Fight about collecting online sales tax in Minnesota gets personal

  • Article by: ADAM BELZ , Star Tribune
  • Updated: March 3, 2013 - 7:58 AM

Consumers love getting a break on online purchases, but critics say out-of-state retailers get an unfair advantage.

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Larry Lucast of Corvette Specialties in Mounds View said he went out of business because online competitors didn’t collect sales tax.

Photo: BRUCE BISPING • bbisping@startribune.com ,

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The white 1969 Corvette, profiled in the center of Larry Lucast’s shop, was the essence of his business model. It was also, in the age of the Internet, his downfall.

He used the car, cut open to expose its insides, as a teaching tool.“It’s just a real handy way to show customers how the part is going to work once they take it home,” said Lucast, 64, owner of Corvette Specialties in Mounds View.

So handy, in fact, that customers used their newfound knowledge to buy the parts they needed online, where they didn’t have to pay sales tax. The practice — known as showrooming — eroded the 32-year-old business until Lucast closed the doors for good on Feb. 20 to pack the inventory and ship it to a buyer in South Dakota.

“People see that ‘no sales tax,’ and it’s just an irresistible draw to them,” Lucast said. “I bet there are thousands of mom-and-pop businesses that have gone out of business.”

Efforts are underway to change that. Currently, federal law prohibits states from forcing out-of-state companies to collect sales tax unless the seller has a nexus — a store, warehouse or other physical presence — inside the state.

Online sales accounted for roughly 10 cents of every retail dollar spent in the United States last year, according to ComScore, and the inability to tax that commerce has become a vexing problem both for state officials and for bricks-and-mortar business owners who argue that the system gives Internet sellers an unfair advantage.

Gov. Mark Dayton’s plan to reset the Minnesota tax code takes a swipe at the issue by broadening the definition of what constitutes a nexus to include independent folks in Minnesota who sell through an online retailer like Amazon or eBay. The measure’s impact would be minimal — $5 million in tax collected per year — since many online retailers would end relationships with independent sellers to avoid collecting the tax, the Department of Revenue said.

But states also are clamoring for Congress to give them sweeping authority to force all out-of-state online merchants to collect tax on items shipped to their states. A bill in the U.S. Senate that would do just that has the support of the Twin Cities Metro Independent Business Alliance, Best Buy, Target, Sen. Amy Klobuchar, Sen. Al Franken and even Amazon.com.

Still, consumers cherish Internet shopping that ends up being tax-free, and the bill’s opponents include eBay, its army of independent sellers and some taxpayer groups.

“Congress is going to take a lot of heat for passing this,” said Richard Pomp, a law professor at the University of Connecticut. “The politics are quite brutal.”

Internet sales-tax law stems from Quill vs. North Dakota, a 1992 U.S. Supreme Court decision that held that retailers are required to collect sales tax from customers only if they have a nexus in that customer’s state. States can impose the tax, but must collect it from consumers, not sellers.

Whenever a Minnesotan buys something online from a company that is not required to collect sales tax — a set of kitchen knives, Season 3 of “Downton Abbey,” a vintage steering wheel for a 1960s Corvette — the law requires that he or she calculate the tax and pay it to the state. It’s called a use tax, and almost nobody pays it.

“Most people don’t, and a lot of people don’t understand there is a use tax, and people are going to view this as a new tax,” Pomp said.

In Minnesota, roughly $400 million in tax revenue goes uncollected because the state doesn’t have enough people or time to track down all the people from Luverne to Lutsen who don’t pay the use tax.

Enforcement is a challenge

“Given the roughly 5 million residents in Minnesota, enforcing use-tax compliance poses significant resource challenges,” the Department of Revenue said in a statement.

The bill that would let states shift the onus from the buyer to the seller is the Marketplace Fairness Act, first introduced in 2011 and reintroduced in February by Sen. Dick Durbin of Illinois. The legislation would let states force all retailers to collect the tax, regardless of whether they have a physical presence in a state, so long as the state streamlines its sales-tax administration.

Retailers like Best Buy and Target have long promoted such a bill. Now Amazon, whose evolving business model requires it to build additional distribution centers in more states, supports it as well.

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