Testimony by Chris Stiffler in support of House Bill 13-1295
Mr. Chairman, members of the Committee:
My name is Chris Stiffler, and I am the economist at the Colorado Fiscal Institute.
The Colorado Fiscal Institute is a nonpartisan, nonprofit that provides credible, independent and accessible information and analysis of fiscal and economic issues facing Colorado. Our aim is to inform policy debates and contribute to sound decisions that improve the well-being of individuals, communities and the state as a whole.
I am here today to testify in support of House Bill 1295.
HB1295 prepares the state to comply with the minimum standards required by the “Marketplace Fairness Act of 2013,” federal legislation that would authorize states to require out of state retailers with more than $1 million in nationwide internet sales to collect applicable state and local taxes provided that states simplify their sales taxes and give merchants free software that automatically calculates the correct tax.
This federal legislation is needed because of US Supreme Court decisions in 1967 and 1992 that say a state can require out-of-state companies to charge its sales tax only if they have a physical presence in the state like a store, warehouse, or sales force. The Court said in 1992, “The underlying issue here is one that Congress may be better qualified to resolve, and one that it has the ultimate power to resolve.”
HB 1295 is needed to simplify Colorado sales tax laws in a way that complies with federal requirements.
CFI believes that putting Colorado in a position to have out of state retailers collect sales taxes on remote purchases is good tax policy and the right thing to do for Colorado.
HB 1295 Makes Use Tax Collection More Convenient for Consumers
Current state law requires payment of sales or use tax on sales and purchases of tangible personal property at retail. Under the current interpretation of the Commerce Clause of the US Constitution, the state cannot compel a retailer that does not have a physical presence in the state to collect the taxes owed by the consumer. Therefore, many remote or internet retailers do not collect and remit Colorado sales taxes.
The fact that the retailer does not collect the tax from the consumer does not eliminate the obligation of the consumer to pay the tax. The consumer use tax is payable to the state by individuals and businesses when sales tax is due but has not been collected. It has always been the obligation of individuals and businesses to pay sales or use tax on taxable purchases from out-of-state vendors if the item is sold, leased, or delivered in Colorado for use, storage, distribution, or consumption in the state.
HB 1295 creates a system to allow the Department of Revenue to have remote retailers collect and remit sales tax on sales. Collection by the retailer eliminates the need for consumers to file a separate Colorado Use Tax return in order to comply with state tax law. HB 1295 will make complying with the law more convenient for all Coloradans.
HB 1295 Levels Makes Colorado Tax Policy Fairer for Main Street Businesses
Requiring online retailers to collect sales tax would eliminate the competitive disadvantage that local Colorado stores suffer when competing with online retailers who are currently exempt from collecting sales tax on behalf of consumers.
A retailer located in Colorado is required to collect and remit sales taxes. Since remote sellers with no presence in the state are not similarly required to collect sales taxes there is an illusion of a price advantage for online items. This differential puts our physically present retailers at a disadvantage.
I often hear about Coloradans testing out camping equipment or biking equipment at a local store where they can see and try out the products. Then they go home and order it online from somewhere else, avoiding the payment of sales tax. This system drastically disadvantages local businesses that collect and remit sales tax on behalf of consumers and, as a result, have what seems like falsely inflated prices in comparison to internet retailers.
Local businesses and online retailers with physical presence in the state pay property taxes, state income taxes and make other contributions to the well-being of Colorado communities. And while online and catalog shopping is convenient and many consumers appreciate that convenience those remote retailers should not be provided with an additional price advantage as they compete with local retailers. Especially since the price advantage from not collecting sales tax doesn’t really reduce the price but merely makes compliance with the law more inconvenient for consumers.
HB 1295 Helps Address the Structural Deficit in Colorado Tax Policy
Colorado, like other states, is dealing with a structural deficit in its tax policy. Increasingly, consumer activity is migrating to purchases not taxed through our current tax policy that was designed for a very different kind of economy. When the sales tax became a part of Colorado law in 1937, most purchases were made locally and most consumer dollars were spent on tangible goods. Today, more than half of all consumer purchases are for services that are not taxed and more and more of the tangible goods purchased are bought over the internet. These changes in consumer behavior have meant that our Colorado’s sales tax base is struggling to keep up with funding the public investments it has supported in the past.
HB 1295 Helps Out of State Retailers Efficiently Determine Taxes Owed on Colorado Purchases
Technology is now available to easily calculate sales tax for any U.S. address. These services easily integrate into online shopping carts and instantly calculate sales tax for any U.S. address. HB 1295 though goes farther, and in compliance with the requirements of the Marketplace Fairness Act, requires the Department of Revenue to develop and provide without charge to remote sellers, software that computes sales taxes owed, files returns and updates changes in state and local rates.
HB 1295 is prudent policy that lays the groundwork for modernizing the Colorado sales tax code, levels the playing field for local businesses and makes compliance with tax law more convenient for Coloradans. I urge your favorable consideration of HB 1295.
Thank you.
CONTACT INFORMATION:
Chris Stiffler
Economist
Colorado Fiscal Institute,
1905 Sherman Street, Suite 225
720-379-3019 ext. 223
stiffler@coloradofiscal.org
Responses to common criticisms
This would just set up a nationally mandated Internet tax, which is not fair.
The act would let Colorado, if we so choose, to require online merchants to collect sales tax on purchases that are already subject to sales tax—purchases made by that state’s residents, who have to pay sales tax on online purchases anyway. And the federal government is not involved in sales tax at all. The U.S. doesn’t have a national sales tax, and the Marketplace Fairness Act wouldn’t create one.
It’s unfair to tax businesses that don’t benefit from the taxes.
Sales tax is paid by residents of the state where the tax is remitted, which means the residents who pay it both benefit from the services that sales tax funds and have the opportunity to vote on the sales tax rate. It doesn’t tax businesses; it simplified the system so that businesses can collect sales tax from consumers.
It creates an administrative burdensome on businesses.
Many online retailers already deal with state taxes. Remember that any company that has presence in the state must collect sales tax. Big retailers like Target and Wal-Mart, who have locations across Colorado, have been doing it for year. Amazon complies with “value-added” taxes imposed on its sales in foreign countries—which give further indication of online retailers’ ability to easily comply with tax codes.
In 1992 administrative complexity might have been a legitimate argument. It’s now 2013 and two big things have changed: (1) Computers calculate taxes—-just as shipping costs are determined by ZIP code. (2) State’s agreement on streamlining sales tax. Does anyone really believe that a merchant who can navigate the Internet to sell to people in other states, can’t utilize a free service that instantly calculates how much sales tax is due?
It would hurt some of Colorado’s small businesses that sell the products on the internet.
Remember that small businesses with less than $1 million in remote sales are exempt. And the businesses are not taxes, the bill just gives them the ability to collect taxes from consumers.
