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Lawmakers reject possible Internet sales tax windfall

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PHOENIX — State lawmakers voted Thursday to give up potentially hundreds of millions of dollars of sales taxes owed Arizona — taxes the federal government may finally help them collect.

HB 2061, given preliminary House approval, says if and when Internet companies are forced to collect taxes on sales to Arizona residents, the Department of Revenue will figure out how much new money is flowing into state coffers.

It then requires the state agency to reduce income tax rates by an amount equal to those extra dollars.

Rep. J.D. Mesnard, R-Chandler, acknowledged the taxes already are owed to the state. Arizona law requires those who buy items online to pay the equivalent tax to the state if it is not collected by the seller.

But Mesnard said the record shows few Arizonans actually obey the law. So he figures if they finally are forced to pay the tax, the state should not get a financial windfall.

The Department of Revenue has no figures regarding what the state might pick up. But Rep. Mark Cardenas, D-Phoenix, said the net gain to the financially strapped state could be $190 million.

A final roll-call vote will send the bill to the Senate.

The issue of taxing Internet sales stems from a 1992 U.S. Supreme Court ruling that says states can impose their sales taxes only on companies with a physical presence there.

So an item that might cost $100 online could cost close to $110 when purchased from a “brick and mortar” retailer in Arizona that has to add state and local sales taxes.

Under state law, Arizonans are required to pay what are known as “use taxes” on items they buy elsewhere. But the mandate is all but invisible to individuals — and effectively not enforced by the Department of Revenue.

The federal Marketplace Fairness Act would make moot the Supreme Court decision, and allow states to demand those Internet retailers collect their sales taxes. It requires states to make certain changes in their tax collection practices, some of which Arizona already has enacted. But the federal legislation remains stuck in Congress.

Under Mesnard’s bill, whatever Arizona gets would be given back in the form of lower income taxes.

“Technically, these are taxes that are due us,” he conceded. But he said that’s really just on paper.

He pointed out lawmakers voted in 2011 to try to collect the tax by making the requirement more visible: They added a line to the state individual income tax form informing people of the law and telling them to declare how much they owe in Internet sales.

“There was such outcry from people thinking we created a new tax that the following year the Legislature took it away,” Mesnard said.

“At that moment, we were declaring as a policy statement, ‘This is not a tax we expect to be paid,’ ” he said. “So if we now begin collecting it, we have changed tax policy.”

However, when lawmakers repealed the change in the tax form they did not actually repeal the obligation to pay the tax. Mesnard said that was because Arizona wanted to keep the obligation on businesses that make major purchases from other states, a requirement that is policed by the Department of Revenue.

Arizona did collect more than $235 million in use taxes for the most recent budget year available.

Mesnard’s legislation raised one other policy issue: The state is using what would be increased sales tax collections to reduce income taxes.

He acknowledged the two levies do not necessarily come equally from the same taxpayers.

And sales taxes are considered more regressive, with lower-income individuals spending a higher percentage of what they make on such taxes than those at the higher end of the income scale.

Mesnard said the decision to trade higher sales tax collections for lower income taxes reflects his beliefs.

“I just think it makes better policy to reduce income tax rates,” he said.

Follow Howard Fischer on Twitter at @azcapmedia.

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