Online sales taxes may form part of Minn. revenue pie

Creative Kidstuff
A large purple puppet is packaged for a customer Thursday, Jan. 17, 2013, at Creative Kidstuff in the Galleria in Edina, Minn. The company's CEO said she sees people come to her store to check out products that they will buy tax-free online, a practice known as "showrooming."
MPR Photo/Jennifer Simonson

A broader sales tax that will bring in about $1 billion in additional revenue a year is a cornerstone of Gov. Mark Dayton's proposed state budget.

The governor is also considering hundreds of millions of dollars in sales taxes that go uncollected because the transactions take place online or otherwise beyond the reach of the Revenue Department.

A change in sales tax policy would affect consumers like Ben Aase, who said he does most of his shopping in bricks-and-mortar stores. He recently visited the Creative Kidstuff in St. Paul, where he picked up a gift for a young friend of the family.

But Aase estimated that he makes perhaps a third of his purchases online.

"I don't think of it when I'm making a decision about where I'm buying or how," he said. "But when you think about it after the fact, I suppose I'm saving a fair amount of money if not I'm not being charged sales tax on online purchases."

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Unpaid Minnesota sales taxes*:

Online retail: $149 million
Mail order: $55 million
Purchases made with other out-of-state merchants: $190 million
* Revenue Department estimates

Right now, Minnesotans escape state sales taxes on about $6 billion in annual purchases from merchants that do not have a physical presence in the state. That includes online and catalog sales.

The firms are not legally required to collect the tax. And in the aggregate that gives them a significant price advantage over merchants that do have a presence in Minnesota and must collect sales taxes as a result.

Local retail executives say that hurts their bottom line.

"I absolutely know it's costing us business," said Creative Kidstuff CEO Roberta Bonoff.

The company got its start in the Linden Hills area of Minneapolis and expanded to St. Louis Park, Wayzata, Edina and Maple Grove, in addition to its St. Paul location, according to its website.

Creative Kidstuff
Adele Shriver of Northfield, Minn., pays for a toy for her daughter Thursday, Jan. 17, 2013, at Creative Kidstuff in the Galleria in Edina, Minn.
MPR Photo/Jennifer Simonson

Bonoff said she sees people come to her store just to check out products that they will buy online.

"We absolutely have customers showrooming us," Bonoff said. "They're going to go home. They're going to search online. They might end up buying what we offer in our store online at a discounted rate. And that comes from the 5 to 10 percent online retailers don't have to pay in taxes. We just want to create a fair playing field."

Bonoff said she wants a level playing field, and Dayton wants to tax online purchases to help fill a budget deficit and retool the state's tax system.

But the state's options are limited. Minnesota forgoes an estimated $400 million a year in uncollected sales taxes for online, catalog and other purchases made by Minnesotans.

The Legislature this year will consider enacting a law that might enable the state to collect about 1 percent of that $400 million. The bill would allow the state to tax businesses in Minnesota that sell products through Amazon or other online retailers.

Creative Kidstuff
Eden Prairie resident Betsy Walters shows her 9-month-old son Ethan a stuffed dog while shopping Thursday, Jan. 17, 2013, at Creative Kidstuff in the Galleria in Edina, Minn.
MPR Photo/Jennifer Simonson

State Revenue Commissioner Myron Frans said he thinks Congress should pass national legislation mandating that retailers collect sales taxes owed to the states where customers reside. He said that would be much easier than expecting customers to pay the state sales tax voluntarily.

Last year, Minnesotans paid only about $300,000 in sales taxes not collected by merchants.

"We will do what we can to try to encourage people to file and make them aware of their obligation," Frans said. "But I think it's always going to be a tough, tough situation for enforcement, and we'd be much better off it we could just get sellers to collect that tax at the time of sale."

For more than a decade, congressional proposals to do just that have failed. Frans thinks this could be the year that legislation passes.

Taking action on the sales tax issue would give states billions of dollars in revenue by helping them collect what they are already owed, he noted.

But Joseph Henchman of the Tax Foundation said there are issues that have prevented Congress from taking action. There's a lot of variation in sales taxes and online retailers alike.

"Somebody has their website where they're selling stuff to every state," Henchman said. "Are we really going to require each of those people to send a tax form to all 10,000 jurisdictions in the 45 states with a sales tax?"

In-store tablets
The Best Buy store in Richfield, Minn., features tablets for customers to browse products. In Minnesota, consumers do not have to pay sales tax on purchases made online if the retailer lacks a physical presence in the state. The disparity hurts Minnesota-based Best Buy, which estimated it gets about 7 percent of online consumer electronics sales, far behind Amazon, which has no warehouse in the state.
MPR Photo/Jeffrey Thompson

The sales tax disparity hits Target and Best Buy, too. Target has stores in 49 states, Best Buy all 50. The issue is especially vexing for Best Buy, given how consumers have taken to shopping for electronics online.

Last November, Best Buy estimated it gets about 7 percent of online consumer electronics sales. That's far, far behind Amazon, which has operations in only a handful of states.

But as Amazon opens warehouses and other facilities in states around the country, the company is collecting sales taxes in more states. Laura Bishop, Best Buy's vice president for government relations, said that is helping Best Buy compete with the online giant for sales.

"In the states where they are collecting sales tax, it's early but sales tax parity in states like California, Texas and Pennsylvania appears to be contributing to our business," she said.

So far, though, there's no Amazon warehouse in Minnesota or most other states. And most states' efforts to tax online sales have met with limited success.