Critics assail Governor Henry’s Internet tax compliance ideas

By Patrick B. McGuigan

Published in the Capitol Beat OK: 16-Feb-2010

When presenting his executive budget this month, Oklahoma Governor Brad Henry listed $203 million in potential “adjustments to certification,” including moratoria on selected tax credits, repeal of some tax credits, tobacco tax equalizations and other adjustments. He also announced compliance initiatives to bring $190 million more in taxes to the state government.

While all of the governor’s proposals came under quick scrutiny, among the most controversial of his revenue enhancements are two items touching on Internet sales. These proposals attracted critical commentary from observers of the state’s budget process, and four analysts have responded to requests for comments from CapitolBeatOK.

On page A-6 of the summary of the governor’s proposed FY 2011 executive budget, an item appears designated  “Collection of sales tax on remote sales.”

Narrative under the heading “potential increases to the FY-2011 Revenue Certification” reads as follows: “Currently, out-of-state businesses without a presence in Oklahoma are not collecting sales tax on Internet, telephone or mail order sales made to Oklahoma, effectively providing them with an advantage over Oklahoma-based operations that do collect the sales tax. This compliance initiative allows the Oklahoma Tax Commission to pursue sales tax collections from the out-of-state companies in question. The Governor’s budget includes an increase of $95 million to the General Revenue Fund in FY-2011 collection of taxes currently due to the state on these sales by out-of-state entities.”

Also in the executive budget document, on page A-1 of the executive summary, reference is made to a potential of $3,460,000 in new income from a line item listed as “collect taxes on electronically delivered items.” On page A-4, a more detailed explanation is given: “The governor’s budget proposes the collection of sales tax be extended to include the sale of items delivered electronically that would otherwise be taxed if delivered physically. This would include items such as computer software transferred electronically, digital movies, digital songs, digital books, etc. the total increase in collections from this change is $3.45 million.”

Some advocates of economic growth and smaller government within the state and at the national level responded critically to the proposed revenue enhancements.

Brian Downs of Oklahomans for Responsible Government commented, “Governor Henry's budget uses several new taxes and accounting gimmicks in order to avoid the tough decision to actually cut spending when the state has less money to appropriate.”

Downs continued, “Even some of his Democratic colleagues think the Governor is headed down the wrong path.” Downs pointed to state Sen. Andrew Rice of Oklahoma City, the next Democratic Leader in the upper chamber, who said on OFRG's Open Debate Podcast Series that a tax on Internet sales “is something I just don't think is smart.”

Downs concluded, “Governor Henry would be wise to listen to the growing chorus of voices from both parties calling for less spending instead of new taxes. Oklahoma families are dealing with a tough economy by eliminating frivolous spending and the state should do the same."

Stuart Jolly, state director for the Oklahoma chapter of Americans for Proserity, told CapitolBeatOK, “Governor Henry is floating the idea of closing Oklahoma’s $530 million budget deficit with the help of so-called ‘Amazon taxes.' These would require Internet retailers to collect and remit sales tax to Oklahoma. The Governor calls it an enforcement issue, not a tax increase. But that is a total misreading of the law and a failure to consider the larger consequences.”

Jolly insisted, “First, it is a tax increase. Both businesses and consumers currently operate under the assumption of not paying sales taxes over the Internet. The governor’s plan would change that and increase tax collections. Second, if Oklahoma implements such a plan it would open up the possibility of every internet retailer, even small businesses on E-Bay, having to comply with sales tax regulations in all 50 states. That’s a massive regulatory burden.  And if the states are allowed, why not allow this country’s over 8,000 different tax jurisdictions to do the same?”

Jolly concluded, “‘Amazon taxes’ are already being challenged across the country, including in the New York State Supreme Court. Internet taxes are unconstitutional and break with the long-standing precedent of requiring a physical presence before taxes can be collected.

Phil Kerpen, a policy analyst at Americans for Prosperity’s national office, commented: “Any tax reform that applies taxes to Internet sales, even in a fair nondiscriminatory manner, should be done in a revenue neutral fashion by being paired with other tax reforms, such as completing the phase out of the state franchise tax. Oklahomans are taxed enough, and the legislature should balance the budget by cutting spending, not raising taxes.”

Kerpen continued, “The key principle for taxing online sales is not to impose discriminatory taxes that don't apply to equivalent offline transactions. For instance, taxing out-of-state transactions would be discriminatory and would violate longstanding principles of taxation and the federal moratorium on discriminatory Internet taxes. There is also the definitional challenge of distinguishing between digital goods and digital services; services are not taxes offline and thus taxing them online would be discriminatory. If the proposed tax is consistent with the governor's explanation it would meet these tests, but we would still oppose it unless it is part of a revenue-neutral reform.”

Blasting Gov. Henry’s approach was Grover Norquist at Americans for Tax Reform. He told CapitolBeatOK, “There are two kinds of governors: those who see their states as thriving in the future and those who see their states as losers in the modern economy. Loser governors want to invent new taxes to tax people who leave their state or buy from other states. Winner governors see taxing Internet sales as hurting new companies and young dynamic entrepreneurs.”

Norquist continued, “Brad Henry sees Oklahoma as a losing state. Yes his governorship has done much damage to Oklahoma, but those with confidence in Oklahoma’s future should oppose new taxes on Internet sales. Henry’s pessimism is unwarranted, but it could — if his new taxes pass — be self-fulfilling.”

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