States believe Internet sales a taxing issue

11/21/2004

Buy a $1,000 television at the Appliance Center in Maumee, and Lucas County receives $12.50 in sales tax. Buy the same TV on the Internet, and the county probably won't see a dime.

With expenses from child-support collection, sheriff's office patrols, and the prosecution of criminals largely dependent on the 1.25 percent Lucas County adds to the state sales tax, officials are trying to figure out how to capture the revenue lost from Internet sales.

"People will shop on the Internet and buy a diamond ring that they don't declare on their state taxes," said John Zeitler, the county's budget chief. "In the old days, they would go to the jeweler's and buy that diamond ring and pay the tax on it. If you multiply that by all the people who are buying things on the Internet, how much are we losing?"

That's a tough figure to quantify locally, but Ohio lost an estimated half a billion dollars last year through Internet sales by not collecting its 6 percent sales tax, said Gary Gudmundson, spokesman for the Ohio Department of Taxation. He said the collective loss for the state's 88 counties could be about $100 million.

Michigan officials estimate their state will fail to capture more than $200 million in the current fiscal year.

"So we're talking about pretty serious money here that's going out the door," Mr. Gudmundson said.

In Ohio, people who buy things from out-of-state companies selling over the Internet are supposed to report the tax they should have paid on their state income tax return. So, if you buy a sweater or a stereo over the Internet, you're supposed to 'fess up to the state and pay the tax.

But that's not happening a whole lot.

Last year, Ohio residents paid about $1.2 million in taxes that they owed for catalog or Internet sales, Mr. Gudmundson said.

"The optimum solution is to have the retailer collect the tax," he said. "It's just the most effective way to do it."

And the only way that's likely to happen is if Congress passes a law requiring it nationwide, Mr. Gudmundson said.

U.S. Rep. Paul Gillmor (R., Old Fort) said he doesn't think legislation requiring companies to collect the tax for Internet sales would pass Congress, but he does think states have a right to collect those taxes.

"I'm opposed to taxing access to the Internet, but I think you have to let states and local governments have the opportunity to collect tax on the transaction," Mr. Gillmor said. "Otherwise, you will end up with a tremendous hole in the revenues for the state and local government which will impact local services, impact schools, and everything else that state and local government does."

Ohio has joined a coalition of states that are revamping their sales tax laws to make them more uniform.

Mr. Gudmundson said one goal is to lobby for federal legislation that would require companies that sell products through catalogs and the Internet to collect taxes and send them to the states from where the orders are made. After that, Ohio would send taxes to the appropriate counties.

Like Ohio, Michigan is part of that coalition. The state estimates that it will lose $257 million in its current fiscal year, said Terry Stanton, a spokesman for Michigan's treasury department.

"We are hopeful that we will begin to see some revenues flowing," he said. "Some regional and national retailers are already doing so. So we're beginning to see some of that. We're hopeful that we'll see some pay off."

Collecting additional revenue would be welcome in Lucas County, which has felt an economic pinch over the last few years. Sales-tax revenue is the most volatile portion of the county budget and accounts for more than half of the general fund budget.

This year, the county expects to collect about $69 million in sales taxes from the 1.25 percent it piggybacks on the state sales tax, Mr. Zeitler said. The general fund budget for the year is about $133 million.

Harry Barlos, president of the Lucas County Board of Commissioners, said he's been calling for the state or federal government to do something about collecting taxes on Internet sales for five years. He doesn't know why a sale over the Internet should be treated any differently than a sale at a shopping mall.

"I've always looked at it as a source of revenue and a way to level the playing field," he said. "If you continue to have people buying products worldwide over the Internet, you will continue to erode the local economic [tax] base."

In Wood County, Commissioner Tim Brown said there hasn't been a major focus on the issue, but he hopes that the state will act to capture some of that revenue.

Wood County expects to collect $13.8 million this year in sales tax, said Kristy Muir, the county's clerk and budget director. The county has a general fund budget of about $35.9 million.

"We don't want to tax the Internet, but tax the sales on the Internet," Mr. Brown said. "That's no different than catalog sales for the state of Ohio."

Contact Dale Emch at: daleemch@theblade.com or 419-724-6061.