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State, local officials keep eye on Internet sales

December 07, 2000
By: Paul Monies
State Capital Bureau

JEFFERSON CITY - Click, click...ka-ching. Another sale on the Internet, another sale lost at the local mom-and-pop or megamart. And another hit to local and state tax coffers.

As if the $244 million to be refunded to Missouri taxpayers under revised Hancock Amendment rulings wasn't enough, tax collectors across the state have the Internet to worry about.

A recent federal government report estimates more than $10.8 billion will be lost nationally in sales tax revenue by 2003 from Internet shopping. And with record numbers of people going online this year for holiday purchases, revenue collection could affect funding for basic government services.

Statewide revenue loss is hard to pin down, said Stan Farmer, deputy director for the state Revenue Department's Taxation Division.

"We've tried to figure out a good way to quantify those losses," Farmer said. The state collects about $2.8 billion each year in sales taxes. Personal income taxes bring in $3 billion each year.

However, according to one Internet research company, Forrester Research, Missouri lost about $6.8 million in sales tax revenue in 1999 from online sales. Forrester's data is used by the government's General Accounting Office and companies involved in online sales.

If the Internet economy grows at its current rate, Missouri could lose as much as $91.6 million by 2005, said Jeremy Sharrard, an analyst for Forrester.

Sharrard said the recent spate of failed dot-com companies hasn't affected online spending.

"Most consumers aren't even aware of the shakedown," Sharrard said. "And it doesn't translate into people buying less online."

Public officials are following the trends closely.

"If you read the trade journals, sales over the Internet are increasing," said Farmer of the Taxation Division. "Eventually there will be some erosion of traditional sales in Missouri."

Farmer said Missouri is one of the leaders in a national group of 39 states looking into simplifying collection of existing sales taxes. The group is hoping to make it easier for catalog merchants and Internet retailers to collect sales taxes.

Sen. Wayne Goode, D-St. Louis County, said he is happy with the group's "streamline" proposal.

"We're looking at it right now to see if we need to make any legislative changes," Goode said. "We want to do it right because a lot of this is changing, but we're headed in the right direction."

With Gov.-elect Bob Holden ready to present his budget to the legislature in January, revenue loss projections are also being studied by Mark Ward in the governor's Division of Budget and Planning.

"It's basically a reduction in the growth of sales tax revenues," Ward said, adding that the state isn't bringing in less money, just not as much as it could because of online sales.

Technically, an Internet sale is subject to whatever sales taxes are in force at the consumer's location -- but with a catch. In a case involving mail-order catalog sales, the U.S. Supreme Court held that local sales taxes could be assessed only if the seller had a business presence in the state -- an office or warehouse, for example.

The move from bricks to clicks is worrying to state governments because Internet sales would continue to be exempt from new state or local taxes under a moratorium renewed by the U.S. House earlier this year. The moratorium, the Internet Tax Freedom Act, will expire in 2005 and awaits a vote in the Senate.

The federal moratorium only blocks imposition of new taxes -- it would not exempt Internet sales from any currently levied taxes.

Backers of the moratorium said that Internet sellers need time to establish themselves and any taxation would stifle growth. Critics say it is unfair to "bricks-and-mortar" retailers and damaging to local tax-supported services.

At the county level, the tax burden has been shifting from property taxes to sales taxes, which now account for almost 60 percent of Boone County's budget revenue. The county's proposed budget for 2001 stands at $34.6 million.

Sales taxes fund 13 percent of the City of Columbia's operations for the 2001 budget passed by the council in September. Property taxes fund just 2 percent.

City officials have discussed the issue, but actual revenue losses due to Internet sales are hard to quantify, said spokesman Robert Ross.

Boone County Auditor June Pitchford said she and the county commissioners are aware of the problem, but that the solution would have to come on the national level.

"We are concerned about the potential loss of revenue from transactions over the Internet because they take place outside our sales tax structure," Pitchford said.

Pitchford said the problem is basically an enforcement issue. Although Internet sales are not exempt from sales taxes, the nature of the Internet makes it difficult for sellers to collect because of the many jurisdictions involved in cyberspace retailing.

More than half of the county's general revenue fund comes from sales taxes, Pitchford said. And almost three-fourths of the county's road and bridge fund comes from sales taxes.

"Revenue officials prefer a balanced mix of revenue" between sales and property taxes, Pitchford said. "Property taxes are stable but grow at a slower rate, whereas sales taxes can grow much more quickly but are susceptible to downturns in the economy."

With that in mind, preparing the county's budget requires her to maintain a little more in the county's fund balance, the unappropriated money used for cash flow. Pitchford said the fund balance for 2001 is at $3.4 million, about 17 percent of the general revenue fund.