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Maryland Sales Tax Update
Posted By: Brent Mead - 07/29/11

The threat of a devastating online affiliate sales tax, and other tax hikes, is still lurking in Maryland, but has taken some unexpected positive turns

At Tuesday’s Budget and Taxation Committee briefing, Chairman Kasemeyer stressed none of the proposals heard before the Budget and Taxation Committee are under active consideration and he is not currently expecting to take up the issue of finding new revenue during the October special session.

Looking specifically at the issue of online affiliate taxes: Maryland has twice, in 2009 and 2010, looked at implementing an Amazon Tax. SB 824 and SB 1071 would have amended Maryland’s tax code to establish that a person, or seller, without a physical presence in the state is presumed to engage in taxable business in the state if that person: 1) enters into an agreement with an in-state resident by which the resident agrees, for a commission or some other consideration, to refer customers either directly or indirectly, such as through an Internet link, to that out-of-state person, and 2) the cumulative gross receipts of sales from referrals are greater than $10,000 during the preceding year.

If that language looks familiar, it is because it is almost word-for-word the same failed legislation passed in 8 other states. The author of the two previous bills, Senator Madaleno, will again push for such language. However, the Committee expressed some skepticism on the Amazon tax and floated a couple other ideas to target the $160 million in unremitted sales taxes. The Committee suggested offering a temporary sales tax exemption to an online-only retailer who locates a physical presence in the state, such as a warehouse, or forcing online retailers to place a disclaimer at the end of all sales reminding customers of their obligations. NTU will be keeping an eye out for a concrete proposal from the General Assembly.

The Committee spent significant time looking at possible expansions of the sales tax to service industries. Currently, Maryland applies its sales tax to four sectors of the service economy (pay-per-view TV, certain cleaning services, cell phone service, and pre-paid calling cards). Legislative Analysts for the General Assembly stated that expanding the 6% sales tax to other sectors has the potential to raise upwards of one billion dollars. Taxis, cable TV, and haircuts were mentioned as potential targets.

The briefing was intended to be ‘informational’ only, the claim being that Maryland is not looking to raise taxes, but in case we need to, here are some options. Of course, once that option is on the table for government, taxpayers need to watch out.

It should be some consolation that the Senate is devoting some effort to examping the possible consequences of tax hikes. That may help avoid another debacle like the repealed computer services tax in 2007. Another way to avoid such situations would be to cut spending, not raise taxes, when looking at a budget deficit.

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Where You Travel Matters
Posted By:  - 07/25/11

One online reservation site says that where you book matters.  It turns out, that where you're headed matters too -- in terms of your tax bill that is.  Tanya Mohn, blogging at Forbes.com, reports on a study done by the Global Business Travel Association Foundation that found "taxes targeting travelers impose an average cost of 56 percent more than general sales taxes."  The report looks at the overall tax burden that travelers face (this combines both general sales tax and travel-related taxes) as well as just travel-related taxes. 

So, if you still haven't booked your summer vacation yet, take a look at the lists and see whether you'll need to fork over a little more in taxes for that enjoyable summer getaway. 

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Don't Miss School Tax Holidays for 2011
Posted By:  - 07/25/11

Tax Girl, aka Kelly Phillips Erb, has compiled a list of states that offer sales tax holidays for back to school purchases on her blog on Forbes.com.  She lists dates and the exempted items along with any restrictions, such as purchases of school supplies under $75.  Plan ahead and you might be able to save.

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Maryland vs. The Travel Gnome
Posted By: Brent Mead - 07/22/11

This morning’s Baltimore Sun chronicles the latest development in Maryland’s assault against online businesses. As a prelude to next week’s Amazon tax hearing, the state took aim at online travel companies such as Travelocity and Orbitz.

Across the country, almost all state and local governments apply an occupancy tax, in one form or another, on hotel rooms. More often than not, such taxes are higher than the base sales and use tax. What is at issue in Maryland, and under legal challenge in at least 80 other jurisdictions, is how that occupancy rate is applied to online travel companies who book rooms for clients.

