Don't Mess With Texas' Taxes

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Count Texas among the states seeking to preserve the vitality of their sales taxes by addressing sales made by on-line retailers to in-state residents. As the Dallas Morning News reported earlier this month, Texas Comptroller Susan Combs is investigating whether Internet titan Amazon owes millions of dollars in uncollected taxes on sales made to Texas residents in recent years. At issue is a distribution center in Irving which Amazon has operated since 2006, but which the company maintains is run by a subsidiary. (Owning and operating such a center would mean that Amazon has a physical presence in the Lone Star State and would therefore be required to collect sales taxes.) At stake is some portion of the $541 million in sales taxes that Texas officials believe the state loses to on-line sales.

The Comptroller's decision comes on the heels of new legislation in New York -- enacted as part of the state's FY 2009 budget -- to require on-line retailers to collect sales taxes on sales made to New York residents, if those retailers rely on affiliated web sites based in New York to refer customers to the retailer's own site. The change, which effectively expands the criteria for determining whether a business has a presence in New York, is expected to generate $50 million in additional revenue each year. Not surprisingly, Amazon -- one of the parties most affected by the statutory change -- has already filed suit against New York, questioning the constitutionality of the measure.

To be sure, the most effective and most sustainable solution to this problem would be Congressional action permitting states to require "remote sellers" to collect sales taxes (in addition to more widespread participation in the Streamlined Sales Tax Project). In the absence of such action, though, no one should be surprised that states -- many of which are under substantial fiscal strain -- are now using any means at their disposal to shore up an important source of revenue.

To learn more about Texas' current financial situation, see the Center on Public Policy Priorities -- 2008 Tax and Budget Primer.

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