Internet tax missing the mark

February 5, 2009

By Jim Feehan

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City takes a  hit in its sales tax collection

A new law that tries to cash in on Internet sales has not yielded the tax revenue proponents boasted a year ago. Moreover, some City Council members said sales tax money is going to Renton, because the city does not have a unique ZIP code.

The state Department of Revenue said that many national retailers were only using the five-digit ZIP code and that Newcastle is compromised by not having its own ZIP code, City Manager John Starbard said.

The law, called the streamlined sales tax, shifts sales tax receipts from the place an item was bought to the city where it was delivered. The city’s two ZIP codes — 98059 and 98056 — are Renton ZIP codes and city officials said they believe their sales tax revenue is going to Renton.

“Maybe we should start a demonstration outside Renton City Hall and demand our money,” City Councilman Steve Buri said partly in jest.

“There are some legitimate concerns raised by this issue,” he added. “We need to educate retailers on how to allocate the sales tax revenue and why it’s important to them and why it should matter to them.”

Buri said he hopes the Legislature addresses the issue of streamlined sales tax collection and dispersal during the current session.

Some smaller communities that share a ZIP code with Seattle also may be losing similar tax revenue, said City Councilwoman Jean Garber.

“Maybe there is some utility in getting together with these cities,” she said.

The state joined a nationwide push to have Internet and catalog companies collect sales taxes when they sell to out-of-state customers.

Passage of the streamlined sales tax measure was expected to bring $280,000 a year to Newcastle in new sales tax collected by the state. That figure was ratcheted back to $150,000 to $170,000, Starbard said. 

“Our first check from the state was $2,000,” he said. That was for the period of July 1 to Sept. 30.

Gov. Chris Gregoire signed the legislation into law in 2007 with collections to begin the following year. Gregoire requested the measure saying it “levels the playing field between in-state and out-of-state retailers.”

Proponents said the measure would streamline those definitions and allow so-called “brick-and-mortar” businesses to better compete with Internet and catalog suppliers, many of which do not collect sales tax.

According to the state Department of Revenue, more than 1,000 companies that sell products in multiple states have voluntarily agreed to begin collecting and distributing sales tax to any state that passes legislation to become a member of the Streamlined Sales Tax Project.

The project was started in 2000 by national tax and government associations, including the National Conference of State Legislatures and the National Governors Association. 

A 1992 U.S. Supreme Court ruling prohibits states from forcing a business to collect their sales taxes unless the company has a physical presence in the affected state. The court noted the dizzying array of tax jurisdictions and widely varying definitions of taxable goods, such as fast food versus groceries.

The state revenue department predicted that by joining the program, Washington would initially see an additional $35 million to $40 million in sales tax from out-of-state companies that sell products to Washington residents.

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