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Bill would shrink income tax if state collects sales tax from online sellers

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PHOENIX – If federal law gives states the authority to require online retailers to collect state sales taxes, Arizona should reduce the amount of income tax it collects to offset its gains, a state lawmaker says.

“At the end of the day, the point is people should not be paying more taxes,” said J.D. Mesnard, R-Chandler, author of a bill calling for the change.

HB 2061 addresses the Marketplace Fairness Act, which would give states the power to require out-of-state online retailers to collect and forward sales taxes.

Online sales taxes have been a confusing issue for years in Arizona. Taxpayers owe a use tax, or a tax on items purchased online from out-of-state vendors, but the state hasn’t enforced it.

Arizona added a line on its income tax form for “Unpaid Arizona use tax” in 2011, but it was removed from the form under a 2012 state law after there was a public outcry.

“If we are going to change that policy position, it’s a de-facto tax increase,” Mesnard said. “And I don’t think that’s a good policy. I think we need to be consistent. If we don’t expect people to pay that tax now, we shouldn’t expect them to later. Or if we do, we should acknowledge that we changed our tax policy, which in my view would amount to a tax increase.”

The bill passed 5-4 in the House Ways and Means Committee on Jan. 26, with one opponent saying it isn’t clear whether a state law would be needed since under the proposed federal law Arizona wouldn’t have to demand the sales tax.

Dennis Hoffman, a professor of economics at Arizona State University’s W.P. Carey School of Business, said although the Marketplace Fairness Act would collect more tax dollars, it isn’t a tax increase. People owe a tax on goods purchased online, but if the online vendor isn’t required to administer the tax, it doesn’t get collected.

“If we were to buy a product online from many online vendors, the vendor right now is not obligated to administer the collection of sales tax on that item,” Hoffman said in a phone interview. “Now you and I owe the tax, but frankly the tax never gets paid because if it’s not administered, people don’t know that they owe it … so right now a lot of taxes go uncollected.”

Hoffman said other state and local governments would look at the passage of the Marketplace Fairness Act as an opportunity to collect tax dollars that were supposed to be collected in the first place and put it toward public services, like road or prison maintenance. By lowering the income tax, HB 2061 would prevent any additional revenue from coming into state coffers, he said.

Mesnard said the although individual taxpayers’ situations would be different, as a whole taxpayers wouldn’t be paying more into the state’s general fund.

“Basically we want to preemptively ensure that if the stars align for those who want to collect online sales tax … if we go down that road, we would not be doing so as a revenue grab,” he said.

Rep. Michelle Ugenti, R-Scottsdale, who voted against the bill, said its language is unclear about what the state would do if the federal bill becomes law.

“It doesn’t say what as a state we’re going to do if a qualifying federal law were to pass … it just doesn’t clarify what the state may do,” she said.

Rep. Mark Cardenas, D-Phoenix, who also voted against the bill, proposed unsuccessful amendments to lower the sales tax rather than the income tax and to direct additional revenue from the Marketplace Fairness Act toward a fund that shares state revenues with cities and towns.

“Especially this year, we’re not going to be funding individual cities as they would like to be,” he said. “So if we’re going to be able to receive additional revenue if the Marketplace Fairness Act does pass, then we would first make the cities hold and then by all means determine if we’re going to reduce the individual income taxes after that.”