Maryland Online Sales Tax Ignored by Enforcers, Customers

By CHRIS LEYDEN
Capital News Service

As Marylanders join millions of others nationwide in the computer shopping blitz that's become known as Cyber Monday, they should think about this: If they paid the sales tax they owe to the state for such purchases, Maryland would be $200 million richer.

The problem is, virtually no one pays, and the state's top tax enforcement officer doesn't believe they should.

Online buyers are supposed to pay sales taxes for their purchases by Jan. 21, 2013, one of the four deadlines a year for Maryland residents to file their "use tax." This use tax is imposed on any purchase that is not taxed by the seller, whether it be out of a catalog, from an Internet retailer or even from a store in Delaware, which does not impose sales taxes. If the good is being used in Maryland by a state resident and has not been taxed, that person is required to pay the 6 percent tax.

State Comptroller Peter Franchot said between consumers' lack of knowledge of this tax and an inability to enforce it, over 95 percent of the Maryland public is breaking the law. However, the comptroller said he would not enforce it.

"I am not comfortable in enforcing that and will not," said Franchot, who said it is not the citizen's fault there is not a "sensible" compliance program for online sales tax. "The collection of sales tax is a responsibility of government and industry, not the consumer."

This use tax is almost impossible to enforce, Franchot said, and is costing the state around $200 million a year in tax revenue, with that number only increasing as e-commerce grows. The comptroller's office estimates that by 2020 the lost tax revenue will be more than $310 million.

Even if this lost tax revenue was collected, Franchot said it's unlikely that other tax increases, like the recent tax hike on those making $100,000 or more, would go away.

"Maryland has an insatiable appetite to raise taxes, so I would doubt that the Internet tax revenues would substitute for some other tax increase," said Franchot. "They'd just do both."

Dee Hodges, president of the Maryland Taxpayers Association, said her organization opposes the use tax, saying it is "more regulation of the Internet," and "a way of shutting down commerce."

If the tax replaced another tax in the state, Hodges said she would consider supporting it. Maryland already grossly overtaxes its residents, she said.

"Pretty soon they'll have a bill to tax oxygen," said Hodges.

Franchot said this problem is better solved by the U.S. government than the state, as it involves interstate commerce and companies outside Maryland's jurisdiction.

For many bricks-and-mortar retailers, the issue is one of equality. They say they can't fairly compete against online retailers who don't charge sales tax, while the state's physical retailers must.

Multiple bills in the House and Senate tackle this problem, including the Main Street Fairness Act, the Marketplace Equity Act and the Marketplace Fairness Act.

In the 1992 U.S. Supreme Court case Quill Corp. v. North Dakota, the court found that a business does not have to collect taxes on customer purchases unless it has a physical location in the state. However, Associate Justice John Paul Stevens wrote for the court "that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve."

U.S. Sen. Ben Cardin, D-Baltimore, is a cosponsor of the Marketplace Fairness Act, which was introduced over a year ago and is yet to come out of committee.

"Maryland retailers aren't looking for special treatment but simply a fair way to compete against large Internet sellers who charge similar prices but get away without collecting sales tax," Cardin said in an April hearing on the bill.

Maryland Retailers Association President Patrick Donoho agreed, saying this "give(s) an added incentive to use one retailer over another." Donoho says while 6 percent may not sound like a lot, the success of the state's summer, tax-free week underscores the fact that consumers do care.

Donoho cited the example of a jeweler who had a customer come in with a $10,000 ring purchased online. When the jeweler said it would cost $100 to resize, the customer was upset. Meanwhile, by purchasing the ring from an online retailer without a state location, the customer avoided paying the $600 in sales tax.

"I think what has happened is that technology and the market has so radically changed that our laws don't, have not kept up with them," said Donoho. "It has to get fixed because you can't pick winners and losers."

Joseph Bailey, a research associate professor at the University of Maryland's Robert H. Smith School of Business, said he sees why this tax is so impossible to collect.

"The burden of collecting the tax moves from the seller to the buyer," said Bailey. While he agrees the federal government needs to solve the problem, he said it might be the rough economy, and not partisan gridlock, that is stopping bills like the Marketplace Fairness Act from moving through.

"I think it's a very difficult thing to do regardless of politics," said Bailey, who added he believes the economic landscape has to change before customers will accept another tax.

Amy Gruner, 20, said she often shops online at places like Nordstrom, Forever 21 and Amazon, but had not noticed that some places charge sales tax while others do not. The Annapolis native said she was slightly alarmed to find out she should be paying sales tax on all purchases online.

"It will hurt (Maryland businesses) if Amazon is not charging. Then people would go to Amazon more often than going to other places that do have that sales tax," said Gruner.

Robert Craynon, an 18-year-old Bowie resident, said he understands the problem for businesses in the state.

"It gives the online (retailers) a kind of unfair advantage in some ways," said Craynon.

Franchot agreed not enforcing the tax hurts Maryland businesses, but because he can't fix the problem, he won't be collecting the tax anytime soon.

"I have zero interest in making the overtaxed citizens of the state of Maryland guilty of some kind of felony for non-payment of a remote sales tax."
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