When a number of local officials and state legislators in DuPage and Kane Counties speak of their hopes for a level playing field, they’re not talking about a new Bears stadium or minor-league ballpark.
They’re hoping to see businesses that sell over the Internet held to the same rules as the counties’ local revenue producers, which include the more than 160 merchants at Oakbrook Center in Oak Brook and the hundreds of retailers in the area’s many shopping strips and downtown business districts. The issue is the local businesses’ role as sales tax collectors for the state, a job not often shared by e-tailers.
For instance, Amazon.com currently collects a use tax (levied on catalog and e-commerce sales by states that have sales taxes) but only from customers in the few states where it has a physical presence or nexus (defined as headquarters, warehouses or distribution centers; Amazon.com has no nexus in Illinois), according to national legislative and retail organizations. On the other side of the field are the businesses with a physical presence in town (known as “bricks and sticks” establishments), which are required to collect county and state sales taxes.
Given the growth in Internet sales, many local officials and legislators are insisting that all retailers should have to abide by the same rules, whether their address is Main Street or dot-com.
“The most important issue is having a level playing field,” said Oak Brook Village President Karen Bushy. “The current system is patently unfair to the mom-and-pop company in Downers Grove and the bricks-and-sticks merchant in town.”
Her town’s retailers, with annual sales of more than $1 billion, generate more than $10.9 million in sales tax revenue for municipal services each year, according to Illinois Department of Revenue officials. DuPage County merchants did more than $16.4 billion sales during the state fiscal year that ended June 30, 2000, generating more than $164 million for local municipalities. Kane County retail sales enriched municipal coffers by more than $43.6 million.
In Illinois, sales taxes (except for food and drug purchases) are based on a 5 percent state tax, with additional percentages added by municipalities, counties, regional transportation and regional water systems.
The Internet’s impact on local funding was contained in a briefing on “Internet Taxation Issues and Impacts” issued by the Illinois General Assembly’s Economic and Fiscal Commission in February 2000. The report estimated that, depending on how fast Internet retail sales rise, Illinois’ loss from the failure of e-tailers to collect sales tax revenue could range from $28.5 million to $57 million in 2002.
“The revenue helps to operate all those levels of government,” Bushy said. “When someone has a way to circumvent that, they are not only harming the competition. It also eliminates the income from all those levels of government.
“That becomes critical in several areas. The obvious example is that the merchandise ordered over the Internet, which comes by a UPS truck, still has to arrive wherever it is going. The village has to pave, patrol and plow those roads. If there is an accident, police have to come. Village services are an integral governmental part of the functioning of commerce. It doesn’t do any good to order something if you can’t get it.”
Just as important, she added, is the role local merchants play in their communities.
“Local merchants help with the softer side of community life,” Bushy said. “It is your Main Street stores that sponsor Little League teams and other things that help make a community work. You don’t see a dot-com company name on Little League shirts or on the list of donors at a luncheon for a shelter for battered women. [Local merchants] are there supporting those things. If their slice of the [total retail] pie goes away, who will make that up?”
As Bushy explained, “Our merchants go through the expense of having a beautiful store where people like to come. But people can also go there, try something on or figure out what they want, then go to the Internet to order it. If they get it on the Internet but don’t pay sales tax, how fair is that?”
Officials say that e-merchants that do not collect a use tax (present in the 45 states, including Illinois, that have sales taxes; Oregon, Montana, Arkansas, Delaware and New Hampshire do not levy sales taxes) enjoy a price advantage not available to bricks and sticks merchants. They argue that even though customers who don’t pay the use tax to online merchants are supposed to remit the appropriate amount to their state (usually a line item on income tax forms), most don’t.
Indeed, Neal Osten, director of commerce and communications for the National Conference of State Legislators, puts non-compliance as high as 90 percent.
“Of the people who buy on the Internet from companies such as Amazon.com, which does not collect taxes where they have no nexus, the vast majority do not report the sale.”
State Sen. Steven Rauschenberger (R-Elgin) said people don’t think about the effect of lost sales tax revenue on local and state services and the Internet’s possible price advantage over local stores.
