Collecting Internet Sales Tax: It's Time
Grossman
Each year, according to the Massachusetts Retailers Association, the state loses approximately $335 million in sales tax revenue to online or other remote sales, such as telephone orders and catalog shopping. Massachusetts should act to collect this revenue and use it to improve our infrastructure, especially transportation.
Massachusetts does not collect sales taxes on remote sales unless a company has a physical presence here. This creates an advantage for online and other out-of-state vendors and penalizes local businesses, especially retailers, who face competition from online giants, and must also charge their customers sales taxes. This threatens the more than 500,000 retail jobs in the state.
Our calculations show that these funds could support more than $3 billion in capital borrowing over the next 25 years, plus $2 billion in pay-as-you go expenditures. This is by no means the full answer to our transportation and other infrastructure needs. But it's a significant down payment.
We have been fortunate that Massachusetts has had a higher growth rate and a lower unemployment rate than the national average recently. However, there are no guarantees this will continue, especially if we fail to provide the basic infrastructure businesses need to grow: transportation, communications, utilities and core public services.
Online sales are already subject to use taxes, but they're rarely collected. So, most taxpayers would see taxing Internet sales as a tax increase.
Using the retailers' $335 million estimate, we project that approximately $54 million would automatically go to transportation because, by law, a penny of the sales tax is pledged to the MBTA. An equal amount would go to the Massachusetts School Building Authority which, by statute, also receives a penny. That would leave $227 million in new unobligated revenue, which, combined with the money earmarked for transportation, would yield $281 million annually.
Using a conservative calculation of the amount of bonding those revenues could support, at an equally conservative 4-percent interest rate, we calculate $3.1 billion in bonds could be sold with no impact on the state's bond rating. About $80 million of the annual revenue would not be needed for debt service, providing $2 billion over 25 years in pay-as-you-go money for maintenance or operating costs.
The most effective path to collecting Internet sales tax revenue would be for Congress to approve national enabling legislation for such levies, and for Massachusetts to adopt legislation to bring the state into compliance with the proposed national standard. But many states have stopped waiting for Washington and begun taking action. Last month, eight mayors in Massachusetts urged Gov. Deval Patrick to reach a deal with online retailer Amazon that would allow the state to begin collecting sales taxes before Christmas.
Taxing Internet sales is fair, reasonable, and brings our tax system into line with modern business practices. Our retailers are asking for Main Street fairness, and our economy needs up-to-date infrastructure. It's time to deliver.
Steven Grossman is Massachusetts state treasurer.
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