Ohio’s online sales tax collections have hit historic highs this year as more businesses are voluntarily charging sales tax on purchases and sending the money back to Ohio.
The state has collected $45 million — a 68 percent increase over the past five years — in the 2014 budget year from out-of-state retailers. The money collected continues to climb this year as Ohio officially joined a multi-state effort to streamline sales tax for online purchases. That means the state has just begun to tap an estimated $308 million worth of tax revenue that could be collected from online sales, according to figures provided by the Ohio Department of Taxation.
But still, Ohio has no legal authority to collect on sales tax from online retailers who don’t operate a storefront or warehouse in the state, so buyers don’t get charged sales tax on millions of dollars worth of purchases made on popular websites, such as Amazon.
That might be good news if you’re looking for a good deal on your next online buy, but it’s bad news if you want your local government to pave crumbling roads or prosecute criminals, Craig Johnson, the executive director of the Streamline Sales Tax Governing Board, said.
“It really puts the state in a position that you have to either raises taxes because you have a revenue source that people aren’t paying or you cut the budget where you can,” Johnson said.
Not paying up
Taxpayers are supposed to pay up, when they’re not charged sales tax for online purchases, on their annual tax return.
Many taxpayers, however, either don’t know to do that or choose not to report it, Gary Gudmundson, a spokesman for the tax department, said. Buyers should be charged between 6.5 percent and 8 percent in sales tax, depending on the county the purchase is made.
“The presumption is, no matter what, that it’s taxable,” Gudmundson said of sales in Ohio.
Of the estimated $308 million in online purchases, only one percent, totaling $3 million, was reported to the state in annual income tax returns during 2012, the most recent data available.
“It’s very difficult for the department to try to enforce against individual online purchases,” Phyllis Shambaugh, legal counsel for Ohio’s sales tax division, said.
Shambaugh said it’s easier to find businesses that might be operating in Ohio but not charging sales tax than to go after tax delinquent shoppers. Still, it’s impossible for department officials to track down every Ohioan who’s selling something on a website.
That’s why 24 states, including Ohio, joined the Streamlined Sales Tax project launched in 2000. The group asks businesses that do online sales to voluntarily collect sales tax and distribute the funds to states.
In exchange, the businesses get free software and accounting that charges the sales tax automatically as the assurance that they’re legally charging for their product, Johnson said.
“There’s a lot of patchwork legislation out there,” Johnson said. “Sellers aren’t sure: do I need to legally collect or don’t I?”
Roughly 2,200 businesses nationwide are part of the project, although Johnson wouldn’t name any of them, citing a confidentiality clause. He did say, however, they range from small-town shops to big box retailers. Overall, $1.5 billion is sales tax has been collected and then pumped back into the 24 member states.
Since Ohio became a full member this January, out-of-state retailer collections have risen by nearly $2.5 million between January and March from a year ago, the latest figures available.
Not only are sales tax revenues rising overall with improving economic conditions, but collections from those who report their online purchases in their yearly tax return to Ohio have also grown.
After dipping in 2010 to $7 billion, Ohio’s sales tax revenues grew to $8.4 billion in 2013, according to the tax department. Local governments have seen sales tax revenues rise another $290 million from 2010 to $2 billion collected in 2013.
Sales tax represents a huge chunk of revenue for both state and local governments. It’s the biggest share of revenue — at roughly 40 percent of the budget — for Butler County, Charlie Young, the county’s administrator said. But as more people turn to online purchases, which are expected to account for 30 percent of U.S. sales by 2025, the need for local government to share in some of that online revenue will grow, Young said.
“It’s the most important revenue stream we have,” Young said of sales tax. “There needs to be a solution to it, a sense of fairness to the local business and the local entities. It has a powerful ripple for the local economy.”
Local businesses owners say it’s unfair to compete with companies that aren’t charging sales tax for online purchases.
Bill Welling, owner of jewelry store Welling & Co. in West Chester Twp., said some customers will scope out top-dollar products in his store and then turn around and buy the same thing online. He’s found customers are more willing to buy jewelry online if it costs $3,500 or more. That saves the buyer about $227.50 in sales tax.
“There’s a huge disadvantage there,” Welling said. “I don’t see why there couldn’t be a universal tax (for online purchases).”
Companies like Amazon, for example, which operates its closest warehouse in Hebron, Ky., don’t have to charge sales taxes on customers making purchases. Welling — and other Ohio business owners — are competing against those retailers.
“Our 6,000 members aren’t opposed to e-commerce. However, they’re just looking for fairness,” said Gordon Gough, president and chief executive officer of Ohio Council of Retail Merchants, a trade group representing retailers statewide. His organization supports federal Internet sales tax legislation.
“The in-state retailer loses that sale. They essentially become a showroom for an online retailer,” Gough said.
Johnson, of the streamlined tax project, argues that if every seller is required to tax then the playing field is leveled for businesses nationwide.
“You’re really taking tax out of the equation,” Johnson said. “Don’t let the government pick the winners and losers based on if you don’t have to collect sales tax or you do have to.”
States: We need your help, Feds
State officials say the only way to fix the tax disparity between online and in-store sales is for Congress to step in.
The Marketplace Fairness Act, waiting for action from U.S. Congress, would require Internet retailers with more than $1 million in out-of-state sales to collect sales tax on purchases made online.
“Ohio is one of the states that continues to rely on sales tax revenue to fund its government,” Gough said. “If that tax base continues to erode — and we believe it will as more purchases are made online … we’ll have to make a decision whether they change their tax base or continue to lobby the congress to pass this law.”
Ohio lawmakers included an Internet sales tax for transactions between residents and out-of-state companies in the state’s fiscal 2014-2015 budget bill, but Gov. John Kasich vetoed the item in July 2013. A spokesman for his office said Kasich was concerned about the legality of imposing such a tax on out-of-state retailers and wants to see a federal solution to the problem, instead.
The right to regulate interstate commerce lies with the federal government, read the governor’s veto explanation.
“Without some kind of federal action that’s going to require these remote sellers to come forward, register and collect, we’re not going to be able to force them to do it,” Shambaugh, of Ohio Dept. of Taxation, said.
THREE WAYS THIS MATTERS TO YOU
1. Are you paying your taxes? Ohio taxpayers — individual people and businesses — are supposed to add up the sales taxes they owe for goods purchased online, if the seller didn’t already charge them for it. Then taxpayers report the sales taxes with their annual income tax return to the state. While hard to enforce, taxpayers who are caught can face penalties and interest.
2. Unfair advantage. Businesses with Ohio storefronts, who are required to charge sales taxes to residents, say out-of-state retailers that are not required to do so have an unfair advantage.
3. More tax revenues. Actual sales tax collections, which fund local governments, are only a fraction of what Ohio could potentially collect if out-of-state retailers were required to charge an Internet sales tax or if individual tax filers paid up. Additionally, if the federal government passes an online sales tax, Ohio lawmakers already approved a law that would put proceeds into an income tax reduction fund that could reduce Ohioans’ payroll tax rates.