's move to the "new economy"

The Kaufman Foundation's latest ranking of states puts Wisconsin 30th. The 2007 State New Economy Index finds that states in the Midwest, including Wisconsin, are not adapting their economies to compete effectively in regional and global markets. The report uses 26 indicators to rank the states.

Wisconsin's highest rank, 12th, is for package exports; its lowest rank, 47th, for job churning. Our state's rank on most of the other indicators hovers around 30th, although we rank 15th in both online population and technology in schools.

The most interesting and relevant analysis for our region, however, is the report's conclusion that economic success in the future will not be due to old-fashioned, industrial-based versions of economic development, such as big-company relocations. The new model of economic development will include the creation and retention of value-added, high-wage jobs. The states ranking highest show above-average levels of entrepreneurship, and most have a solid infrastructure that fosters and supports technological innovation. Many also boast high levels of domestic and foreign immigration of skilled knowledge workers seeking good employment opportunities coupled with a good quality of life.

Which model of economic development is in use in southeastern Wisconsin?