 Currently, a company like Travelocity will enter an agreement with a hotel to reserve multiple rooms and then book those rooms for customers. The online companies claim the difference in price between what the room is reserved for and then booked for is the company’s service fee, and not subject to taxation.  NTU generally takes this view. States such as Maryland contend occupancy taxes should apply to the higher retail rate.

However, the state’s view is a fundamental misunderstanding of the online travel business model. Travelocity and its brethren do not own or operate any hotels and they do not act as resellers. They are merely agents who connect sellers (hotels) with customers. No different than a personal shopper really.

Also at issue is a basic matter of fairness.  Governor O'Malley's desired lawsuit would target out-of-state businesses only. Old fashioned travel agencies are not being discussed as part of any lawsuit, despite performing a nearly identical function. Unfortunately, Maryland is simply following the trend of state governments looking beyond their borders for additional tax revenue. By only going after out-of-state groups, politicians can avoid appearing to raise taxes on their voters, even though these taxes will get passed down onto all consumers.

Finally, similar to Amazon taxes, we are talking about a small slice of revenue – at most $30 million per year. In order to claw back those revenues, states must go through years of legal challenges, which have proven unsuccessful elsewhere. When your state is already the 44th worst for business climate, one needs to question the efficacy of pursuing a multi-million challenge against a growing sector of the economy, which is likely to fail.

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They're Baa-aack. Gang of Six Returns to Haunt Taxpayers
Posted By:  - 07/20/11

They’re baa-aack. Just like the evil spirits in Poltergeist ( the movie that spawned the phrase) the Gang of Six has seemingly come back from the dead. Moreover, it appears their goal is to haunt the American taxpayer.

The six Senators have put forth a lame-brained “plan,” or to be more specific, “set of vague ideas,” that they say will reduce the deficit. But why now? After all, Sen. Dick Durbin (D-IL), a member of the Gang of Six, said that the plan would not be ready in time to factor into the debt limit negotiations. “The Gang of Six plan has not been drafted nor has it been scored by the CBO – it’s not ready for prime time,” Durbin told The Hill.”

Seems curious that you would release something that isn’t ready now and has no hopes of being ready before the supposed August 2nd deadline. That is, until you realize that the entire purpose behind the release was to divert media attention from the passage of the Cut, Cap and Balance Act. While the mainstream media, President Obama, and a smattering of Senate Democrats were fawning over the Gang’s vague promises and unspecified cuts, House Republicans actually passed a concrete plan to reduce the deficit and raise the debt limit.

The craziest thing about this ruse is that even the few details that were provided paint a pretty scary picture. Given the list of bullet points that seemingly comprise the entirety of the “plan,” it looks like it only cuts $500 billion (despite providing no details on where they come from) and then establishing a “process for the committees in Congress to specify further savings.”

And that’s the plan at its most concrete. For instance, the plan promises savings by “spend[ing] health care dollars more efficiently in order to strengthen Medicare and Medicaid.” If it were as easy as this, wouldn’t be doing it already? All that description really tells me is that it punts on making much-needed adjustments to our largest drivers of spending.

Where the plan really induces some Poltergeist-style terror are its tax provisions. To be fair, the plan says it would eliminate the Alternative Minimum Tax (which Congress already patches every year) and reduce top individual and corporate tax rates, but, as with everything that comes out of Washington these days, the devil is in the details.  

The plan says it would “reform, not eliminate, tax expenditures for health, charitable giving, homeownership and retirement” which somehow would “provide $1 trillion in additional revenue.” As Daniel Horowitz sarcastically asks, “You really mean to tell me that Chris Coons and Dick Durbin finally understand the Laffer Curve and the economic effect of cutting marginal tax rates?” Either that, or (as is more likely) the vague mandate to “improve the progressivity of the tax code” implies some sneaky tax hikes on things like capital gains.   

Overall, the plan promises to provide $1.5 trillion in tax relief relative to the CBO March baseline. But this is nothing more than a dishonest budgetary trick designed to hide the real impact on taxpayers. “The CBO baseline assumes the expiration of tax relief, resulting in a $3.5 trillion revenue increase. As a result, the plan appears to include a $2 trillion revenue increase relative to a current policy baseline,” says the House Budget Committee in their analysis of the proposal. “If the $800 billion in tax increases from the new health care law are included, the plan appears to increase revenues by $2.8 trillion, without addressing unsustainable health care spending that is driving our debt problems.”

