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Comptroller: Internet Sales Tax Would Be Minimal

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BALTIMORE (AP) — Maryland should not expect to generate significant new revenue by chasing unpaid sales and use taxes from online sellers without changes in federal law to enable states to collect the money, the state’s top financial officer said in a letter to the governor Friday.

Gov. Martin O’Malley asked Comptroller Peter Franchot’s office earlier this year to study how the state could recapture tens of millions of dollars believed to be lost when online sellers don’t pay taxes on what they sell.

“Our experience, however, leads us to conclude that the state should not pursue legislative remedies based upon the expectation of significant new revenue streams,” Franchot wrote.

That’s because online sellers have found ways to minimize their tax obligations when other states have tried to collect, the comptroller wrote.

“In the absence of federal legislation that would authorize states to require online sellers to collect taxes, it is obvious they will continue to do so, and the amount of revenue that would be accessible to the state is modest, if not minimal,” Franchot wrote.

At the most, the comptroller added, Maryland could obtain between $20 million and $40 million in sales and use tax revenue from remote sales and digital goods without changes in federal law.

“A more likely outcome, however, is a revenue increase of about $5 million and virtual assurance of litigation,” Franchot wrote. “The United States Supreme Court has made clear that, without federal authorization, states do not possess the ability to require sellers without physical presence in the state to collect and remit the sales tax.”

The state’s Bureau of Revenue Estimates released a study Friday that found Maryland lost an estimated $198 million in sales and use tax revenue from the sale of tangible goods by remote sellers. That represents roughly 5.4 percent of gross sales tax collections.

“This estimate includes an estimated $97.2 million from e-commerce remote sales, and $101.2 million from non-electronic remote sales,” according to the study. “The estimated revenue loss in 2010 for business-to-consumer sales is $164.5 million, while the loss from business-to-business sales is $33.9 million.”

The comptroller noted that sales of digital goods are not taxable under current Maryland law. However, he said the General Assembly could make them taxable.

“Doing so would increase revenues by approximately $5 million annually, but Maryland would still be unable to compel retailers without a physical presence in the state to collect the sales tax, so a larger amount of revenue would go uncollected,” Franchot wrote.

(Copyright 2011 by The Associated Press. All Rights Reserved.)

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