Md. Studying Tax Revenue Lost To Internet Sales

In an April letter, Gov. Martin O'Malley asked Comptroller Peter Franchot to study the issue. The comptroller asked the Maryland Bureau of Revenue Estimates last month to prepare the study, which is expected to be done by the end of summer.

Franchot said he believes lawmakers are likely to take up the issue within the next year.

"It's a fair application of existing taxes," Franchot said. "It's a business fairness issue, and it's increasingly a revenue issue because of the greater use of the Internet."

Internet retailers are required to collect sales tax only when they sell to customers living in a state where they have a store or office. Franchot, a Democrat, said he has asked his staff to come up with an estimated tax bill for Internet retailer Amazon.com, which he said would add up to tens of millions of dollars if the company had a store in Maryland.

"The key point for Maryland is that the Internet industry is no longer in need of subsidies and tax protections and special treatment," Franchot said. "They've grown into behemoth companies that they currently are, and they have a responsibility to the states, I believe, that they do commerce in. Right now, they're avoiding it on a technicality, which is 'we don't have a bricks and mortar company in Maryland.'"

O'Malley, a Democrat, noted in his letter that the state's Department of Legislative Services adapted a study by the University of Texas to estimate that Maryland loses more than $160 million each year from unpaid taxes related to Internet sales.

"I am concerned that the failure of any subset of retailers to collect and remit sales tax has a negative impact on Maryland's overall fiscal strength, including our ability to meet our priority investments such as public school construction or maintaining our Transportation Trust Fund," O'Malley wrote.

With Maryland facing a structural budget deficit of roughly $1.1 billion, state officials are eager to find any new revenue sources. Some lawmakers are talking about trying to address the deficit during a special session this fall, when the General Assembly will convene for congressional redistricting. Some also are talking about ways to increase revenues for the state's huge transportation infrastructure demands.

The study will estimate the volume of Internet sales that take place annually in Maryland as well as their estimated percentage of total retail sales. The study also will try to estimate how much tax revenue loss is due to sales by online retailers. Recent developments in the Internet sales market also will be explored, including the expanding market for digital goods, such as music, books and software downloads.

The comptroller said the study will explore the potential effect policy changes would have on Maryland's economic climate based on recent experiences in other states and best practices that have been used to ensure tax compliance among Internet sellers.

The study also will examine the Streamlined Sales and Use Tax Agreement, which would standardize sales tax laws and filing requirements for Internet retailers. So far, 24 states have adopted the streamlined sales tax.