The first provision, buried deep in the 4,500-page bill, positions Ohio to collect sales tax from all Internet retailers once Congress passes legislation enabling states to do so. The U.S. Senate passed a non-binding resolution last month to support the Marketplace Fairness Act, which would empower states to collect sales tax from online purchases.
The second provision would immediately lead to more sales tax collection by changing the definition of “nexus,” the location determined taxable by state law. Currently, only retailers with a physical presence in Ohio are required to collect sales tax. State law requires individuals and businesses pay use tax at the same rates on items purchased out of state, but very few comply.
The proposed change would require retailers that use packers or shippers located in Ohio to assess and collect sales tax when an item is sold. For example, remote retailers might not keep goods in stock but transfer orders to a wholesaler that packs and ships the good. Retailers that use these “drop shippers” in Ohio would have to collect and remit sales tax to the state.
The House approved the whole budget bill late Thursday night in a 61-35 vote, with three Democrats joining Republicans to support the bill. The Senate will review the bill this week and likely make changes.
The Ohio Council of Retail Merchants, which pushed for the changes, says they would be a good first step toward leveling the playing field between brick and mortar stores and online retailers.
“This is the No. 1 issue for retail in the country and it doesn’t discriminate between large and small — it affects us equally,” Gough said.
Matt Mayer, president of free-market research group Opportunity Ohio, said both changes would mean a tax increase for most Ohioans. Mayer said brick-and-mortar stores reap benefits of sales tax in fire and police protection and other infrastructure improvements but retailers in other states do not.
Mayer said the tax change would disproportionally hurt small businesses that would have to purchase software or services to track and collect the thousands of tax rates around the country.
Ohioans have been subject to use tax on items purchased outside state lines and brought back since 1936, one year after the state began collecting sales tax.
A line was added to Ohio individual income tax returns to make it more convenient to pay the tax, but results have been dim. Self-reported use tax amounted to $2.8 million in 2011, according to the Ohio Department of Taxation.
“Certainly, there are some people who know and are just enjoying the opportunity to not pay tax, but I think more often the case is they’re just not aware they owe it,” said department spokesman Gary Gudmundson. “They just think there’s no tax on Internet sales.”
Skipping out on use tax payments could mean a 15 percent penalty plus interest — if the Taxation Department finds out. Gudmundson said use tax violations are rare, but are usually discovered when an out-of-state retailer is audited.
He said the department did not request the sales tax changes and has not studied the possible effects.
Gough didn’t know how much revenue the change could generate for Ohio, but a University of Tennessee study estimates Ohio lost $307.9 million in 2012 from unpaid tax on Internet sales.
Gough said states need to examine online sales tax if they plan to depend on those revenues to pay for state services.
“More people are going to continue to buy online — that won’t change — so traditional sales tax revenues will continue to decline,” Gough.
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