ST. PAUL, Minn. - Tax reformers in the Minnesota Legislature have waded into an area loaded with political risk, tinkering with the state's sales tax system.
One of those ideas, capturing sales taxes from Internet sales, was supported by business groups. Another, expanding the tax to apparel, will clearly be a harder sell.
Minnesota currently relies on individual consumers to voluntarily send sales tax payments to the state when they buy things from online retailers. That Individual Use Tax kicks in when your Internet purchases total more than $770 in a calendar year.
The UT-1 tax form can be downloaded from the Minn. Dept. of Revenue website, and can be submitted by mail or paid online.
The problem is, according to department officials, only 800 taxpayers to that each year. The state lacks the capacity to track those online sales, so it's an honor system at this point.
But it's the only option to capture those taxes for the time being, because the federal government has not authorized states to collect directly from those online-only stores, known as remote retailers.
Sen. Ann Rest, a New Hope Democrat, told her colleagues the best solution would be for the federal government to authorize collecting taxes from online retailers. In the meantime, her bill would require those companies to tell customers they're responsible for paying sales taxes.
Those who own traditional brick and mortar stores support any idea that will put both types of retailers on more of an equal playing field.
"This deeply flawed and outdated system hurts small businesses," Rochelle Westlund of the Minnesota Retailers Association, told the panel.
"By not enforcing the collection of this tax, remote retailers create the perception that the Internet is tax free and therefore costs less."
Roberta Bonoff, the president of the Twin Cities chain known as Creative Kids Stuff, said online retailers can afford to discount items or offer free shipping because they don't send taxes to the State.
She said communities are struggling to hold onto locally-owned stores, which play an important philanthropic role.
"Who's going to donate to Children's Hospitals, St. David's, Second Harvest, Crisis Nursery, PACER, Cheerful Givers and local schools? We contribute to all of those," Bonoff said.
Sen. Rest Wednesday also formally presented two bills that would subject clothing to sales tax in Minnesota, while dropping the overall rate on all goods and services currently taxed.
Rest told her fellow senators that she's providing two options to soften the impact of such a move on lower income Minnesotans. One would be a tax credit available when those families file their income tax returns.
The other would be to make the first $200 of any clothing item exempt from the tax.
"Isn't that just an invitation for mischief?" Sen. Rod Skoe, the Clearbrook Democrat who chairs the Taxes Committee, asked.
"When I buy a suit next time won't I just buy the pants, and then go back the next week and buy the jacket, so I can stay under the $200?"
Rest conceded some will be tempted to game the system. But Rest asserted applying the exemption at the point-of-sale would do away with the need for taxpayers to apply for a credit at the end of the year.
"The attractive point for me in that was that the tax relief was immediate," Rest said.
Rest said she's not trying to create a new major source of revenue for the cash-strapped state, but to broaden sales tax base in hopes of providing more long-term stability.
Sen. Julianne Ortman, a Chanhassen Republican, said she worried the administrative costs of collecting the tax, and processing the credits, would outweigh the benefits of broadening the tax base.
She also noted the lack of a sales tax on clothing in the state is an advantage to some Minnesota retailers, especially those who attract customers from other places.
"There's the competitive advantage to the Mall of America and other stores than can now say to the rest of the nation, and the whole world, 'We don't have a sales tax'."
Maureen Bausch, Executive Vice President of the Mall of America, told the panel that 50 percent of the MOA's customers are tourists. She predicted a sales tax on clothing would hurt the tourism economy, and make it tougher to attract new companies to the state.
"When people are deciding to come to the Minnesota, the fact we don't have sales tax on apparel is one of the top three factors," Bausch said.
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