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Study: State loses millions annually in online sales taxes

November 22, 2011

A report released Tuesday morning by the Indiana Fiscal Policy Institute says the state annually loses $40 million to $114 million in sales tax revenue from online sales.

The not-for-profit, along with Ball State University’s Center for Business and Economic Research, conducted the study to help state legislators who plan to take a more serious look at the issue.

“Historically, this has been left to the states, because it’s a state sales-tax issue,” said John Ketzenberger, president of the Fiscal Policy Institute. “But the patchwork of tax districts has caused a lot of people to think that one federal tax might make more sense.”

Whether Indiana should collect sales tax from online retailers has become somewhat of a hot potato, in light of a lawsuit filed early this month by local shopping mall owner Simon Property Group Inc.

Simon’s suit supports the contention of retail advocates that state law already requires the Indiana Department of Revenue to collect sales taxes from online retailer Amazon.com Inc.

To help lure Amazon to Indiana, the state repealed a law in 2007 that required companies that didn’t maintain a place of business in the state but had affiliated locations to get a retail merchant’s certificate, which would subject them to the same tax-collection duties as brick-and-mortar shops.

Amazon has four distribution centers in the state.

The Fiscal Policy Institute’s report contests the notion that a sales-tax exemption is the most important factor leading Amazon to locate operations in Indiana. Rather, Ketzenberger argued that a central location, access to interstates and a viable work force are more important.

“There are far greater questions that are a concern to an organization when they decide to locate somewhere,” he said.

Both state and federal lawmakers, meanwhile, are beginning to weigh in on the issue.

Sen. John Broden, D-South Bend, intends to file a bill in the coming legislative session that would force the state to collect sales taxes from online retailers that have a physical presence or affiliated distributors in the state.

Nine states so far have instituted measures requiring retailers, whether or not they have a physical presence there, to remit online sales taxes.

Indiana Gov. Mitch Daniels’ administration and Amazon officials have advocated a federal solution to address the issue. Three bills are pending in Congress.

Sen. Luke Kenley, a Noblesville Republican, has been at the forefront of efforts to get a federal law requiring online sales-tax collections.

“I’m strongly in favor of doing this, but it has to be done at the federal level,” Kenley said. “The Indiana Legislature cannot do it, in order to achieve a complete solution.”

Estimates of Indiana’s sales tax revenue lost to online sales have varied widely, from as little as $33 million a year to as much as $398 million, according to the Fiscal Policy Institute’s report.

Using existing data and new methods for analyzing the data, the institute pegs Indiana’s annual losses at $40 million to $114 million.

A similar amount likely is also lost to traditional mail-order sales, according to the report.

 

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