Internet Sales Tax One Step Closer to Reality in Michigan

Six Republicans and three Democrats in the state House last week approved a two bill package that would establish an Internet tax in Michigan. 

House Bills 4202 and 4203 are aimed at forcing Michigan residents to pay taxes on purchases they make on the Internet. Gov. Rick Snyder favors the bills, but, according to news accounts, House Speaker Jase Bolger, R-Marshall, is less than enthused about bringing the legislation up for a vote in the full House.

A key aspect of the issue is a 1992 U.S. Supreme Court ruling that said a physical presence was required to compel retailers to collect a sales tax. Because of this ruling, efforts by states to collect taxes on Internet purchases have generally not taken place.

The six Republican committee members who voted “yes” on the bills last week were Reps. Kevin Cotter, R-Mt. Pleasant; Frank Foster, R-Pellston; Tim Kelly, R-Saginaw Township.; Lisa Posthumus Lyons, R-Aldo; Margaret O'Brien, R-Portage; and Amanda Price, R-Holland.

Rep. Aric Nesbitt, R-Lawton, voted "no" on both bills. Rep. Pat Somerville, R-New Boston, voted "no" on House Bill 4203 and abstained on House Bill 4202. Four other committee members abstained on both bills.

"I still have concerns over how this mixes with the federal court ruling and the 10,000 sales tax jurisdictions and how the state would enforce this," said Rep. Nesbitt, who opposed similar legislation in 2011.

Proponents of the legislation argue that Internet taxes would not be new taxes but rather just facilitate the state in collecting the already existing sales and use taxes on purchases.

"A sale, is a sale, is a sale, and all sales should be treated the same," Rep. Lyons said. "Small businesses are the backbone of our economy and these bills ensure that the traditional brick and mortar storefronts in our communities can compete on a level playing field with large online retailers, who up until now, have gotten away with not collecting the already required tax. This is not a new tax; it's a 'due' tax."

Rep. Price made the same claim.

"House Bills 4202 and 4203 are not new taxes; they merely move the point of collection from the individual consumer to the out of state vendor," Rep. Price said. "In fact, they will simplify the process of filing an income tax return in our state by removing the legal obligation of the individual resident to keep track of and self-report their Use Tax from all their online, phone, or catalog purchases over the course of the entire year."

However, Michael LaFaive, director of fiscal policy with the Mackinac Center for Public Policy, said that the legislation is not about fairness.

"Just because something exists doesn't mean it needs to be taxed," LaFaive said. "If tax fairness is really at issue here, than why not just lower the tax burden on existing bricks and mortar businesses instead?

"This recent tax hike measure is another that represents apparent Republican back sliding on solid policy reforms of the past two years," LaFaive continued. "This is designed to bring the government more revenue than it would otherwise have. So far, it seems not so much about fairness as fattening the Treasury's coffers. It would be in the state's interest to find offsetting revenue and tax cuts elsewhere."

Rep. O'Brien said the bills are reasonable.

"The conservative policies guiding taxation are based on [the] simplest, broadest and fairest tax," Rep. O'Brien said. "Enforcing existing laws supports Michigan job creators and ensures a competitive playing field for all businesses.

"Anyone saying this is a tax increase, expansion, or new tax is in reality supporting the non-compliance of existing tax laws and is being dishonest about the issue," she continued. "The evasion of taxes is never a platform I will promote and I'm shocked by some who have suggested it is good policy."

In 2005, Michigan joined a compact of states that agreed to join forces in an effort to find ways to collect taxes on Internet purchases. At the time, several other states chose not to join the compact. If most states taxed Internet sales, the few that didn't might become magnets for online retailers.

Many think the issue requires action at the national level. Repeated efforts in the past to get Congress to clear the way for states to collect taxes on Internet sales have failed and it appears that current efforts are making little headway.

"While I believe Main Street Fairness is a federal issue, the failure of the U.S. Congress to act has made it necessary for us to take steps on the state level to protect our local small businesses and retailers," Rep. Price said. "It is these local businesses that create jobs in our state and invest in our communities.

"In short, my votes in favor of House Bills 4202 and 4203 were for an efficient solution that will enable local businesses to be more competitive while removing the onerous legal burden on Michigan residents to keep a record of all online purchases in order to fully comply with state law."

The Alliance for Main Street Fairness is a coalition backed by big box stores that is leading efforts nationally and within the states to clear the way for collecting taxes on Internet purchases.

House Bill 4202 is sponsored by Rep. Eileen Kowall, R-White Lake. House Bill 4203 is sponsored by Rep. Rob VerHeulen, D-Walker. The bills are only slightly different than legislation that was introduced last session.

House Bill 4202 pertains to the sales tax, which is levied on retailers and technically is a tax on the privilege of doing business in the state. Retailers generally pass on the cost of the tax on to customers.

House Bill 4203 pertains to the use tax, which falls on consumers, but the state has limited ability to enforce.

The committee members who abstained on both bills were: Republican Reps. Jeff Farrington, R-Utica; Bob Genetski II, R-Saugatuck; and Democrat Reps. Vicki Barnett, D-Farmington Hills; and Jon Switalski, D-Warren.

"I voted for HB 4202 and 4203 in committee to rectify a tax inequity between our brick-and-mortar mom-and-pop establishments and large online retail behemoths," Rep. Kelly said. "This is a tax that already exists. It simply isn't being properly enforced. An overriding reason for my vote, however, is to force a solution by the federal government. Many believe that tax fairness must be handled federally and it is my belief that an affirmative vote from Michigan, as well as other states, will force the issue in Washington and lead to meaningful reform."

Rep. Foster also defended his vote in committee.

"We are consistently working to ensure that our tax system in Michigan is simple, fair and efficient," he said. "With this legislation, we are asking our online retailers to be treated the same as the brick-and-mortar shops we have right here at home. While this is a step in the right direction, our legislation is realistically part of a larger solution that must ultimately be accomplished at the federal level.

"I also believe, however, that the collection of taxes on Internet sales should not be used as an avenue or excuse to increase revenues on the backs of our taxpayers through a new form of collection. This is why I have introduced HB 4973, which states that if and when our federal government does approve the Marketplace Fairness Act, we will sufficiently lower our income tax rate to make this a revenue-neutral change for Michigan's residents overall.

"This bill is part of a larger commitment I have made to my constituents to avoid unnecessary tax increases and promote a conservative and fiscally responsible state government in Michigan."