25 May Finance Committee rejects extra tax on Internet buys
The Joint Finance Committee rejected Governor Jim Doyle’s proposal for a 5 percent sales tax on Internet purchases on Tuesday. The proposal, a plan to charge consumers for their music, book, art, and movie purchases made online, was one of several proposals turned down by the budget review panel.
After much debate, the committee rejected the proposed sales tax on electronic entertainment – called by some detractors the “iPod tax” – as well as the governor’s proposal for a broader Internet sales tax. The committee received feedback from businesses and consumers, resulting in a bipartisan vote against both measures.
“The main reason behind that was simply that it runs counter to what Govenor Doyle himself and other members of the legislation are trying to do … to brand Wisconsin as a place to do business,” said Mike Prentiss, spokesperson for the finance committee’s Senate chair, Senator Scott Fitzgerald. “We feared [the tax on Internet purchases] was running against our efforts to make Wisconsin a place to encourage business and create new jobs.”
Governor Doyle, however, disagreed that the tax would discourage businesses; spokesperson Melanie Fonder suggested that allowing online purchases to go tax-free, while small businesses charge buyers a sales tax on the same goods, puts Internet companies at an unfair advantage.
“This was a proposal consistent with what many other states are doing and have done,” Fonder said. “It was intended to level the playing field for small businesses in Wisconsin, and to update our tax code. … Why shouldn’t the Internet companies have to play by the same rules?”
Governor Doyle’s plan also includes a tax on Internet access. Though there is federal legislation in place to ban this type of tax, Wisconsin has been able to use a loophole in the legislation to continue to collect the tax.
“The Internet access tax was imposed prior to October 1, 1998. Wisconsin was one of the small number of grandfather states to which the [federal] laws on taxes do not apply, because we applied the tax prior to this date,” said Diane L. Hardt, administrator and spokesperson for the Wisconsin Department of Revenue’s Division of Income, Sales, and Excise Tax.
Governor Doyle’s Internet sales tax was only a proposal in the 2006 budget, but because the Internet access tax has been in place since 1998, the governor is still planning on collecting it through the Department of Revenue.
The Joint Finance Committee, as well as other legislators and Wisconsin businesses, is alarmed at this practice. Though the Internet access tax brings in a considerable amount of revenue for the state, it may cost Wisconsin more in the long run.
“His plan continues to collect taxes on Internet access. Federal legislation banned it, and the clear intent of that legislation was to prevent states from doing this,” Prentiss said. “But, because of essentially a minor drafting error … this is costing the taxpayers of Wisconsin almost $60 million. By continuing to collect this tax essentially illegally, we’re in a position to get sued, and the state will have to pay back the taxes with interest.”
The “iPod” tax would have brought in considerably less revenues for the state. The governor’s office estimated that it would bring in roughly $3 million in taxes, but based this information on overall sales tax compliance rates. Because the proposal included no provisions to make compliance easy or mandatory, consumers would have to track their purchases, calculate how much tax was owed, and pay it on their own.
“Even if his proposal had gone into pay, it wouldn’t have brought in as much money as the governor estimated,” Prentiss said of the Internet sales tax. “It’s been filled with shortfalls and holes; from both a policy and an overall budgetary perspective, these things fell way short of being the kind of things that we want to see Wisconsin doing.”