Maryland's grasp for Internet tax likely to fail

The guy didn't want a necklace, brooch or anything else shiny. He already had the bling: a huge diamond-and-sapphire ring that he placed on the counter at Nelson Coleman Jewelers a couple months ago.

He just wanted a Nelson Coleman gift box in which to wrap the ring, to disguise the fact that he'd bought it on the Web and received it by mail in a zip-lock bag, recalls store co-owner Chris Coleman.

Maryland jewelers have gotten used to this kind of thing. For many shoppers, the high value and low shipping weight of jewelry make it the perfect Internet product. Shop the world. Compare discount prices. Get the bauble in your mailbox. Use the local jeweler for sizing and other minor services.

And skip the sales tax while you're at it.

Merchants like Coleman are cheering Gov. Martin O'Malley's decision to look at the "sales tax loophole" for Internet goods. At O'Malley's request, Comptroller Peter Franchot is trying to calculate how much revenue the state loses when Marylanders buy stuff from Amazon, jeweler Blue Nile, shoe seller Zappos and other online merchants that don't collect Maryland's 6 percent sales tax.

"It'll give us a base point to judge how big of a problem this is," says Patrick Donohoe, president of the Maryland Retailers Association. "With the growing ease of Internet shopping, it's going to be a bigger piece of the retail pie. As a result, states are losing probably [one of] their biggest sources of revenue."

Unfortunately, sales tax parity for Internet and Main Street merchants is probably years away in Maryland and elsewhere, as O'Malley will find out. It's blatantly unfair that a $3,000 purchase comes to $3,000 on Blue Nile and $3,180 at Nelson Coleman, after sales tax is added.

Only Congress, however, can nullify a Supreme Court decision that says a retailer must have a presence in a state before it can be forced to collect that state's sales tax. Any attempt by Maryland to do what California just did — define revenue-sharing deals with bloggers as an in-state "presence" — will cause more trouble than it's worth. Amazon, Blue Nile, and other companies simply cancel the blogger-affiliate deals, and the states don't collect much extra money.

"It's a fairness issue," says Coleman. "Why shouldn't other [online] retailers just like myself have to pay Maryland sales tax? I have to. Why shouldn't they?"

Actually, they're supposed to. Or at least their customers are. Under Maryland law, you're required to pay Franchot a "use tax" equal to the sales tax for merchandise carried or shipped into the state from elsewhere. In practice, however, hardly anybody complies.

A 2009 study from the University of Tennessee estimated that Maryland will lose $164 million in uncollected sales tax from online transactions this year and $184 million next year. That prompted O'Malley to ask Franchot, who is responsible for collecting state taxes, to take a closer look.

The tax disparity between online and Main Street sales has been around as long as the Internet. In 2002, a fiscal commission reported to then-Gov. Parris N. Glendening that "E-commerce revenue losses" were already estimated to be more than $100 million a year.

That was probably exaggerated. Indeed, sales tax leakage from Web sales "has not played out the way a lot of people were very afraid it would 10 years ago," says David Roose, director of the Bureau of Revenue Estimates under Franchot.

Many online merchants do charge sales tax and remit it to states. Best Buy, which collects tax on merchandise bought through its website as well as at its brick-and-mortar stores, is a vocal proponent for requiring Amazon, Blue Nile and everybody else to do it, too. Lands' End started collecting sales tax after it was bought by Sears.

But even if revenue lost from online sales is less than predicted, $164 million or whatever Maryland loses each year is substantial. No surprise that recession-whacked states are looking wistfully at untaxed Internet commerce. Amazon's North American sales will probably pass $20 billion this year.

The dough, however, is beyond most states' grasp. New York pioneered the idea that in-state affiliates with links to Amazon or amount to local storefronts for the companies and therefore are a taxable presence.

Amazon is paying sales tax in New York, for now, while it challenges the law in court. In other states — Connecticut, Arkansas and now California — it simply fired all the affiliates and continued to sell tax-free.

Maryland's experience would likely be similar if it tried to mimic New York — whatever the number Franchot comes up with. A bill to tax Internet retailers based on whether they had Maryland affiliates failed in this year's General Assembly. In Washington, the Republican-controlled House is highly unlikely to pass the federal legislation necessary to make all retailers play by the same rules.

Which means the likes of Blue Nile will continue to have an unfair advantage over Maryland jewelers that employ Maryland residents, serve Maryland customers — and pay Maryland taxes.

"Avoiding the sales tax is one of the major motivators behind their growth," Coleman says of Blue Nile.

Blue Nile spokesman John Baird attributes the company's success to deep discounts and "in-depth education and transparency" for consumers.

Maybe. But Blue Nile doesn't have Nelson Coleman gift boxes. For that, you have to buy Nelson Coleman jewelry in Towson. Sales tax and all.

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