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On-line exemptions cost Mississippi millions with increases expected

Internet sales harming state businesses and tax collections

Internet sales are booming, and local businesses — and state sales tax collections — are losing. It is estimated that Mississippi loses $25 to $30 million a year in sales tax revenue from mail order sales that include Internet purchases.

Most merchandise purchased through the Internet is exempt from sales tax. Mail order businesses have long been largely exempt from paying state sales taxes. But now that Internet sales are growing at a rapid rate, the impact on both state businesses and sales tax collection is becoming increasingly worrisome.

“It is a trend that has been concerning us for a long time,” said Mississippi State Tax Commission Deputy Commissioner Lester Herrington. “We have been working through our national organization, the Federation of Tax Administrators, lobbying Congress to make some changes to require these companies to collect sales taxes once they are doing a certain amount of business within our state. But that has been a long, hard row to hoe because there is opposition out there to making any changes.”

Herrington said at one point the tax administrators in city and state governments made a unified effort to convince Congress to set up guidelines to allow collection of state sales tax from direct marketers. But then a bulletin was sent out to all members of the American Association of Retired People (AARP) which recommended AARP members, many of whom might have difficulty getting out and thus buy a lot of merchandise through mail order, contract their Congressional representatives to oppose the tax.

“When they responded, it pretty much killed our efforts,” Herrington said. “We have continued, but with very little success. We get bills introduced on an annual basis, but it is hard because of resistance from direct marketing. Internet suppliers fit into the direct marketing area and as that grows, the resistance will grow, and the amount of money being lost will also grow.

“It doesn’t take long to see this isn’t a fair application. It is sort of depressing not being able to get any action to correct the problem.”

Herrington said retail merchants should get involved lobbying for changes because the sales tax exemptions put state business on an unlevel playing field compared with direct marketers.

Richard Howorth, manager and owner of Square Books in Oxford and the incoming president of the American Booksellers Association, said the sales tax exemption is hurting businesses across the country.

“From the point of view from booksellers across the country, we are obviously concerned about it,” Howorth said. “Internet sales are increasing dramatically. Amazon.com, the chief book retailer over the Internet, did $32 million in sales its first year of business. The second year, it did $187 million in business. They are projecting to triple or quadruple their sales this year. So they are taking sales more dramatically than any new retailer I have seen in 20 years in the book industry.”

Amazon, which has “one click” ordering that makes purchasing books very simple, has seen phenomenal success, and is now the largest book seller in the country. The company offers discounts and orders arrive within a couple of days.

In 1997, 3% of books across the country were sold on the Internet. This year the figure is expected to increase to 5% or 6%. Howorth said it is important to realize that these sales aren’t tapping a market that didn’t already exist. Instead, the sales are being taken away from traditional retail booksellers.

“It is not simply a matter of being unfair to existing retailers, although it is that,” Howorth said. “It is also a matter of tax revenue. Not only do I pay state sales tax, I pay county and local taxes. When you take these things into consideration and realize the government is doing nothing to replace the tax revenues they have depended on from retail for years, I’m worried about government. If they are too stupid to deal with this problem to help themselves, then they are asking for it.”

Howorth said book buyers aren’t stupid, and will increasingly use companies like Amazon to purchase books when they can save the 7% to 9% charged as state sales tax. Howorth said mail order companies have been able to keep their exemptions for years by lobbying Congress, and now Internet businesses are doing the same thing.

Herrington said state tax collectors have been aware of the problem for at least 15 years, but find they have little clout in Congress compared to constituents such as those who belong to the AARP, considered one of the strongest lobbying organizations in the country.

Some mail order businesses are required to collect sales taxes. If a company does business in Mississippi, has sales people, offices or stores in the state, they are required to collect taxes. An example would be JCPenney Co. and Sears, both of which collect state sales taxes on catalog orders.

Sales made by Mississippi businesses to customers in another state usually don’t escape taxation. Mississippi is in an association with 12 southeastern states that share audit information on sales made to another state. If a Mississippi merchant reports sales as being exempt because the goods were shipped to Alabama, then the state of Alabama is furnished with that information so sales tax can be collected by that state.

Herrington said it appears that Internet buying is the wave of the future, which means the problem will only get worse. “We’re losing the tax, and the Mississippi merchants are losing the net income,” he said. “So that makes Mississippi a loser all the way around. The profit on any of those sales is going outside the state. And, of course, we’re searching, studying and working to try to do what we can to resolve this. But as I have said on many occasions, we tax collectors don’t have a very big alumni association. And it really makes it hard to address these things unless we get some help from people who are suffering along with us, and that is the merchants. If we can’t get help from our merchants, I don’t know that we’ll get a total resolution of this problem.”


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