Phantom Menace: Fear of "lurking taxes" may deepen budget holes

One might imagine that with a $500 million budget shortfall for the upcoming year and the strong likelihood of chronic shortfalls for years to come, Oklahoma legislators would not want to jeopardize millions in annual state and local tax revenue paid by out-of-state retailers. Yet that is precisely what a majority of House members did recently in using the phantom threat of new taxes to vote down legislation (SB 744) implementing a minor technical revision to the Streamlined Sales and Use Tax Agreement (SSUTA).

The SSUTA has its origins in Supreme Court rulings that restrict the ability of states to collect taxes from remote retailers who sell by mail order, phone or over the Internet if the seller lacks a physical presence, or nexus, in a state.  As more commerce is conducted through remote sellers, the Supreme Court’s rulings have had an increasingly adverse fiscal impact on states and municipalities, as well as putting locally-based brick-and-mortar operations at a competitive disadvantage (see our discussion here).

The Streamlined Sales and Use Tax Agreement is a form of interstate compact that states have negotiated in the absence of federal action to address the problem. Under SSUTA, participating states agree to various reforms that serve to harmonize their sales tax laws, including adopting uniform tax definitions, simplifying rates, administering all local sales taxes at the state level, and standardizing where sales are taxable. In return for these efforts that reduce business administrative expenses, some remote sellers voluntary agree to collect and remit sales tax on purchases made in those states. Participating sellers are also absolved of certain uncollected and unpaid sales and use taxes they may have previously owed.

Oklahoma is one of 24 states that have passed the conforming legislation to implement SSUTA. Currently, some 1,400 retailers voluntarily collect and remit taxes in participating states. The Oklahoma Tax Commission reports that Oklahoma is collecting $15 million annually in use taxes from those retailers as a result of our participation in the Streamlined Sales and Use Tax Agreement.

It is this revenue that is endangered by the failure of SB 744. The Agreement is periodically modified to address new issues based on negotiations between states and retailers. Participating states must then amend state law to conform with the Agreement. SB 744 represents one such modification to standardize how advertising and promotional direct mail are taxed. The bill had no fiscal impact and creates no new tax obligations; it only clarifies the application of taxes on sales that are already taxable.

The bill passed both the full Senate and the House Appropriations and Budget committee unanimously. Then, unexpectedly, the bill was twice voted down on the House floor, with majorities from both parties voting “nay”.  Opponents, led by Representatives Mike Reynolds and Mike Ritze, referred to the bill as a “lurking tax on Internet transactions

If the conforming language in SB 744 is not revived, Oklahoma will be obliged to report to the Streamlined Sales Tax governing board that the state is out of compliance. According to the Agreement:

If a member state is found to be out of compliance with the Agreement, the governing board may consider sanctions against the state. The sanctions that the governing board may impose include expulsion from the Agreement, or other penalties as determined by the governing board.

Oklahoma will likely be granted the opportunity to return to compliance next year before facing significant penalties or expulsion. However, if the Legislature refuses to adopt this change and Oklahoma is forced to withdraw from the compact, some of the 1,300 remote sellers participating in SSUTA could decide to stop remitting taxes to the state. We would hope lawmakers would spend less time worrying about phantom taxes and instead start taking responsibility for funding a budget adequate to Oklahoma’s needs.