There are multiple threats to the continuing prosperity of Little Rock and communities throughout our state and nation (crime, education, climate, etc.). But none is more serious or more easily resolved than our inability to collect sales taxes on purchases made over the Internet.
When the Internet was in its infancy, a bill was passed in Congress called The Internet Tax Freedom Act. It was signed into law in October 1998 by President Bill Clinton, and was last extended by President George W. Bush. It was intended to preserve the commercial, educational and informational potential of the Internet.
The law banned federal, state and local governments from taxing Internet access and from imposing discriminatory Internet-only taxes. The law did not exempt sales taxes on online purchases of physical goods, but two Supreme Court decisions--National Bellas Hess v. Illinois Department of Revenue and, in 1992, Quill Corp. v. North Dakota--addressed taxes on ordered items. The 1992 Supreme Court ruling reaffirmed the earlier Bellas Hess decision, stating that taxation on sales by vendors who had no significant physical presence in the state violated the Commerce Clause of the U.S. Constitution. This ruling allowed companies with no physical presence in the state to not collect taxes on goods purchased over the Internet.
Why is this an important and critical issue to the people of our community? City and county sales tax make up about 50 percent of the revenue for the city of Little Rock. Unfortunately, over the last four or five years, the rise in Little Rock's sales-tax revenue has been minuscule. As an example, if you look at the combined county and city sales-tax revenue for 2013 compared with 2012, there is only an increase of $173,443, much less than 1 percent. During this same period of time, our city expenditures, employees, health care, CATA, etc., have risen at a 2 percent to 4 percent rate. Our fixed expenditures represent 85 percent of our budget.
In 2012, there were $225 billion worth of online sales and an estimated loss of sales-tax revenue of $23 billion. In order to correct this injustice, a bipartisan group in Congress led by Arkansas' Steve Womack introduced The Marketplace Fairness Act of 2013.
The bill acknowledges the two Supreme Court decisions prohibiting sales-tax collections if a company has no physical presence in the state. The bill presents an alternative to the conundrum of how to collect sales taxes on Internet sales by simplifying individual state sales-tax laws, thus easing the concerns of multistate sales-tax collections. The bill has already passed the Senate but still languishes in the House of Representatives. Interestingly, a number of large corporations including Wal-Mart, Best Buy, Bed Bath & Beyond and Barnes & Noble have all endorsed the bill.
In December of last year, this subject took an unusual twist when the U.S. Supreme Court let stand a ruling on a 2008 New York state law requiring Internet companies to collect taxes even if they had no physical presence in the state. This suit was brought by Amazon.com and Overstock.com. New York Court of Appeals Chief Judge Jonathan Lippman said that "if a vendor is paying New York residents to actively solicit business in this state, there is no reason why that vendor should not shoulder the appropriate tax burden."
Barbara Underwood, New York's solicitor general, wrote that her state law called for simple fairness, and I agree. I believe that the unintended consequence of the Internet, National Bellas Hess v. Illinois, Quill Corp. v. North Dakota, and the Internet Tax Freedom Act has been to deprive Little Rock and communities throughout our state and nation of the sales taxes they need to pay for services for our citizens.
Without this revenue, communities throughout our nation will gradually have to trim their budgets, which will inevitably lead to decreased services for citizens. City governments must be good stewards of all public monies, cut all unnecessary items from their budget, and assess the value to our community of every activity paid for by public monies. But without the ability to collect all the sales tax due on goods and purchased by our citizens, we will be unable to maintain our present level of service, much less enhance the quality of life in our community.
As I am sure you note, I am frustrated about this problem because I think it threatens the viability of Little Rock and communities throughout our nation. I feel that there are three solutions that we as a community should consider.
The first solution is to wait until November when the Internet Tax Freedom Act expires and start taxing various aspects of the Internet. The second is to urge our elected officials in the House of Representatives to aid Representative Womack in passing the Marketplace Fairness Act. Lastly, we should consider asking our governor and legislature to pass a bill modeled exactly after New York's law mandating payments of all sales taxes on goods bought outside the state.
It appears that the Supreme Court is not at this time desirous to take up this issue, having let stand New York's legislation dealing with Internet sales. Copying the legislation may well be the quickest way to solve this issue.
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Dr. Dean Kumpuris is an at-large city director for the city of Little Rock.
Editorial on 05/29/2014