The Golden Egg

Act 60 is on trial in Vermont. While painful for many, this is a good thing. Since enactment in 1997, Act 60 has been the lightning rod for all that’s wrong with Vermont’s tax policy, education funding, escalating education costs, property values and the quality of education, all in the context of declining enrollment. Fixing this problem requires the riveted attention of the best minds in Vermont and hard choices by our leadership at all levels.

As the Legislature and Governor Douglas attempt to negotiate and legislate an answer to the crisis, the options are few and solutions difficult. They become more difficult because the discussion focuses on funding without adequately considering cost containment, let alone quality. With a 40% increase to a billion dollars in the education budget since 1997, both sides of the financial equation require concerted action.

On the funding side, the House identified recently a goose that some suggest may be ready to lay a golden egg that would help solve the education funding crisis.

Here’s the promised egg: The future possibility that Vermont sales taxes, a big part of the House funding formula, can be levied and collected by all merchants in the US on catalog and online sales of goods and services to Vermonters. However, this egg requires the goose to waddle through many obstacles before deciding to nest.

Today, catalog and online merchants are required to collect and remit sales taxes only in states where they have a substantial physical presence, called a tax nexus. This means that if a merchant has no such presence in a state, they are not required to collect or remit state sales taxes.

Here’s an example: Resolution has many clients that sell goods in all states, yet they have a physical presence in only one, or at most, a few. Because our clients store their goods in Resolution’s warehouse and Resolution takes orders and ships those items from Vermont, a physical presence exists. Accordingly, Resolution collects sales taxes from Vermont consumers and sends these taxes to the Vermont Tax Department for our clients.

The responsibility to pay sales taxes on items purchased online from a merchant with no Vermont nexus rests with the person who buys the product online or from a catalog, not the merchant. This has been true since 1992, when the US Supreme Court decided to prevent a state from requiring a merchant without a physical presence in that state to collect sales and use taxes. The Supreme Court in the Quill decision said that requiring catalog and online businesses to collect taxes for all states was an unreasonable business burden, thus an unacceptable infringement of the Constitution’s Commerce Clause.

Vermont’s personal income tax instructions require a declaration of the value of these purchases and payment of taxes due, yet few people actually pay them. Although we are legally obligated to pay, no Vermont collection enforcement mechanism exists.

Because revenue is needed to fill budget shortfalls and online and catalog sales continue to grow, some 38 states, including Vermont, have allied to tap this potential sales tax revenue source. Ten states have signed on to a “Streamlined Sales and Use Tax Agreement,” a 70 page document adopted in November 2002 whose purpose is: “to simplify and modernize sales and use tax administration in the member states in order to substantially reduce the burden of tax compliance. The burden referenced is the burden on merchants who will be expected to collect the taxes for the 7,500 plus taxing jurisdictions in the US.

However, this agreement cannot be implemented by any state until Congress enacts legislation that would effectively undo the Supreme Court decision. To do so will require solid evidence that the burden of collecting taxes by all merchants, large and small, has diminished. Otherwise, a legislative challenge to the Supreme Court’s Quill decision may fail. Perhaps consumers will agree that the tax-free days are ending, but many online and catalog businesses may not agree they can accommodate this ‘streamlining.’ Very sophisticated software will be required and this may not be affordable for small businesses.

States will be required to pass legislation to meet a complex set of requirements tat results in simplification so that merchants pay only one state tax jurisdiction under a common set of criteria.

Although Federal legislation may be proposed this summer, the goose is far from nested and the golden egg of windfall sales tax revenue is several years away. Vermont should not count on it for the short term. Meanwhile, Vermont’s legislature searches high and low for new sales and income taxes to reduce dependence on property taxes to fund Act 60, when education costs are the basic problem.