$2.8 trillion in tax hikes?!? The Gang of Six may be baa-aack, but if that’s the best they can do, they should have stayed gone.  

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50 State Flyby: Week of July 15th
Posted By: Brent Mead - 07/15/11

Minnesota is looking like they have a tentative deal on a budget solution. The compromise is essentially the budget deal Republicans offered Governor Dayton before the state shutdown for two weeks. Differences between the two sides will be covered by $700 million in defered K-12 payments and $700 million in state bonds using tobacco settlement funds. Additionally, the Governor called for halting a plan to cut the state workforce by 15%, stripping policy riders from the budget, and passage of a $500 million bonding bill.

Whether Dayton’s change in heart on soaking the rich comes from political pressure, or threat of bars going dry, the deal as it stands now does not contain any new taxes. 

California

Before heading out for a break, the California Assembly narrowly defeated ACA 6. Requiring a 2/3 majority for passage, it failed 50-23. The folks at Howard Jarvis Taxpayers Association have been on top of the attempt to radically rewrite the initiative process in California.

ACA 6 would prohibit any initiative from even being voted on if, in the opinion of either the Legislative Analyst or the Director of Finance, the measure did not “pay for itself.”

The most telling aspect of ACA 6 is that if it had been on the books in 1978, Prop 13 likely would never have gone to the voters.

Michigan

It is not a huge secret that pension reform looms large over many states. The Mackinac Center published a report this week detailing the billions in savings achieved in 1997 when the state moved from a defined benefit to defined contribution plan for most new hires. 

As states attempt to reform unfunded liabilities in public pensions they would do well to follow Michigan’s example.

California (Again)

Amazon.com decided to file a referendum to repeal the recently passed affiliate tax. While things are about to get litigious, affiliate taxes remain terrible policy.

As NTU’s press release earlier in the week states, companies such as Amazon have very little incentive to submit to such onerous requirements. It is far easier for the large online retailers to terminate their affiliate programs. Amazon's decision to cancel its 10,000 contracts falls in line with what happened in North Carolina, Rhode Island, New York, and elsewhere. Meanwhile, the state will not reap the predicted $150 million revenue windfall, and will likely cost itself a healthy portion of the current $125 million in existing taxes collected from affiliates.

NTU argues against these proposal because they attempt to impose a burden on businesses which do not have a physical presence in the state. Further, the big box stores, Best Buy, Wal-Mart, etc. account for a large percentage of online sales and are subject to a state's sales and use tax. Amazon taxes end up having the effect of punishing small affiliates for little, if any, gain to the state.

New York

Sports fans – Next time you have a chance to grab a part of history, remember the tax implications.

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No Disenchantment on Failed Tax Policies Yet
Posted By: Brent Mead - 07/15/11

New Mexico, fresh off of cigarette tax hikes totaling $1.46 per pack in the past decade, now wants to take aim at smokeless tobacco and cigars. Calling the current 25% tax rate on smokeless products a “loophole,” tax hike cheerleaders want raise rates on all tobacco products to equal the new cigarette tax in the interest of fairness. I won't be breaking new ground with any of my arguments, but tobacco taxes still target the poor, still don't produce their advertised revenue, and they still hurt small businesses. 

New Mexico currently enjoys a slight competitive advantage vis-à-vis most of its neighbors. The 25% tax rate on the first purchaser is lower than Colorado (40%), Oklahoma (60%), and Texas ($1.16 per ounce). The proposal to more than double the rate to 57% would make New Mexico more expensive than all but the Sooner State. Further complicating the situation are the multiple Native American reservations in the state, which have varying tax relationships with the state. What all this means is that small businesses, like convenience store owners, who rely on tobacco sales will be hit hard at the register as consumers buy less, or more likely just buy elsewhere.   

