EXCLUSIVE: Hidden Tax Cut in State Budget—$70 Million

Wednesday, July 06, 2011

Stephen Beale, GoLocalProv News Editor

 

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The new state budget signed into law last week contains a hidden $70 million sales tax cut, GoLocalProv has learned.

The cut is aimed at making the tax system fair for local retailers who collect the tax while out-of-state retailers do not, according to David Sullivan, the state tax administrator.

The previously undisclosed provision calls for the state sales tax to be lowered from 7 percent to 6.5 percent—bringing it closer to Massachusetts and Connecticut, which have rates of 6.25 percent and 6.35 percent, respectively.

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But that cut will only happen if Congress passes the Main Street Fairness Act, which mandates that online retailers such as Amazon.com collect sales taxes for every state where a customer buys a book from them—even if they do not have a physical presence in a state.

“Passage of the Main Street Fairness Act would put brick and mortar retail establishments in Rhode Island and across the country on even footing with their online competitors,” Senate President Teresa Paiva Weed told GoLocalProv. “The more equitable distribution of taxes would enable Rhode Island to make its sales tax rate more competitive. I look forward to working with our federal delegation to see that this sensible legislation is enacted.”

Under current state law, customers already have to pay sales taxes on items purchased online. Most businesses comply, but not necessarily individual customers, Sullivan said. Under the new federal law, an online retailer would be responsible for collecting and paying the tax—not the customers.

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Economists praise tax change

As a result, an estimated $70 million in new revenue is expected to flow into the state’s coffers, state officials say. That would allow Rhode Island to lower its sales tax rate by half a percent.

Local economists say the new law—sometimes referred to as the “Amazon Tax”—is a good thing for the state budget and economy. The more sources of revenue there are, the less likely the loss of one of them will push the budget into a deficit, said Ed Mazze, a business professor at the University of Rhode Island. That, in turn, helps restore consumer and business confidence, according to Mazze.

Leonard Lardaro, an economist at the university, said the additional revenue could be just what the state needs. He believes that the revenue projections on which the new budget is based are overly optimistic and that the state could find itself facing a shortfall in six months.

He said he wouldn't be surprised if state officials end up using the money to plug a hole, instead of lowering the tax rate. “That might just prevent us from having as large a January surprise,” he said.

Kate Brock, head of Ocean State Action, said the new revenue should not be used to cut taxes further. “After seeing cuts to services for people with developmental disabilities, the elderly, workforce development, and health care for low income families in this year's budget, perhaps this revenue could be put to better use by investing in these programs,” Brock said.

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From tax hikes to tax cuts

The idea of using new revenues to lower the local tax burden actually originated with Governor Lincoln Chafee, when he first unveiled his plans for overhauling the state sales tax back in March.

At the time, Chafee planned to reduce the rate from 7 percent to 6.5 percent while broadening it to include a laundry list of new items, like haircuts and prescription drugs. Chafee also proposed creating a new one percent sales tax on everything from home heating oil and clothing. All told, the changes would have raised an additional $165 million in revenue. But Chafee said he would abandon the one-percent tax if Congress came through with the Amazon Tax.

One month later, General Assembly leaders declared his plan for broadening the sales tax and instituting a special one-percent tax effectively dead—and the issue of the Amazon Tax faded from public discussion of the budget.

When the dust settled in June, the House Finance Committee had whittled the new tax increases down to $29.6 million, a figure that also includes fee increases. The House also kept the sales tax rate at 7 percent and did not broaden it.

But one key detail was not well-publicized: if the Amazon Tax was instituted, the sales tax rate would drop to 6.5 percent. (Another key detail: The total 8 percent rate paid in meals and beverage and hotel taxes would remain unchanged—but 1.5 percent of that would go to cities and towns, leaving 6.5 percent to the state.)

The possibility of a lower sales tax is good news for most local retailers, but Lardaro doubts it would help make the state business climate more competitive. “I can’t imagine anyone that would allege that Rhode Island has a competitive tax structure,” Lardaro said. “This doesn’t level the playing field, but it makes one element a little closer.”

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One big local retailer opposes it

However, not everyone in the Rhode Island retail community is happy with the Amazon Tax.

A spokesman for Ross-Simons, a national online jewelry retailer which is headquartered in Cranston, said his company opposes it. “We don’t have a clue what the tax laws might be in Hawaii and we oppose this. We would be hard-pressed to set up the infrastructure for all the other states and municipalities,” said Larry Davis, vice president of marketing.

For state officials the issue is one of fairness: a local bookstore has to collect a sales tax on a book bought in Rhode Island while Amazon.com does not.

Davis responded said that Amazon does not use benefit from local services like the local retailer. “What burden does Amazon have to support the police in Providence? They don’t use the roads. They don’t use the Police Department. They don’t use any of the services in Rhode Island,” he said. “They shouldn’t be required to set up the infrastructure to collect taxes in all 50 states.”

That burden is compounded by the fact that some cities and counties have their own sales taxes. “There’s a hundred different tax jurisdictions … to figure out which state to tax, then which municipality to tax, then which county to tax, would be a nightmare,” Davis said.

Ross-Simons grossed $100 million in sales in 2010 and maintains 500 full-time employees. Davis did not provide exact figures on how its business would be affected, except to say that the company would have to hire two full-time tax analysts to handle the new workload. “They don’t provide any economic benefit to us or the consumer, so it would be a complete and utter waste of money,” he said.

A spokesperson for CVS Caremark, which also would be affected by the Amazon Tax, did not respond to requests for comment.

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