Sales Tax Bill Stalled Over Local Issue

By CYNTHIA POLS

REPRINTED FROM THE NATION'S CITIES WEEKLY

A key House subcommittee completed hearings on mail order sales tax legislation recently amid growing signs of reluctance on the part of the states to accept a compromise solution on the local issue.

The legislation as currently drafted authorizes the collection of state sales taxes on interstate sales, but allows for the collection of local sales taxes only if the local rate is uniform and applies to comparable sales in every geographic area of the state.

It appears that local sales tax in only two states — Virginia and North Carolina — could be collected under this standard.

An estimated $500 million in revenues is forgone by local governments each year because of the Supreme Court's 1967 decision in the National Bellas Hess v. Illinois Department of Revenue. That decision barred states and cities from requiring out-of-state retailers to collect the sales taxes owed by their residents on interstate transactions via the mail system and other means.

The proposed legislation would reverse the parts of that decision which limited the ability of states to impose collection requirements on out-of-state direct marketers.

The hearings — held by the monopolies and commercial law subcommittee of the House Judiciary Committee and presided over by Rep. Peter Rodino, Jr. (D-NJ), chair of the subcommittee and the committee — focused on the views of proponents of the legislation in its current form. Speaking in favor of the legislation were representatives of the National Conference of State Legislatures (NCSL), the American Federation of State, County and Municipal Employees, and the National Association of Retail Dealers of America (representing local merchants).

Criticizing the legislation for its failure to protect the interests of cities and counties were Reps. Hamilton Fish, Jr. (R-NY) and Carlos Moorhead (R-CA). Fish expressed concern about NCSL stance that the legislation should be moved without waiting for the state and local interests to reach a compromise agreement on the local issue.

NLC submitted a statement for the record to update the subcommittee on developments since the subcommittee's March 30 hearing. The statement called on the subcommittee to adopt amendments "to ensure fairness for the nation's cities and counties" and pointed out the deficiencies of the legislation.

Local sales taxes could not be collected under the proposed legislation in 30 of the 32 states where local governments levy local sales taxes. In some states where the local sales tax system appears to be uniform — for example, California — the presence of transit add-ons in some counties destroys the system's uniformity.

(In California, a 1.25 percent local rate applies throughout the state on a county-wide basis (the proceeds are divided among the county and its municipalities), but an additional sales tax earmarked for transit is assessed by seven counties. Under the pending legislation, no local sales taxes would be collected in California because comparable transactions would not be subject to a uniform local sales tax rate in every area of the state (they would be taxed at a somewhat higher rate in counties with a transit add-on).

In other states, local sales taxes are not collected on transactions which take place in unincorporated areas (e.g., Texas where most local governments levy a sales tax, but there are unincorporated areas where no sales tax is applicable). In yet another set of states — for example, New York, Oklahoma, Colorado, and Alabama — local sales tax rates range from zero to 4 percent.

In the Bellas Hess case, the Supreme Court, in striking down Illinois' attempt to require out-of-state retailers to collect its use tax, found that "this is a domain where Congress alone has the power of regulation and control." Thus, a state has no authority to require the collection of a sales tax by an out-of-state direct marketer unless Congress authorizes the imposition of collection obligations.

The legislation will not provide for the collection of local sales taxes owed to cities and towns in the vast majority of cases unless radical changes in local taxing systems are made. Moreover, if these changes are implemented (and state-local tax structures completely revamped in virtually every state), diversity will be sacrificed in favor of a uniform state-local local sales tax system.

With such a system, the NLC statement noted, some cities would be required to increase their taxes and impose taxes which do not reflect local needs on their citizens). Other cities would be forced to lower their taxes and cut back on vital services.

NLC, the National Association of Counties, and the U.S. Conference of Mayors have devoted about ten months to an effort to fashion a workable compromise on the state-local issue with the National Governors' Association (NGA) and NCSL.

The state legislators consider a federal requirement for the equitable sharing of sales tax receipts between a state and its local taxing authorities to be inconsistent with basic principles of federalism. The governors argue with equal force that the legislation must be administratively simple and that only one sales tax rate can be collected per state. From the local perspective, these two positions are virtually impossible to reconcile.

