One measure adopted this session to mitigate the extent of budget cuts was HB 2359, which aims to increase the collections of taxes owed on purchases made over the Internet or by other remote retailers. After opposition emerged, the final enrolled version of the bill dropped a controversial provision that would have required online retailers to report annual sales by each customer to the Tax Commission. Michael Mazerov, a Senior Fellow at the Washington-based Center on Budget and Policy Priorities, is one of the leading national experts on state taxes and a staunch proponent of state efforts to collect taxes on remote sales. He discussed Oklahoma’s new bill, which awaits final action by the Governor, in a phone interview with OK Policy’s Director, David Blatt.
David Blatt: Remind us of why a bill like HB 2359 is needed? What’s the problem that this legislation is trying to address?
MM: Legislation like this is needed because, like every state with a sales tax, Oklahoma is losing a significant share of revenue because it can’t collect sales taxes from many purchases made from internet sellers, catalog companies, and other so-called ‘remote sellers’. In fact, the best estimate is that Oklahoma is losing over a hundred million dollars a year in potential sales tax revenue from uncollected taxes on remote sales. This is revenue that is already due under existing state law. The state’s failure to collect this revenue makes its budget gap that much bigger and undermines the ability of state and local governments to maintain basic public services. It also makes the sale tax more regressive because most of the people that are avoiding paying this tax are relatively affluent people who have computers and Internet access account and can buy things tax-free online, while low-income people have to pay tax when they shop in stores.
Finally, one of the most important reasons why the non- collection of taxes of internet sales is a serious problem is that it puts local businesses in Oklahoma at a disadvantage in competing with out-of-state remote sellers. If local businesses have to charge Oklahoma sales tax and remote sellers don’t, then remote sellers start off with a built in price advantage.
DB: Why can’t states just assess taxes on these remote sellers?
MM: States can’t directly require remote sellers to collect tax when they have no physical presence in Oklahoma because of a Supreme Court decision from 1992. So even though the tax is technically due from the purchaser, there are some remote sellers that Oklahoma can’t require to collect these taxes. This new legislation is aimed at both increasing the ability of the state to make sure that the purchasers pay the tax and also, in some instances, increasing the incentive for sellers to charge the tax.
DB: Some are referring to this as a new tax or a new tax increase. Would you agree?
MM: This is definitely not a tax increase and I don’t think it can be fairly characterized as one. These are taxes that are due under existing law on remote purchases. Every state with a sales tax has a complementary use tax when the purchaser buys things that are sold across state lines. This tax has existed from virtually the beginning of the time since Oklahoma has had a sales tax. So it’s not a new tax, it’s always been there.
DB: What do you see as the good points about HB 2359 from the perspective of increasing collections from remote sellers?
MM: HB 2359 emulates what a lot of other states have done recently to maximize the amount of use taxes that are paid on remote sales. So, for example, the bill emulates part of a Colorado law passed a few months ago that required remote sellers to disclose to their consumers that they may owe use tax on what they are buying despite the fact that the seller is not charging use tax. It also clarifies that some Internet sellers ought to be collecting the tax because they have a related store in Oklahoma that may be doing things on their behalf that enhance their ability to make sales in Oklahoma. The Supreme Court has made clear that, notwithstanding the physical presence requirement, if you have a related party or an unrelated party that is helping you to make sales in a state, then that state can require you to charge the tax. One provision of the bill is aimed at putting out-of-state sellers that are in that situation on notice that they ought to be charging the tax…
Another thing I like in this bill is a provision that says that paid income tax preparers must tell their clients that they may owe use tax on what they bought… I think this is a very good thing to do. It’s another opportunity for someone in the position to do so to tell purchasers that they owe tax on what they buy.
DB: What did Oklahoma not do in this bill that it could have done?
MM: Well, I think that there are three significant shortcomings of this bill. As I’ve said, Oklahoma copied a Colorado law passed earlier this year in some respects, but it omitted two key provisions that I think would have been useful. The first is a provision that requires a remote seller to send a report to their customers at the end of each year, reporting the total amount of purchases they made from that seller over the year broken down by categories. This is another opportunity for the customer to be educated by the seller that they may owe tax on what they buy. HB 2359 requires the seller to provide some disclosure to the consumer on the invoice, but often times the invoice gets thrown in a box and the consumer never looks at it. So if sellers were required to send a separate mailing like they have to do in Colorado that increases the likelihood they would actually be informed by the seller that they owe the tax. In addition, the information on the form actually helps them comply with the use tax; it tells them how much they bought so they don’t have to go back and pull out their credit card bills. So the first major shortcoming of the bill is that it didn’t copy this provision of the Colorado law.
Second, the final version of HB 2359 dropped a provision of the Colorado law requiring remote sellers to report the total annual purchases of their Oklahoma customers to the Tax Commission annually. That would have enabled the Commission to make a follow-up contact with purchasers of big-ticket items like laptop computers and big-screen TVs to collect the tax from them.
Finally, Oklahoma failed to copy a law that was passed two years ago by New York and passed last year by Rhode Island and North Carolina that requires a certain set of Internet sellers to actually charge the tax in the state. New York passed the so-called ‘Amazon law’ that says if a remote seller has a so-called affiliate program, in which they pay commissions to in-state websites for linking customers to the website of the remote seller, then the remote seller has to charge tax because effectively they have an in-state representative. Oklahoma could also have emulated that law and actually require additional Internet sellers to collect the tax and not just report to their customers that the tax may be due.
DB: So based on experiences in other states, what do you expect the reaction to be to HB 2359 from online retailers? Should we expect a full-fledged assault on this bill?
MM: I don’t think so. I think the things that I just recommended that were left out of this bill were more controversial steps that states have taken in the past couple of years to address this problem. Without those three measures I wouldn’t expect a huge amount of opposition to this, but undoubtedly there will be some.
DB: Overall what grade would you give Oklahoma for HB 2359?
MM: Overall, I would give the state a “C.” I think you lost a good opportunity to address the problem a little more forcefully with the Colorado provisions that were omitted and not enacting the New York version of the law. Nonetheless, the state deserves some credit for trying to get more compliance from purchasers and increasing the likelihood that at least some sellers will charge the tax.