The County Line - January/February 2001

Counties Search for Solution to Internet Sales Tax Problem

It is not a $64,000 question. Nope, it's more much more important than that. And right now county government doesn't much like the answer.

Several years ago, perhaps even as much as a decade ago, the real forward thinkers were concerned about the impact this thing called the "Internet" could have on local businesses and tax revenue for state and local governments. Back then, very few people listened to those thinkers since nobody really understood the term "Internet" or what it might become.

Today, worry about the economic impact of Internet sales is almost a daily pastime in state capitols around the country. And in Alabama the worry has almost reached epidemic scale, especially since sales tax revenue is the lifeblood of county government.

Internet retailing has grown faster than even the most optimistic dreamer would have believed. The growth has been so enormous and the impact on "traditional" retailers is so scary that today Congress and the Alabama Legislature face one heck of a difficult problem -- how do you require internet businesses to collect state and local sales taxes?

As most everyone knows, right now few Internet retailers charge state or local sales taxes on transactions that occur from your computer. Translated, this means you can purchase your little leaguer's new titanium baseball bat for $225 at the local sporting goods store; drop another 20 bucks on sales tax and have it in your hand this afternoon. Or you can order it over the computer at any number of web sites and avoid the sales tax by paying about $8 to $10 in shipping. You'll have to wait three days for the bat to be delivered, but that's not really a difficult choice.

This "no-brainer" of a decision is repeated millions of times each month all over the globe as consumers avoid the state and local sales taxes by purchasing over the internet. And folks are starting to get mad. Mad enough that the leadership in Washington is searching for a solution to the expensive question.

When the Internet sales tax water first began to boil a few years back, Congress imposed a moratorium on state efforts to require Internet companies to collect sales taxes on their transactions. The thinking was that we'd let the internet grow and allow people to get accustomed to buying through this new method while we waited for some computer geek to come up with some way to tax this tricky monster.

But this cease-fire is about to run out. And it's just about time for those in charge to answer the question.

The latest possible answer being floated about has everyone in Alabama's county and city government gritting their teeth. And if this latest approach is adopted, it will not be very pretty in the courthouses and city halls here at home.

The idea, supported by a collation of organizations on the national level, is to collect SOME taxes from Internet companies by establishing a unified sales tax collection method throughout the country. Each state would be required to identify one central tax collection point that would collect BOTH internet sales taxes as well as sales and use taxes from the more traditional retailers in the malls and street corners. With is unified approach in place, it is assumed, Internet companies will begin to collect taxes on their transactions because they could pay all the Alabama taxes, for example, to the department of revenue. The state agency would then be responsible for distributing the money to the local governments.

For most states this is not that big of a deal. Because in most places the state government already collects all of the sales and use taxes. But it is more complicated in Alabama.

Sales and use taxes are the lifeblood of local government here in the Heart of Dixie. With increases in ad valorem taxes about as rare as a total solar eclipse, counties and cities have been forced to mortgage their entire future on sales and use tax income. County and city services are now totally dependent on revenue from these consumer taxes.

Things have gotten so bad in the last decade that counties and cities, in search of every tax dollar available, have moved away from the docile tax collection procedures of the state department of revenue. Instead, the local governments have set-up their own aggressive tax collection offices or hired private "head-hunter" firms that have sought-out taxpayers with an aggressive collection approach that has produced increased revenue from reluctant taxpayers.

This procedure has worked very well. Just the other day a county administrative official was reporting that the shift of collection to the local front had increased revenue by more than 25 percent per year. Such increases are commonplace.

Retailers, as you might imagine, do not like the fact that counties and cities collect their own taxes. A couple of years ago local governments locked heads with business groups that initially sought to rescind county authority to collect sales and use tax on the local level. In the end a compromise was forged that kept counties and cities in the tax collection business but set up standard payment dates and procedures designed to relieve the burden on the taxpayer.

But with this new excitement about taxing the Internet, the effort to create unified collection in Alabama has renewed momentum. For today, business leaders are saying, a shift to unified collection could provide the answer to that expensive question by unlocking the path to sales tax revenue from the Internet.

In fact, it appears that during the 2001 session of the Alabama Legislature some folks will be asking Alabama's 140 legislators to shift county and city tax collection from the local level back to the Alabama Department of Revenue. Such a shift will not come peacefully.

Certainly Alabama's counties could benefit from taxing Internet transactions.

But only if, both state AND local taxes are collected on ALL Internet and traditional sales transactions.

Only if, the local taxes are returned efficiently, timely and aggressively to the local level.

Only if, the Internet sales tax processors are subject to the same enforcement procedures to which the traditional retailers are subject.

And, only if, cities and counties are finally given some say in how their taxes are administered on the state level.

These are all mighty big "ifs." And these are not "ifs" that can be answered very quickly. In fact, they cannot be answered at all until Congress takes some progressive and positive steps on the national level.

Until then, it appears that Alabama's best answer to the expensive $64,000 question about taxing the Internet might well be to wait until someone forges a better list of possible solutions.