While the governor and a majority of legislators have taken a “no-new-taxes” pledge, they did provide in the recent legislative session for distributing any new revenues that might result from collecting sales taxes on purchases from “remote sellers.” Collecting taxes on these sales would improve tax fairness and produce large revenue gains for the state, cities and counties, but only if Congress allows.
In 1992 the U.S. Supreme Court ruled that a state may not require a company to collect its sales taxes if the company is located elsewhere. Because of this rule, companies that sell through the Internet and by telephone or mail order often do not charge sales taxes. Purchases through such “remote sellers” have grown substantially in recent years, and this creates a fairness issue for retailers who have stores in the state and do collect sales taxes on purchases. Taxing some sales but not others also reduces the revenue of state and local governments.
The Supreme Court pointed out that Congress can change the rules of interstate commerce if it wishes, and there is some momentum in this case to do so. For example, a bill titled the “Marketplace Fairness Act” would allow any state that simplifies its sales tax rules to require that remote sellers above a certain size collect those taxes.
The new Alabama law anticipates such a change and provides that half of the new revenue would go to the state and the remaining half would be split between the city and county where the purchaser is located. The state share would be divided between the General Fund (75 percent) and the Education Trust Fund (25 percent). It is estimated that this would produce more than $210 million each year in new revenue for Alabama’s state and local governments. About $79 million would go to the state’s General Fund, which is facing a budget shortfall of more than $100 million in the coming year.
It is important to recognize that collecting taxes on remote sales is a fairness issue: all retail transactions should bear the same tax burden, regardless of where the seller is located. Making this happen is a matter of tax reform. It is not incompatible with a “no-new-taxes” pledge, as our state officials seem to understand.
EDITOR’S NOTE — Jim Williams is executive director for the nonprofit, nonpartisan Public Affairs Research Council of Alabama. Jim may be contacted at jwwillia@samford.edu.
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