Shoppers often visit Great Northern Trading Co. to look around and ask about products. Many visitors to the Rockford-based home decor and gift store also pull out their smartphones to compare prices with online retailers.
Owner Barb Stein says those shoppers have a common refrain: They’ll ask if she can match the online price, which doesn’t include state sales tax.
“That’s not really fair to us. In many cases, that’s probably my profit on that sale,” Stein said. “Every one of us is threatened by this non-collection of sales taxes online.”
That’s why lawmakers in Lansing are considering a four-bill package that would collect state sales and use taxes on online purchases in a move aimed at leveling the playing field for brick-and-mortar retailers.
The bills before the House Tax Policy Committee would codify into state law the guidance issued by the Michigan Department of Treasury weeks after a June 2018 U.S. Supreme Court decision in a South Dakota case gave states greater ability to collect sales taxes from online sellers.
The ruling established that states can require online retailers to collect and remit sales taxes on purchases if they have an “economic presence” in the state. Sellers previously needed to have a physical presence in a state to be forced to collect and remit sales taxes.
For years, online retailers generally left it up to customers to pay sales taxes. In 1999, Michigan added a line on its tax form for residents to fill in and pay a use tax on online purchases when they file their annual tax returns. However, only a small percentage of residents ever actually did.
Out of more than 4.7 million tax returns filed by residents for 2018, just 93,035 paid the use tax for online purchases made during the year, according to the House Fiscal Agency.
The state Department of Treasury issued its administrative bulletin last August that put in place rules adhering to the U.S. Supreme Court ruling. The state rules, which took effect Oct. 1, require out-of-state online sellers to collect and remit sales taxes if they had more than $100,000 in sales or 200 or more separate transactions in the state over the prior 12 months.
Two of the bills in the state House give the rules the force of law, although based on transactions in the previous calendar year rather than on a rolling 12-month window that’s currently used. The other bill would extend the same legal requirements to so-called online “marketplace facilitators,” or platforms such as Amazon and eBay that sell a third party’s products.
“We believe this is a fairness issue,” said state Rep. Lynn Afendoulis, a Republican from Grand Rapids and the main sponsor of one of the bills.
“The world is changing rapidly. ‘Main Street’ isn’t a promenade of shops in the midst of a community, but a line of fiber optics that run under a community’s roads to sellers around the world. This creates tremendous opportunities for buyers, but it puts retailers in Michigan often at a disadvantage,” Afendoulis said.
Similar laws already have been adopted in 27 other states and the District of Columbia, some of which “are better and more thorough than others,” said Afendoulis, who chairs the House Tax Policy Committee. She and other sponsors of the bills are open to changes to “make sure that our legislation is thoughtful, thorough and effective.”
Having large online platforms like Amazon collect and remit sales taxes on transactions that originate in the state eases the burden on small online sellers and makes it easier to enforce, said Dave Metelski, an administrative law specialist for the state Department of Treasury, which supports the bills.
“It really actually helps with compliance because you have a lot of small sellers now that sell through these marketplaces that aren’t remitting Michigan tax, and when you make the facilitator essentially the collection agency of those smaller sellers, your enforcement of the tax becomes much, much easier because you have less taxpayers remitting larger amounts of cash on behalf of lots of different people,” Metelski said.
In the recent committee hearing on the bills, Afendoulis noted how business owners often see people who browse for products in their retail stores only to end up buying on Amazon, eBay or another platform to avoid paying the sales tax.
Stein at Great Northern Trading Co. said that has occurred more frequently in the last three or four years. She called passage of the bills a “no-brainer.”
Other retailers testifying at the Tax Policy Committee hearing told similar stories. That includes Doug Wildey, CEO of Comstock Park-based Game Room Guys, which has stores in Comstock Park and Livonia that sell arcade video games, pool tables, pinball machines and other games. The company also ships products nationally.
Wildey told lawmakers that after spending more than $1 million in the last 14 months to expand his Comstock Park store and open the Livonia location, “it has become evident … that we were getting show-roomed significantly.”
“People would walk into our showroom in Livonia, play with the brand-new pinball machines on the floor, talk to us and ask us how much it was, and we would tell them,” he said.
