Untaxed Internet sales are costing Md. dearly

The Economy

Few buyers pay levy

stores lose business

February 07, 1999|By Jay Hancock

MARYLAND will lose $20 million in sales taxes this year that should have been collected on Internet retailing, if you believe analysts' projections.

That's enough to fix more than a few leaky school roofs. It's almost enough -- not quite, though -- to bribe Marriott International into staying in Maryland instead of booking reservations on the other side of the Potomac.

Internet commerce is quickly becoming material not just to state treasuries but to hapless "analog" stores that still do business -- can you imagine? -- in buildings.

Virtual retailers have shucked off dozens of costs that enchain their brick-and-steel enemies: Store rent. Fire insurance. Parking lots. Cash registers.

As the recent Christmas season showed, the advantages are starting to tell. Forrester Research of Cambridge, Mass., projects online U.S. retail sales of $18 billion this year and more than $100 billion by 2003.

Much of the e-trade is being pirated from malls and Main Street. And why not? Besides cutting their operating costs to half of what real stores pay, Internet vendors help consumers violate tax law and not get prosecuted.

Drive over to Borders to pick up, say, "Mechanical Animals," the latest in the Marilyn Manson canon. The CD costs $17.99, plus Maryland's 5 percent sales tax of 90 cents. Total: $18.89.

If you link to Amazon.com, however, it's only $14.99, plus $2.95 shipping. Total: $17.94.

No sales tax.

No sales tax collected by Amazon, that is. You're supposed to pay it anyway, listing the CD on Maryland tax form ST-118 and sending it with your check to Comptroller William Donald Schaefer. You are familiar with Form ST-118, aren't you? You do file it quarterly, listing not only Internet purchases but also goods from L. L. Bean, J. Peterman and other mail-order vendors. Right?

OK, maybe not.

"Taxpayers tend to be less familiar with the tax on out-of-state purchases than with the tax on local sales," says literature from the Comptroller's Office. That's a delicate way of saying: "Marylanders have never heard of Form ST-118 and wouldn't fill it out even if you told them about it and gave them a pen to do it."

All 45 states that tax retail sales also tax out-of-state purchases made by resident consumers. No state, however, works too hard to collect the money.

Bureaucrats sometimes fret about lost catalog-sale tax revenue, estimated to be about $4 billion a year nationwide. But never loudly or to much effect. Politicians aren't crazy about policing small consumer purchases, and states do get some mail-order sales tax. (If a catalog retailer has a store, headquarters or other physical presence in a state, it must tax mail-order sales in that state and send a check to the authorities.)

The Internet Age, however, is going to change all this.

"Most of the numbers you see out there suggest that somewhere by the year 2002, Internet sales will be as large as catalog sales," said Harley Duncan, executive director of the Federation of Tax Administrators in Washington. "I don't think it's unreasonable to suggest that in the next five to seven years, you could be looking at a number as large as $10 billion in foregone sales tax revenue on an annual basis.

"That, I think, gets our attention."

It should also get the attention of traditional stores and the people who do business with them. By selectively enforcing the law, states are discriminating against local retailers, who have enough battles to fight.

And laws taxing Internet sales do, in fact, exist. Last year, Congress passed the Internet Tax Freedom Act, which was widely and amazingly misreported as a "moratorium" on taxing all Internet commerce.

It's actually a ban on new taxes aimed at the Internet exclusively. Mail-order taxes are still in force, Web transactions included.

Besides the $20 million Maryland stands to lose on lost Internet-sales tax this year, the research cited by Duncan suggests that the state also will let more than $50 million in catalog-sales tax go uncollected.

To plug the leaky till, retailers and policy-makers are talking about cleaning up states' tax codes and requiring all merchants to administer a simplified sales tax in each jurisdiction. Alternatively, there's talk of applying one federal sales tax that would get dished off to the states.

For years, some conservatives have talked about setting up a national consumption tax. This may be their chance to get it.

Pub Date: 2/07/99

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