Internet retail tax puts state GOP in a bind

  • Article by: BAIRD HELGESON , Star Tribune
  • Updated: February 18, 2012 - 9:11 PM

Republicans oppose more taxes but don't want Amazon to hurt local firms such as Target and Best Buy.

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Rich Ploude, left, and wife Kelley, leave with goods from after-Thanksgiving shopping at Best Buy in 2010.

Photo: Peter Pereira, Associated Press

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An increasingly tense fissure is opening among Republican legislators over a proposal to require Internet retailers to collect state taxes.

The issue pits behemoth Internet companies like Amazon squarely against bedrock Minnesota retailers like Target and Best Buy, forcing some Republicans who control the Legislature to choose between helping Minnesota companies and honoring their longstanding refusal to raise taxes.

An infusion of campaign cash and a strong push from powerful business groups is thrusting the issue closer to the forefront, triggering a standoff between two sides of the GOP caucus in one of the most complex fights of the session.

"It is a wrenching dilemma," said Republican Sen. Dave Thompson, a staunch tax opponent from Lakeville. "I am not interested in collecting more revenue, but at the same time I am not interested in putting Minnesota retailers at a disadvantage. I am still trying to see what I think on it."

Until now, most legislators were swayed by arguments from Internet retail giants like Amazon that the issue was one best left to Congress. But attempts at a federal fix have stalled.

Now, as Internet sales continue to soar and traditional, hometown retailers struggle, a handful of Minnesota Republican legislators are embarking on an unprecedented push. They argue that the law gives an unfair price advantage to Internet retailers, and they're drawing strength from some of Minnesota's largest retailers.

The Capitol arm-twisting is playing out vividly in the lobbyist ranks. Former Republican Gov. Tim Pawlenty's finance commissioner, Tom Hanson, now represents Amazon, while Pawlenty's former revenue commissioner, Ward Einess, is squaring off on the other side, representing Best Buy Inc.

"This is not a new tax," Einess said. "It is a state making its best effort to collect the taxes that are owed."

He's backed up by Brian Steinhoff, president of the Minnesota Retailers Association, who testified recently before a jammed committee hearing. "This is our No. 1 issue," he said. "We are not asking for special treatment, we are asking for equal treatment."

Minnesota revenue officials estimate the state loses $149 million a year in taxes through e-commerce from out-of-state retailers. Adopting the change would bring in an additional $5 million a year.

Steinhoff said Minnesota-based companies are competing in a cutthroat retail climate where even a perceived tax break can be the difference that sends a customer to an online retailer.

The tax law has left "government picking winners and losers, with the losers being those who have made the largest investment in their community," said Chris Peterson, a group manager for taxes at Target Corp.

'Not a level playing field'

The argument is winning new supporters.

State Rep. Greg Davids, chairman of the House Taxes Committee, had opposed the change as recently as last year, saying Congress needed to resolve it. Sometime over the summer and fall, he changed his mind.

"It's not a level playing field at all," said Davids, who introduced the measure in the House this year. "I am not going to waste my life waiting for Congress to act."

Amazon lobbyist Hanson maintains that the solution must be national in scope, and that the rush to create a patchwork of state laws won't help.

"Amazon is working with Best Buy and Target to convince Congress at a national level," Hanson said.

He said state solutions have encountered a nest of legal problems that make collection difficult. In California and Illinois, where legislators changed the law, Amazon initially severed relationships with local affiliates. Amazon later struck a deal with California and agreed to collect the tax.

Minnesotans who make purchases on the Internet are already supposed to send a so-called use tax to the state. In fact, very few actually do -- only 789 tax filers did in 2010, bringing in roughly $375,000.

No new taxes

A powerful faction of Republican legislators still view the proposal as a thinly veiled tax hike, something they have fought hard against.

State Sen. Warren Limmer, who serves on the Senate Taxes Committee, doesn't want to punish companies like Amazon for not having bricks-and-mortar outlets.

"There are inventive corporations that have learned to make a mouse trap better, and if they happen to make more sales out of it, I am fine with that," said Limmer, R-Maple Grove. "My preference is to not raise taxes in Minnesota and leave it at that."

Rep. Steve Drazkowski, who serves on the House Taxes Committee, said he does not want to see more money flowing into state coffers.

"We have a spending problem and we need to address that," said Drazkowski, R-Mazeppa. "It is a tax increase at a time when we need to be getting government to live within its means."

Senate Minority Leader Tom Bakk, DFL-Cook, said Republicans are letting ideology crush what should be a slam-dunk proposal. He said Republicans have tried to "bend over backwards" to help businesses with proposals to lower their property taxes.

"How hard is this? It's not a tax increase," Bakk said. "They want to cut taxes for all these companies, Menards, Home Depot, Wal-Mart and all these out-of-state people. Yet we can't seem to help companies like Best Buy and Target."

Minnesota is looking to join a half dozen other states that have forced Internet retailers who have affiliates in the state to collect taxes.

To ensure the proposal has smooth sailing, Bakk said he has offered a deal to Senate Taxes Committee Chairwoman Julianne Ortman: Send the proposal straight to the Senate floor and Democrats would not amend it or sully it with any other legislative hijinks.

"Let's just send it straight to the governor, on its own," Bakk said.

Sen. Geoff Michel, R-Edina, is expected to introduce the Senate version of the bill any day. So far, Ortman is not biting on Bakk's offer.

"It's really misunderstood and there needs to be a lot of education," said Ortman, R-Chanhassen. "I am not sure the general public is ready for it."

Could she vote for it herself?

Ortman paused: "I don't know."

Baird Helgeson • 651-222-1288

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