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

The tools in Milwaukee's revenue toolbox

As the Public Policy Forum’s 2010-2011 Norman N. Gill Civic Engagement Fellow, I have completed my year-long project that analyzed how local governments raise revenue. The report, The tools in Milwaukee's revenue toolbox, stems from a 2009 Forum report that assessed the fiscal health of the City of Milwaukee. That report found that the city is over-reliant on state shared revenue as its main revenue source, and handcuffed by rising fringe benefit costs for city employees and growing expenditure pressures associated with police and fire services (which account for more than one half of all city operating expenditures).

Under the recently adopted state budget repair bill, the city has been granted cost-saving “tools” that will allow it to impose greater fringe benefit cost-sharing for non-public safety city employees. Yet, some city officials and policymakers are unsure if these tools, because they exempt public safety employees and are coupled with a cut in state shared revenue, will be enough to alter the city’s fiscal predicament. Consequently, my project explores the other side of the debate – the revenue toolbox. It asks what alternative revenue structures exist in other cities, and whether they are suitable for Milwaukee.

To answer these questions, we researched 15 cities that are comparable to Milwaukee, analyzed each city’s budget, and compared how each city generates revenue. Our key finding was that Milwaukee relies heavily on intergovernmental revenue (i.e. state shared revenue) to fund its budget (46% of general budget revenue), while the comparison cities raise the bulk of their revenues via the use of broad-based sales, property, and/or income taxes. In fact, no other city relies on intergovernmental revenue for even a third of its budget, and the vast majority has a dependence of less than 10%. Meanwhile, Milwaukee’s use of broad-based taxation for only 20% of its general budget pales in comparison to the other cities, the vast majority of whom use broad-based taxes for more than half of their general budgets.

Given these findings, we next examined the sales, income and property tax and their potential application in Milwaukee if city leaders were authorized to use them to reduce reliance on state shared revenue. Some of the insights we gleaned are as follows:

• Because Wisconsin has a relatively low sales tax compared to other states, implementing a city sales tax of .01% to 1% would not put Milwaukee out of line with comparable cities nationally, and could benefit the city by requiring non-residents to contribute toward the cost of city services. Milwaukee does not have the ideal sales tax base, however, because of the comparably low amount of retail sales that take place in the city, and because of Milwaukee’s high poverty rate.


• A city tax on individual income would allow for the possibility of shielding the poor from tax liability through specific tax rates for different income groups, or the ability to utilize deductions and credits. Also, such a tax potentially could be applied to non-residents who work in the city as well as residents, thus providing a mechanism to collect revenue from non-residents who use city services. On the other hand, even without a local income tax, residents in Milwaukee already have a relatively high state income tax burden, and adding an additional layer of income taxation could be harmful to the attraction of residents and businesses.


• Using a property tax to fund a greater proportion of the city budget could allow for a more predictable revenue stream because local governments would have some ability to change the tax rate to meet expenditure needs or to accommodate a decline in property values. Yet, because Milwaukee has comparably low assessed property values, funding a larger portion of the general budget with property taxes would require Milwaukee to add substantially to its already high property tax rates.


• An option in which city leaders were allowed to pursue a better balance of revenue sources by implementing a 1.0% city sales tax would allow for a sizeable decrease in property tax rates and reduced reliance on state shared revenue.

In the end, the report demonstrates that there are no easy answers to the City of Milwaukee’s revenue dilemma. In the event that the cost-saving tools contained in the budget repair bill are not enough to address Milwaukee’s longstanding fiscal problems, however, it also shows that it may be helpful to consider a balanced revenue structure that is more comparable to the other cities we studied.

Special thanks to the Gill family for their generous support of this project through the Norman N. Gill Fellowship, and the Public Policy Forum for their assistance and guidance throughout the year.

Are the right tools in the toolbox?

As the Public Policy Forum’s 2010-2011 Norman N. Gill Civic Engagement Fellow, I am working on a year-long project examining how local governments raise revenues. An earlier blog post on the project discussed alternatives to financing local governments, including a local sales tax. Overall, 33 of the 45 states that have a sales tax also allow their local governments to levy one. In addition, 43 of the 67 largest cities in the country have a local sales tax.