Customers then would leave and when the company followed up with them, they’d say they already bought what they wanted online from an out-of-state seller and saved hundreds of dollars by not paying sales tax, Wildey said.
Since the Supreme Court ruling, Game Room Guys has collected and remitted sales taxes on online sales to customers in states that have enacted laws similar to what’s proposed in Michigan.
“However, our competitors on those channels don’t pay state taxes coming our way, so we lose sales again. We not only lose them in the showroom but we lose them online,” said Wildey, who called the proposed legislation “a great step forward to try to get people to comply with the state sales tax.”
Dan Marshall, the CEO of Lansing-based Marshall Music Co. that has seven retail stores in Michigan, called the present situation “a bit of a runaway train for retailers with the tax disadvantage we’ve operated under.”
The bills “would certainly help Marshall Music compete on a level playing field” and compete against third-party sellers that use Amazon or eBay and operate out of “industrial parks or pole barns or garages or basements and forcing us to compete with them when they have that sales tax advantage,” Marshall said.
“There has been significant decay in our business. There are entire areas (and) product line areas that we’ve had to walk away from because of the unlevel playing field over the last 25 or 30 years. It started with catalogs and now with internet,” Marshall said. “It’s wonderful for guitar enthusiasts to be able to walk into any one of our seven stores and see a broad selection of instruments for them to sample and play and consider and dream about, and eventually purchase. Now they do all those things, but because the margins are so thin on high-end guitars, the vast majority of those sales would go to online retailers and we’d end up just being the showroom for them. It was just an economic impossibility to continue.”
A House Fiscal Agency analysis of the bills indicates that codifying into law the state Treasury Department’s guidance would generate $168 million in state revenue in the present fiscal year, $225 million in the 2019-2020 fiscal year, and $240 million in the following fiscal year.
Nearly three-quarters of the revenue from sales taxes goes into the state’s school aid fund and about 10 percent goes to revenue sharing with municipalities. The rest goes to the state’s general fund.
Extending the requirements to online marketplace facilitators would generate another $80 million to $120 million annually, according to the House Fiscal Agency.
‘Correct the imbalance’
The legislative package has bipartisan support, as well as the backing of business groups. That includes the Michigan Retailers Association, which has long advocated for equity between online and physical retailers in collecting and remitting sales taxes.
Amy Drumm, the MRA’s vice president of government affairs, told legislators the bills are needed to make sure the state tax code reflects the current digital age and consumer buying habits, “and that all retailers are treated the same way, and that all sales are treated as sales.”
“The reality is that retailing has changed dramatically over the last 30 years, but our tax laws haven’t kept up,” Drumm said. “Michigan retailers want to compete in a 21st-century economy, but it’s hard to do so when online retailers aren’t expected to follow the same rules and collect the same taxes as Michigan-based retailers do.
“The mission here is not to put any one business at a disadvantage or any type of business at a disadvantage, but to correct the imbalance to the extent that we can.”
Large platforms already are collecting and paying taxes on third-party sellers using their sites in the 27 states that have enacted laws in accordance with the Supreme Court ruling, Drumm said.
Sales from e-commerce now account for a growing percentage of all U.S. retail sales.
The National Retail Federation projects overall retail sales in the U.S. to grow between 3.8 percent and 4.4 percent this year to $3.82 trillion to $3.84 trillion.
That follows nationwide growth in 2018 of 4.6 percent to $3.68 trillion, according to the NRF. By comparison, online and “other non-store sales” grew by 10.4 percent in 2018 to $682.8 billion and are projected to grow another 10 percent to 12 percent this year.
As e-commerce grew over the last two decades, so did the amount of tax revenue the state lost through uncollected sales taxes on online purchases. The House Fiscal Agency estimates that amount was $300.1 million as of 2017, versus $173.5 million in 2010 and $37.3 million in 2000.
“Clearly, there’s a lot that’s not being captured here,” said Jim Stansell, senior economist at the House Fiscal Agency.
Other business groups indicating support for the legislation include the Grand Rapids Area Chamber of Commerce and the Michigan Chamber of Commerce. Associations in Lansing representing public schools, cities and townships, plus retailers Kroger and Walgreens also indicated supported.
Nobody spoke in opposition to the bills during the legislative hearing.
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