Politics & Government

Washington covets online sales tax revenue, may take the risk of budgeting for it

In a bet that the U.S. Supreme Court is ready to change its mind, Washington state lawmakers are considering trying to collect vastly more tax revenue from online shoppers.

A budget approved Thursday by the state House counts on that gamble paying off.

Democrats spearheading the move say they’ve waited long enough for Congress to let states collect sales tax from Internet businesses.

The high court has said for decades that unless Congress changes the law, state governments may collect sales tax only from sellers that have a physical presence in their states. Even Washington, home to one of the biggest online sellers – Amazon – still misses out on roughly $400 million a year in state and local revenue from other online retailers.

“Just because the federal government is both impotent and incompetent in this area,” House Finance Committee Chairman Reuven Carlyle said, “doesn’t mean that we in Washington, who are smart enough to know how to turn on a computer, shouldn’t move forward with this policy.”

Senate Republicans’ chief budget writer, Andy Hill of Redmond, isn’t ruling out the idea, even though a competing budget plan he unveiled last week doesn’t include it. In fact, he proposed a less sweeping expansion two years ago.

The idea could be more palatable to the GOP than other items in Democrats’ $1.5 billion tax package awaiting action in a House committee because it can be viewed as enforcing existing tax law rather than raising taxes.

Online shoppers are already supposed to send state government a check for “use taxes” equivalent to any sales taxes they don’t pay. It’s just that almost no one does.

Another bipartisan selling point for the House proposal is that it’s one of the few proposed tax changes not under attack by the state’s chamber of commerce. Members of the Association of Washington Business have seen their sales undercut by the tax-free prices of online competitors. While not taking a position on the proposal, AWB chief lobbyist Gary Chandler said the state should pursue online sales revenues it’s missing out on.

The Democrats’ idea, know as expanding “nexus,” will nevertheless face opposition. Internet-based companies such as eBay and Overstock.com have organized to fight such tax expansions at the federal and state levels, arguing sellers will simply change the way they do business to avoid the tax burden.

But that would be a tougher argument in Washington because of the wide net cast by Carlyle’s proposal. It makes five major additions to the set of scenarios in which the state can collect sales tax from a business. The combination of all five should capture the vast majority of uncollected taxes, Carlyle argues.

That’s why the Seattle Democrat is pushing the changes, two years after calling the more modest plan by Senate Republicans “a train wreck of a policy.” It didn’t go far enough, Carlyle now says.

The state Department of Revenue believes four of Carlyle’s five proposals for expanding nexus rest on “strong legal ground,” said Drew Shirk, the agency’s assistant director for legislation and policy.

The fifth one, though, is the central pillar of the plan.

And that’s where the Supreme Court comes in.

That pillar is a declaration that all businesses would be responsible for collecting sales tax on online purchases from Washington customers if they make at least $267,000 from sales in the state, or if they meet one of several other thresholds.

Those thresholds exist in Washington law for other kinds of taxation, but applying them to sales tax would break with decades of Supreme Court precedent requiring physical presence.

The plan “will run smack into the physical presence standard,” said Steve DelBianco, executive director of e-commerce trade group NetChoice.

But Justice Anthony Kennedy has invited a challenge to that precedent. He did so in a recent opinion in which he said the current system is “inflicting extreme harm and unfairness on the States.”

While Kennedy is just one of nine justices, he often casts the swing vote when there are divisions between liberals and conservatives.

Kennedy’s message was “a green light for action,” said Carlyle, who said he’s heard a couple other states are also reacting with proposals for change. Carlyle’s House Bill 2224 quotes extensively from Kennedy’s opinion in making the case that the current policy is a relic of a time before e-commerce. Today, the bill says, Internet sales are a more than $300 billion-a-year economic force.

But Rep. Drew Stokesbary, R-Auburn, said it would be irresponsible for the Legislature to “go out on a limb” by budgeting for millions of dollars in new revenue based on the words of a single justice, who might have no allies in his position.

And DelBianco contends that even if the court does make the change, websites might be able to take shelter under a separate constitutional provision related to due process.

Stokesbary said the revenue department could instead do more outreach to inform online consumers of their obligation to send in money by paying the so-called “use tax.”

“I didn’t realize the use tax existed until I went to law school,” he said.

At the request of House budget writers, the revenue department drew up a legal strategy for expanding sales tax obligations. But the department says the strategy comes with risk.

Tax collectors predict the plan, by its fourth year of collections, would raise $106 million annually for the state and $37 million for local governments. Those amounts eventually would double.

But tax collectors’ don’t assume Washington governments would reel in all the online sales tax they’re owed. They used more conservative estimates out of caution that the Supreme Court might strike down the key provision.

“It’s still 50-50, really, if we would be upheld in the end,” Shirk said.

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