If all sales taxes cannot be collected for political

May 1988 / Illinois Municipal Review / Page 19

reasons, then equitable sharing of the revenues collected at the state rate is the only way to ensure fairness for cities. The state legislators find such an approach to be unacceptable for philosophical reasons.

Similarly, a more complex proposal providing for the collection of local sales taxes — which might be supported by the state legislators — would not be welcomed by the governors.

Prior to the November 5, 1987 markup of Bellas Hess legislation by the Subcommittee on Select Revenue Measures of the House Ways and Means Commit), asked the state and local organizations to resolve their differences through negotiations.

Elected officials representing NLC, USCM, NACo, NCSL, and NGA met in early December in response to the Dorgan initiative, but no agreement was reached. Since that meeting, efforts have continued to find an acceptable middle ground, with the main proposal being the collection of local sales taxes on the basis of a local "in-lieu" rate.

IN-LIEU RATE PROPOSAL
As a condition for the collection of state sales taxes on interstate sales, a state would be required to enact implementing legislation establishing a local in-lieu rate (equivalent to the weighted average sales tax rate employed by local governments in the state) and providing for the distribution of local sales tax proceeds to local jurisdictions.

Direct marketers would have the discretion to decide whether to collect the local sales tax rate at either the in-lieu rate or the actual local rate. This approach — by providing the retailer with a choice — should eliminate questions relating to the possible "burden on commerce" arising from utilization of the in-lieu rate.

The local sales tax proceeds would then be distributed to local jurisdictions on the basis of a formula which reflects each jurisdiction's normal proportional share of total local sales tax receipts in the state. The legislation would include a severability clause in the event the in-lieu tax were invalidated by a court, leaving the rest of the legislation in force and activating fall back provisions. The fall back provisions would provide for full collection of state and local sales taxes, with remittance (of local sales taxes) to the state and formula-based distribution of local revenues by the state to local governments.

However, NCSL has raised a wide range of substantive, technical, and political problems with this approach, and it does not appear likely that an agreement along these lines will be reached any time in the near future. As a result, NLC, in its statement to the subcommittee, urged its members "to step into the breach and fashion a solution which meets the basic needs of local governments."

Specifically, NLC's statement called for the full collection of local sales taxes. The only argument against the collection of local sales taxes, the statement pointed out, is the possible administrative burden the obligation would impose on direct marketers. This argument masks their real objection — payment of local sales taxes would erode the unfair competitive advantage mail order retailers now enjoy over the main street merchant.

Streamlined collection and remittance procedures — in combination with the installation of commonly-available and inexpensive computer software — should eliminate these burdens. The legislation should require the remittance of all local sales tax receipts — along with the state sales tax receipts — to the state. The state would then be required to distribute the local sales tax proceeds to its local jurisdictions on the basis of a formula which reflects each jurisdiction's normal share of total local tax receipts in the state.

The two bills before the subcommittee— H.R. 1891 and H.R. 3521 (Rep. Jack Brooks (D-Tex.) — treat local sales taxes similarly and do not provide for their collection (except in the two aberrational states). City officials should urge members of the subcommittee to delay any further consideration of the bill until an amendment which addresses the central concerns of cities and towns is developed.

Members of the subcommittee are:
Reps. Peter Rodino (D-N.J.), chair; Jack Brooks (D-Tex.); Romano Mazzoli (D-Ky.); Don Edwards (D-Calif.); William Hughes (D-N.J.); Daniel Clickman (D-Kan.); Edward Feighan (D-Ohio); Lawrence Smith (D-Fla.); Harley Staggers (D-Va.).

Hamilton Fish (R-N.Y.); Carlos Moorhead (R-Calif.); Henry Hyde (R-Ill); Dan Lungren (R-Calif.); F. James Sensenbrenner (R-Wis.); and William Dannemeyer (R-Calif.). •

Page 20 / Illinois Municipal Review / May 1988