Will Minnesota Adopt an Internet Sales Tax?

Imagine for a moment that you were interested in purchasing a new Nikon digital camera. A quick online search returns the same initial price from both Best Buy and Amazon.com--$ 749. However, something strange happens after reaching the final checkout page; the same camera from Best Buy will cost an additional $54.56 in taxes for a Minnesota resident, where no taxes are owed from Amazon.com. $50 may not be a big deal to Ashton Kutcher, but it may mean the difference between a sale benefitting a Minnesota- based business or a competitor--not to mention $50 in lost tax revenue to the state.

Consideration of an internet sales tax proposal has policy makers engaged in heated debate, and the politics are delicious.  As a recent Star Tribune article says,

"The issue pits behemoth Internet companies like Amazon squarely against bedrock Minnesota retailers like Target and Best Buy, forcing some Republicans who control the Legislature to choose between helping Minnesota companies and honoring their longstanding refusal to raise taxes.

A Supreme Court ruling in 1992 said that states cannot force retailers to collect sales tax if they do not have a brick-and-mortar presence in a state.  Yet several states are trying to find ways to force online companies that have “affiliates” in the state to collect taxes.

Sales tax has become the primary funding source for state governments. One reason for this is that is harder for people to avoid the tax at the state level than at the local level.  For example, it would be pretty easy for me to travel the next city over if it meant paying less in sales tax, but it is largely impractical for me to travel to another state to make a purchase. As the internet brings every major retailer directly into my home regardless of where it is located, purchasing out of state becomes not only practical but downright convenient. That sound you hear is the tax base crumbling slowly under your keyboard.

There is also concern that failure to collect tax for online sales makes an already regressive tax (a tax which falls disproportionately on lower incomes) even more regressive. It is comparatively wealthy people with credit cards and ready access to the internet who can avoid paying sales tax online. 

Did you know that you are already required to pay sales tax directly to the state if it was not collected through an online retailer? Unsurprisingly, less than 800 people knew about this law, figured out how to settle up and actually paid this tax in 2010. The current law is about as unfeasible as it gets. Amazon.com claims that forcing them to collect the tax would be difficult to administer on their end as well, having to deal with as many taxing districts and laws as they do. One can speculate that Amazon would be up to the task if necessary, but if online purchases must be taxed, they argue, it is best administered at a national level to make compliance less burdensome.

The question is whether states such as Minnesota can afford to wait for the federal government to act. According to estimates from MPR, not collecting online sales tax costs the state as much as $400 million each year. For those keeping score at home, that’s 61.5% of the projected $1.3 billion deficit for the 2014-2015 biennium.