Building on last year’s online sales tax agreement with Amazon, Gov. Chris Christie’s upcoming budget includes a plan to require out-of-state Internet retailers to collect sales tax from New Jerseyans. It’s also an issue that is up for consideration by the Republican-controlled U.S. House of Representatives and one that puts Christie at odds with most of his potential rivals for the GOP presidential nomination in 2016.
Christie’s treasurer, Andrew Sidamon-Eristoff, decided to include $28 million in his budget for Fiscal Year 2015 for sales tax collections by online retailers who have no stores or outlets in New Jersey after the U.S. Supreme Court decided in December not to take up an appeal challenging the right of New York State to require out-of-state retailers to collect sales tax from its citizens.
The Supreme Court’s decision not to take up the case essentially gave states a yellow light to proceed with requiring out-of-state retailers to collect sales tax on Internet purchasers while the GOP-controlled House decides whether to join the Democratic Senate in approving the federal Marketplace Fairness Act, which would authorize the practice nationwide.
That $28 million — combined with some $40 million in Internet sales taxes expected to be collected by Amazon and other retailers with facilities in New Jersey — is just a fraction of the $300 million to $400 million the cash-strapped New Jersey state government could expect to collect if all New Jerseyans paid the 7 percent sales tax on taxable online purchases, according to academic studies.
Sidamon-Eristoff defended the Internet sales-tax initiative as an issue of “tax fairness” that would “level the playing field by requiring out-of-state on-line retailers to collect the same sales tax as brick-and-mortar retailers” located in New Jersey.
The loss of sales to Internet retailers who don’t charge sales tax is a growing problem for big-box stores, shopping malls, and Main Street independent retailers alike, said Jon Holub, executive director of the New Jersey Retail Merchants Association and a strong proponent of Christie’s decision to follow New York State’s example.
But in the highly charged post-Tea Party politics of the Republican Party, Christie’s decision to put New Jersey on the forefront of Internet sales tax expansion and his endorsement of the federal Marketplace Fairness Act when it passed the U.S. Senate last spring puts him on the opposite side from the strongest antitax groups and most of the leading candidates for the 2016 Republican presidential nomination.
The key question for Republican leaders — and for GOP primary voters — is whether giving states the opportunity to collect an additional $23 billion in sales taxes on Internet purchases that were never previously paid constitutes a “tax increase,” as antitax activist Grover Norquist and most GOP candidates argue, or simply enforcement of an existing requirement that 99 percent of Americans have ignored for years, as Christie and other proponents contend.
Christie’s agreement with Amazon to collect sales tax on its New Jersey sales beginning July 1, 2013 — which was part of a deal under which the online sales giant plans to build a pair of large distribution centers in New Jersey — aroused little controversy when he announced it, but that has not been the case nationally.
Louisiana Republican Gov. Bobby Jindal was forced to abandon his landmark plan to eliminate state income and corporate taxes and replace them with a statewide tax on sales and business services last April after Louisianans objected vociferously to its reliance on a sales tax on Internet purchases projected to raise more than $800 million.
Jindal, whose in-state poll ratings had plummeted, tried to recoup by publicly opposing the federal Marketplace Fairness Act as a “tax increase” when it came up in the U.S. Senate the following month. He was not alone among Republican presidential contenders in his opposition and his rhetoric:
Former Florida Gov. Jeb Bush, who agreed with Christie that Internet sales should be taxed the same as “brick and mortar” store sales, said any online revenue increase should be used immediately to reduce other taxes. That’s what Wisconsin Gov. Scott Walker pledged to do, announcing that he would immediately apply the $95 million his state would collect in Internet sales tax if the federal bill passed to reduce income taxes.
Walker, whose crackdown on public employee pensions puts him in direct competition with Christie for that slice of the GOP primary vote, currently has a $540 million income and property tax cut heading through his GOP-controlled Legislature as part of his FY2015 reelection budget, while the scandal-battered Christie surprised political analysts by not renewing his call for an income tax cut in his budget speech last week.
