The County Line - Legislative Preview
Issue 2002
Streamline Sales Tax Issue Important
for Legislature
Here's wondering just how
many of you used the Internet to purchase Christmas gifts
this season. And, perhaps more importantly, how many of
you intend to voluntarily pay the use and sales tax you
owe on those purchases.
It may be pretty difficult
to estimate the answer to the first question. But the
answer to the second question is rather clear -- few people
in Alabama or around the country voluntarily pay the use
and sales tax they owe from purchases made on the Internet.
We've written here several
times about the national effort to establish a system
for the collection of this tax. As one of Alabama's five
voting delegations on this national project, I still have
nightmares about the issue.
This national effort has now
reached the point that it is in the hands of state legislators
around the country. The national committee has approved
a plan to allow for voluntary collection of this tax by
Internet sellers. Supporters of the concept hope this
voluntary plan will be so successful that the U.S. Congress
will make it mandatory sometime in the near future.
Before even this voluntary
program can begin, at least 10 states must change their
entire tax code to conform to the national program. And
these changes must be applied to BOTH Internet sales and
those sales within the state. This linking of Internet
sales with in-state sales has complicated the decision
that must be made in state Capitols around the country.
Certainly all states would like to receive revenue from
the Internet, but changing your tax code for in-state
sales may mean that some states (perhaps even Alabama)
will not gain enough from Internet revenue to justify
overhauling their entire tax structure.
This issue is likely to surface
during the 2003 regular session of the Alabama Legislature.
At that time, there are many issues for Alabama's officials
to consider. Here are a few of the major ones.
First, the cost of operating
this program may make it prohibitive -- at least at the
outset -- for Alabama. Each state will be required to
fund its share of the administrative activities necessary
to run this national approach. Certainly those costs will
be substantial and Alabama's current financial difficulties
may make it very difficult during the coming fiscal year.
But there are other significant
costs, as well. The remote sellers are going to demand
a discount, or rebate, to off set their costs (including
the credit card transaction fees that are based on the
dollar amount of the charge). The technology necessary
to process the transactions and deliver the funds to each
state and then to each locality will be expensive and
will require almost daily updating.
Once in place, this substantial
investment will only allow Alabama to participate in a
process that allows for voluntary collection. Therefore,
any increase in revenue for Alabama must be evaluated
to determine if collections from remote sales will offset
its share of the cost.
Second, participation will
require a complete rewrite of Alabama's sales and use
tax code, with no guarantee in new revenue. Such a rewrite
will be filled with political difficulties and revenue
uncertainties.
For example, Alabama currently
exempts prescription drugs from sales taxation. The definition
of prescription drugs adopted by the program is far different
from that employed by Alabama at this time. The new definition
will generate political debate, as will every new definition
that will be required by the program.
Third, one of the key elements
in the program is the ability of the national governing
board to evaluate the statutes, rules and regulations
of each state and to determine whether each state can
participate in the program. The decision by the board
cannot be appealed and Alabama would then be forced to
make changes in its laws as determined by this governing
board.
Fourth, the rules and procedures
of the project will not permit self-collection to continue,
even for in-state sales. So members of the Alabama Legislature
must evaluate the expected new revenue in light of losing
the benefits of self-collection on the county and city
level.
Most self-collecting cities
and counties in Alabama continued to enjoy revenue growth
during 2001 and 2002. During the same time, collections
at the state level lagged behind the growth experienced
by self-collecting entities. A shift away from the current
collection method will impact those local entities and
programs that are funded with this revenue.
Cities and counties must also
evaluate the loss in revenue from discontinuing local
collection in light of the level of Internet sales being
produced in their local community. For example, if local
collection has generated an increase in sales tax revenue
of 15 percent, a rural county or city can only expect
this change to be a "net" gain in revenue if it can recover
this 15 percent loss from Internet sales. In rural Alabama,
this seems very unlikely.
Even though there have been
amendments to the self-level collection requirement (amendments
offered by the Alabama delegation), the program cannot
reach its goal of simplification if states are allowed
to have local collection, as we know it today. Perhaps,
some other acceptable arrangement can be forged, but it
will be far different from self-collection under Alabama
law.
Fifth, the streamline program
allows for only one statewide tax rate and one local tax
rate. There is one exception that would allow for another
rate (which could be zero) on items such as utility purchases.
This requirement for one rate
will have a dramatic impact in Alabama because we have
separate tax rates on items such as farm machinery. In
order to participate, the rate on farm machinery (for
example) will be raised from one-and-one-half percent
to four percent or the item will be exempted from sales
taxation altogether.
The rate will also impact the
local governments -- and many local services such as local
boards of education and volunteer fire departments --
because many locals have different tax rates. The agreement
also authorizes each local entity to levy only one rate.
Sixth, the agreement seems
to authorize the local governments to continue to enforce
(audit) for those taxpayers that do not register with
the program. Again, local audits have produced increased
revenue for local governmental services. The elimination
of local government's ability to audit a local seller
simply because that seller registers with the streamline
project will result in reduced revenue for local programs.
At this time, the Alabama Department
of Revenue and the local governments are working on a
"team" approach to auditing that is expected to reduce
costs, reduce audits on the retailer and generate additional
auditors that can focus their attention on out-of-state
sellers. This effort would be difficult, if not impossible,
to utilize under the streamline agreement.
With all of these things to
consider, this issue will certainly be a challenging and
confusing one for both the Alabama Legislature and county
officials. It is important that the ACCA and one of its
affiliate organizations, the County Revenue Officers Association
of Alabama, take a leading role in speaking out on this
issue beginning in March.
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