Under the governor’s proposed 2011-2013 state biennial budget, the city of Milwaukee stands to lose $10.3 million of state shared revenue. Shared revenue currently is a $271.6 million line item in the city budget and represents an unusually large portion when compared to other cities.

In return, the state would give local governments “tools” to help control costs, such as greater flexibility to impose higher health care and pension contributions on public sector employees. Yet, one tool that has been left out of the tool box is the ability for local governments to establish new revenue streams.

Milwaukee has no city sales tax and, by law, it is prohibited from implementing one. If the city could respond to state budget pressures by levying a sales tax, however, what might it look like? Assuming that the city’s tax would bring in revenue proportional to Milwaukee County’s sales tax, a 0.5% tax would generate estimated revenue of $40.3 million. This figure is consistent with economic studies about the city that show a 0.5% sales tax in Milwaukee would raise about $45 million. Therefore, a 0.5% sales tax would more than offset the cut in state shared revenue. In fact, a 0.1% sales tax would almost be enough.

There are several issues, however, that may limit the effectiveness of a local sales tax in Milwaukee. First, it makes sense that cities levying a sales tax should have a large tax base of retail sales. Oklahoma City, which has a 3.875% city sales tax, has more than $6.25 billion of retail sales per year. When measured on the basis of its population of 537,734, Oklahoma City’s retail sales per capita equals $12,057. On the other hand, Milwaukee, with a similar population, has far fewer retail sales. In 2002, Milwaukee saw $3.5 billion of goods sold, which is about $6,094 in retail sales per capita. Moreover, as the chart below indicates, Milwaukee’s retail tax base compares very poorly to similar cities with a city sales tax.


Another big hurdle is that unless a sales tax also is adopted by neighboring cities and towns, a sales tax in the city might put local retailers at a competitive disadvantage by providing even less of an incentive to shop in Milwaukee. For example, if Milwaukee were to impose a 0.5% sales tax to offset a cut in state shared revenue and meet other needs, then goods sold in Milwaukee would be subjected to an overall 6.1% sales tax rate, compared to a 5.6% rate elsewhere in the county. Furthermore, the difference would be even greater when compared to Waukesha County, which has a 5.1% rate. Lastly, the sales tax could disproportionately harm those Milwaukee residents without the means to shop elsewhere.

In return for less state shared revenue, municipal leaders might logically argue that Madison should equip cities with as many tools as possible to fix their budget woes. Were that to occur, however, Milwaukee policymakers would need to carefully consider the tools they use; what’s appropriate for Oklahoma City is not necessarily appropriate for Milwaukee.

The Forum is now accepting applications for the 2011-2012 fellowship year. For more information, go to the Norman N. Gill Civic Engagement Fellowship website. Applications are due April 30, 2011.

Are state budgets going to pull out of the recession in 2011?

The state's budget analysts seem confident of the economy's recovery. According to the National Conference of State Legislatures, Wisconsin is one of 40 states predicting FY 2010 to be the low point of the recession by forecasting higher total tax collections in FY 2011. Wisconsin's forecast is for 5.4% growth in total taxes collected, a rate of growth only 16 other states expect to exceed.

With regard to specific tax streams, corporate income tax collections are expected to grow the most in the next fiscal year, at 14%. These taxes make up only a small portion of the total tax revenue pie, however. The largest sources of state tax revenue, personal income tax and sales tax, are each expected to produce 5.5% more in tax receipts in FY 2011. These projections put Wisconsin among the most optimistic states--only 14 states predict greater personal income tax receipt growth and just nine states predict greater sales tax receipt growth.

The state expects FY 2012 to be even better; in fact, the forecast for that year is a return to the peak collection levels last seen in FY 2008.

Of course, if these forecasts turn out to be overly optimistic, the result will be an even larger state budget hole--perhaps foretelling such an occurrence, most state agencies have been directed to plan for FY 2011 and FY 2012 expenditures to remain at FY 2010 levels.