Ironically, Christie’s use of $68 million in Internet sales taxes to shore up his budget, coupled with his complaint that pension and retiree health benefits costs for public employees were eating up 94 percent of the revenue increase in New Jersey’s budget, inadvertently underscored Norquist’s argument last spring that the drive for Internet sales tax revenue by governors was “all about [link:http://www.youtube.com/watch?v=OoWqfrOg_PA|raising money to pay unionized state and local government workers more money and more pensions.”
It is a point that Norquist and other conservatives will undoubtedly make if Christie — whom they regard as a moderate — survives the Bridgegate scandal as a viable presidential contender.
For now, Christie is trying to make the case to Democratic legislative leaders that they should demand further pension concessions from the public employee unions, while simultaneously trying to get through a difficult budget process that includes a current-year revenue shortfall that Sidamon-Eristoff has promised to fill with $690 million in yet-to-be-disclosed spending cuts. Given that fiscal reality, the $28 million in additional online sales tax revenue and another $176 million in tax changes including $70 million to be raised by requiring businesses in the state’s 35 Urban Enterprise Zone cities to pay the 3.5 percent UEZ sales tax — is vital.
Holub, who heads the New Jersey Retail Merchants Association, said the $28 million estimate from requiring out-of-state Internet retailers to collect sales tax from its New Jersey customers “definitely seems lower than what we would anticipate,” although Treasury officials are probably factoring in a relatively low compliance rate for the first year of the program, given that New York and New Jersey are among just a handful of states currently trying to collect the tax.
He noted that a study by a team from Rutgers University’s Edward J. Bloustein School of Planning and Public Policy led by economists Nancy Mantell and Joseph Seneca forecast that New Jersey could collect $310 million in online sales tax revenue by 2015, up from $170 million in 2009.
“The conventional wisdom is that the potential revenue is in the hundreds of millions of dollars – 300 or 400 or 500 million,” Holub said. “It’s a number that’s going to get bigger every year because we’re seeing double-digit growth every year in online sales, and we’re not seeing that for bricks-and-mortar stores.”
Holub said he was gratified that the U.S. Supreme Court in December decided not to hear a challenge to a March 2013 ruling by the New York Court of Appeals that upheld the right of the Empire State to require the collection of sales taxes from online companies that maintained affiliated independent websites in New York that linked to their main company websites in exchange for commissions. “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,” the New York appellate judge wrote.
The U.S. Supreme Court’s decision to pass on the case gave Christie and Sidamon-Eristoff sufficient confidence to include $28 million from Internet sales taxes to be collected by out-of-state retailers in their FY2015 budget.
Holub said he was also encouraged by the decision of the House Judiciary Committee to hold a hearing on the federal Marketplace Fairness Act, whose passage by the Republican-controlled House — while still an uphill fight — would permanently “create a level playing field between brick-and-mortar retailers and online sellers.”
House Judiciary Chairman Robert Goodlatte (R-VA) laid out a set of principles for consideration that included a provision giving individual states the right and responsibility to ensure compliance by their own online retailers for the collection of sales tax, and requiring that the collection of such taxes be made as simple for online retailers as it is for ‘brick-and-mortar’ stores — a mandate that would presumably require the development of uniform, easy-to-use software.
These provisions are aimed at satisfying the complaints voiced by Republican lawmakers that complying with the new law would impose an onerous burden on online retailers because there are an estimated 9,600 states, counties, and localities that have different sales tax rates and rules. New Jersey is among a minority of states that does not allow the imposition of local sales taxes by all of its counties and municipalities.
Holub noted that New Jersey is one of about 25 states participating in a federal streamlined-sales task group that is charged with coming up with uniform rules for the imposition of online sales taxes across state lines, but acknowledged the complexity of the issues involved.
“It’s not just a question of what you tax, but how you define it,” Holub explained. “Take, for example, the Twix bar. Is it a candy or a cookie? Twix is a chocolate bar, but it has flour. If it is candy, it is taxable. If it is a cookie, it isn’t. States need to come to agreement on what the Twix bar is. These are the types of complicated questions that need to be resolved.”