“I don’t think the average citizen focuses on the impact that Internet retail transactions can have and what changes the Internet can bring about in a community. They’ll go online and say, `Oh gee, I don’t have to pay sales tax,'” Rauschenberger said.
Without a change, Rauschenberger’s long-run, worse-case scenario pictures a drop in commercial property values and community services.
“I believe it will be a long time before men buy neckties over the Internet but not long at all for them to buy white shirts online if they can save money,” he said.
“We’re already seeing some products move away [from traditional stores]. Books, music, travel are well adapted to the Internet. Wal-Mart has even suggested that people can go to their store to figure out what to buy, then go over to the Internet, which they have set up as a separate entity, to purchase the item.” Rauschenberger, chairman of the Senate Appropriations Committee, noted that commercial real estate pays 40 percent of property taxes in Illinois. He is leading a state and national drive to simplify the collection of taxes on Internet sales as co-chairman of the National Conference of State Legislators’ Task Force on State and Local Taxation on Telecommunications and Electronic Commerce. The task force convinced 29 states last year, including Illinois, to participate in a Streamlined Sales Tax System Project. It expects to return to state legislatures this year with recommendations regarding interstate cooperation.
“You can’t have a tax system that treats good citizens unfairly. Either we fix the system so it is fair or phase it out. I don’t think there are other choices, so I am willing to come up with a system that is more modern, simpler to collect and more fair because it will apply to e-commerce and Main Street,” he said.
Wal-Mart Stores Inc. spokesman Warren Townsend, director of sales, use and product taxes, said that the company does play by the rules that are in effect. He noted that SamsClub.com, a part of Wal-Mart subsidiary Sam’s Club, collects taxes in all states where it has a physical presence.
But he explained that because walmart.com is a separate company with its own board of directors, current U.S. laws allows it to operate in conjunction with another company and just collect use taxes in those states in which its partner has a physical presence.
“The corporation, walmart.com, is a partnership with Accel Partners,[a Brisbane, Calif.-based Internet company], which collects taxes in the four states where Accel has nexus: California, Utah, Ohio and Arkansas. Owning an interest in Accel doesn’t qualify it for a nexus under Public Law 86-272. There is nothing in the law that says that nexus is based on affiliated companies,” Townsend said.
He added that walmart.com might collect use taxes if kiosks go into Wal-Mart stores, allowing customers to order online there.
“But putting kiosks in is an operation decision,” he said. “It would depend on whether the company thought customers would be better served that way.”
Some towns in the area, including Geneva, have passed “e-commerce equity” resolutions that oppose any congressional moves to restrict the ability of local and state governments to collect sales or use taxes on e-retail sales. Geneva’s resolution, approved last May, favors the “expeditious” crafting of legislation that would simplify state and local sales taxes.
“We understand that the sales tax structure is different in each state and that there is no consistency in its collection,” said Geneva Assistant Administrator Mary McKittrick, explaining that the City Council supports efforts to simplify sales tax systems throughout the country.
Segments of the resolution passed in Geneva and other towns refer to the three-year moratoriums on a variety of special taxations of the Internet by the Oct. 1, 1998, Internet Tax Freedom Act. The towns oppose extension of the moratorium when it expires Oct. 1, 2001, and they say that the Advisory Commission on Electronic Commerce, created by the Internet Tax Freedom Act, has not adequately addressed the issue of tax-free Internet sales transactions.
“We want to be sure that our retailers are playing on a level field,” McKittrick said. “We have a long way to go, but it looks like there is at least a cooperative effort among many of the municipalities.”
DuPage and Kane County communities that want to work on the playing field have an ally in the Washington, D.C.-based National Retail Federation, a trade organization of 1.4 million retailers, including some pure e-players such as Amazon.com.
NRF government relations director Scott Cahill said his board of directors recently took a position in favor of simplifying sales tax systems and applying them equally to Main Street and “remote” (catalog and e-commerce) retailers.
Cahill, whose board is looking at the issue from both sides, said, “We have 45 different interpretations [states that levy sales taxes] of what nexus is. But there are also issues here of equity and an unlevel playing field. The board, recognizing the potential growth of the Internet, is concerned about how large the disparity could become if not fixed. It has huge implications for our retailers.”