Speaking of Native Americans, they are the group most likely to use smokeless tobacco, and are also the poorest demographic in New Mexico. In addition to having higher than average unemployment, many Native Americans can now also look forward to a massive tax hike that will hit them the hardest. I am not quite sure what is fair about adding another $350 in yearly taxes for a dipper who is already struggling to get by.

Finally, the past couple of years have not been kind to tobacco tax revenue estimates. The best example is the District of Columbia, which actually saw a decrease in collections compared pre-tax levels when it passed a massive increase in 2009. More recently, despite strong revenue growth across-the-board, Kentucky saw its tobacco tax revenue fall by over 5% when the state had projected an increase of over 10%. Maine is seeing similar numbers as well.   

Governor Martinez announced her opposition to the proposal, so perhaps there is hope that the enchanting spell sin taxes hold over New Mexico’s lawmakers will be broken. In the meantime, NTU and others will continue to argue for a sane tax policy that doesn’t drive business out of state, and doesn’t target the poor.

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Mitch McConnell Proposed What?!?!
Posted By: Andrew Moylan - 07/12/11

It's been a crazy week in Washington, but it just got substantially crazier. I'm sitting at my desk plugging away at some work when my email starts blowing up with details of a new debt ceiling plan being floated by Senator Mitch McConnell (R-KY), the Minority Leader. It's a doozy, but the basic breakdown is this: the President would be authorized to request from Congress three separate debt ceiling increases of between $700-$900 billion each. He would be required to submit a plan for an equivalent amount of spending reductions. Congress would then be given a chance to "veto" this package by voting on what's called a "Resolution of Disapproval." If that resolution failed, then the President would have his debt ceiling hike alongside a toothless set of spending reduction ideas. Even if the disapproval passed, he could then veto the resolution meaning that a two-thirds majority of Congress would have to override his veto in order to have the disapproval stand.

So what does that mean in reality? It means the President gets his debt ceiling increase, lock, stock, and barrel, unless a miracle occurs and two-thirds of Congress (AKA every Republican in the House and 50 Democrats along with every Republican in the Senate and 20 Democrats) engage in a sudden burst of bipartisanship and override his veto. True, the plan requires the President to submit a plan to reduce spending by an equivalent amount, but a plan isn't the same as actually cutting spending. Congress would have to actually incorporate those spending reductions into future bills, and the whole reason we have the debt ceiling impasse right now is that they can't agree on what spending reductions to include in future bills.

This is a point that appears to have been missed by some. There are otherwise-solid conservative legislators and activists who have said nice things about the plan because it appears to put the debt ceiling onus directly on the President. But, let me repeat, it does NOT force any cuts in spending. It contains nothing in the way of Congressional fast-track authority, the way several "spending commission" proposals that preceded the President's Fiscal Commission executive order did. Unless I'm missing something (which is always possible), I don't see a single thing that actually requires a spending cut, just a requirement that the President identify a list of spending cuts.

People smarter than I am have also raised real constitutional questions about this plan, as it essentially reverses the legislative process by allowing the President to propose something and Congress to veto that proposal. There is something of a precedent with the Congressional Review Act, which was established to allow Congress to modify or eliminate regulations proposed by executive agencies, but that's a much narrower case where Congress has delegated its legislative authorities relating to regulatory issues. This, on the other hand, strikes right at the heart of Congress' proper authority to determine levels of spending and borrowing as defined in Article I, Section 8 of the Constitution. It also bears a resemblance to the line-item veto debate of the 1990s, where a proposal was ruled unconstitutional because it allowed for the President to implement a set of policies not with Congress' APPROVAL, but simply by its lack of DISAPPROVAL.

Beyond all of the technical issues (which are substantial and important), it strikes me as a classic case of being worried about politics over policy. The reason this proposal was drafted in this way is because it would lay responsibility for raising the debt ceiling at the feet of the President. Of course, in shifting slightly more of the "blame" on to Obama (by the way, I think it can be argued that he already will bear most of the public responsibility for hiking the debt ceiling), it grants him a huge increase in the debt limit without including any kind of enforceable reforms to spending now or in the future. That might be a cutesy way to damage the President politically, but it's absolutely horrible if your actual goal in this whole debate is to address Washington's overspending problem.