The People Speak: Citizens' views on transportation, education reform, taxation

The second installment of the results of the autumn People Speak poll, conducted in partnership with the University of Wisconsin--Milwaukee's Center for Urban Initiatives and Research and The Business Journal Serving Greater Milwaukee, focuses on public policy issues such as mass transit and mayoral takover of MPS.

The People Speak is a tracking poll that will be conducted at regular intervals throughout the year. Its purpose it to gather information from local citizens about their interests in, preferences for, and concerns about public policy. By gathering and reporting out these citizen perspectives, the partners hope to expand the public voice in policy matters affecting Greater Milwaukee.

Highlights from the most current Research Brief include:

• A majority of residents of southeastern Wisconsin favor high speed rail connecting Chicago, Milwaukee and Madison, as well as commuter rail connecting Racine, Kenosha, and Milwaukee. A downtown streetcar line in the City of Milwaukee is less favorable, but still garners support from half of Milwaukee County residents.


• When it comes to funding transportation improvements, toll roads have the most support, with about half of all residents in favor. Increasing the gasoline tax is not favored by most residents, nor is the creation of a regional transit authority funded by an increased sales tax.


• A mayoral takeover of the Milwaukee Public Schools is favored by 43% of poll participants in the region. The level of support among City of Milwaukee residents is the same--43%. The greatest support comes from Democrats, 50% of whom are in favor of the idea.


• Establishing a regional authority to oversee parks and cultural facilities for all of southeast Wisconsin garners the support of a majority of poll participants across the region. The only county in which a majority of respondents is not in favor is Ozaukee.


• Residents of the region are split on whether they would favor increased user fees in order to lower property taxes. Increased sales taxes for this purpose are slightly less favored.

For full results of the poll, go to the poll website.

The fat tax made possible

As state and local governments try to diversify their revenue sources, sin taxes and user fees become more politically palatable. Now the UK has developed a tool that could make possible the ultimate sin tax for cheese-loving Wisconsin: the "fat tax."

The tool arose in order to enforce a new ban on advertisements for junk food during children's TV programing. Britain's Office of Communications (like our FCC) asked scientists to develop a food rating scale that defines what is or isn't junk food. The scale seems simple enough--add points for each beneficial nutrient in a food and subtract points for things like sodium, saturated fat, and sugar. The scale goes from -9 (dried lentils) to 28 (cheesecake); anything above 4 is in the junk food category and cannot be promoted on TV during certain programs or times.

With this simple, objective definition of junk food now available, some of the scientists who developed the rating scale argue that utilizing it to merely ban certain advertising isn't ambitious enough. They join some in the US advocating a fat tax that would make junk food more costly.

Any sin tax is regressive, affecting low income purchasers more than higher income buyers. The proponents' answer to that concern is to advocate using the fat tax revenue to increase the purchasing power of those low income consumers, making healthy foods easier to afford. But what is the justification for such a tax in the first place? It is similar to the argument for a tobacco tax: the high cost of health care.

According to Yale University's Rudd Center for Food Policy:

Obesity accounts for 6 percent to 10 percent of U.S. health care spending, compared with 2 percent to 3.5 percent in other Western countries. The burden of obesity-related medical costs falls disproportionately on public health care in the U.S., draining resources from public programs like Medicare and Medicaid. Obesity accounted for 27 percent of the growth in real U.S. health care spending between 1987 and 2001.

The Trust for America's Health estimates that obesity costs each Wisconsin resident an average of $272 per year in health care fees. In addition, in our state 24.8% of all adults qualify as obese, ranking Wisconsin 22nd in fat among the states. Meanwhile, the same group ranks Wisconsin last for state spending on public health, with only $9.23 spent per capita in 05-06, compared to the national average of $31.00 per capita.

While a fat tax isn't on the radar screen in Wisconsin at this time, our declining revenue in the face of increasing costs, especially health care costs, may lead to desperate and drastic attempts to find new revenue sources. Until then, stock up on chips and candy.

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.