The solution to our debt disaster is not some complicated form of legislative Jiu Jitsu, it's "Cut, Cap, and Balance." Cutting spending in the short-term will address our deficit, establishing a strong statutory spending cap will put us on a glide path to balance in the medium-term, and the passage and submission to the states of a strong Balanced Budget Amendment will provide a real long-term constraint on a Congress that has proven incapable of fiscal discipline.

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50 State Flyby Week of July 8th
Posted By: Brent Mead - 07/08/11

Obviously the big news all week was the continuing government shutdown in Minnesota.  NTU sent out an open letter to the Minnesota Legislature to continue to oppose Governor Dayton’s multi-billion dollar tax hike scheme. 

The latest development is the somewhat predictable call for higher taxation from a bi-partisan deficit commission.  The Carlson-Mondale panel called for billions in new taxes, ranging from a cigarette tax increase to an across the board 4% income tax hike.  Overtaxation does not and cannot fix an overspending problem. 

New York

In better news, Governor Cuomo officially signed legislation capping property-tax increases.  The new law caps increases at the lesser of 2% or rate of inflation.  Speaking at the ceremony, Governor Cuomo stated;

"What government has to realize is it can't just continually raise taxes because the taxpayers can't pay it anymore. People are leaving the state, businesses are leaving the state."

NTU supported Governor Cuomo’s efforts when he included a property tax cap in his budget proposal and this week marks a solid victory for Empire State taxpayers.

New Jersey

On the other side of the Hudson, Assembly leaders have called for hearings to examine Governor Christie’s $1 billion in line-item cuts to the $30.6 billion budget.  While Democrats in the legislature lack the necessary numbers to override the vetoes without Republican support, these hearings will be worth tracking to gauge what sort of a path the state is heading down going into this year’s elections.

New Hampshire

In another big win for taxpayers, NTU supported legislation was signed into law granting local municipalities the ability to once again cap property taxes.  NTU testified on behalf of SB 2 and it is good to see local taxpayers back in control.

Elsewhere

Cut, Cap, and Balance is gaining momentum with another Governor, Scott Parnell, signing the pledge.  Governor Parnell joins Rick Perry in Texas, Nikki Haley in South Carolina, and Gary Herbert in Utah in opposition to an unconditional increase of the debt ceiling.  If you haven’t already, take a few minutes and sign the pledge yourself.

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Smart States Liberalize Regulation, Reap Rewards
Posted By:  - 07/08/11

Deficits plague all forms of government from the local to the federal level.  A mixture of lower levels of revenue and continued reckless spending has caused budget fights across the country.  From Wisconsin, where budget negotiations caused Democrats to flee the capitol, to Minnesota, where the state government has been shutdown, America seems to be at a standstill due to the tax increase vs. spending cuts war.

At the federal level, Democrats are insisting that tax increases be part of any debt ceiling agreement.  However, history proves that higher taxes do not necessarily equate to higher revenues.  Another way to increase revenue is to decrease the number of regulations, especially on smaller businesses, which in turn drives sales.

Many states have done just that this year in an effort to boost tax revenues. While 2009 saw many “sin” taxes increase in an attempt to cure budget woes, many Republican majorities who recently took office at the state level have taken the smarter path and reaped the rewards for their constituents.

Tennessee, Washington, California, Michigan, New Jersey and Virginia passed sampling laws, allowing liquor stores or wineries to hold tastings. Many other states have loosened their controlling grip on Sunday sales, either allowing or expanding hours for sales.  Only two states, Texas and Connecticut forbid any sale of alcohol on Sundays. Alcohol sales generate about $41 billion a year for state and local governments according to the Distilled Spirits Council of the United States.

Changes in regulation can have a big effect on sales and subsequently revenue.  “Between 2002 and 2005, 12 states liberalized their laws to permit Sunday sales. According to DISCUS, each state saw an increase in tax revenue of 5 to 7 percent,” reports Stateline, a state level policy organization.

These states should be applauded for finding creative ways to improve their budget situation through free market policies, while avoiding tax increases.

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