ALBANY COUNTY — As consumer habits and technology zoom past the often cumbersome process and lethargic pace of legislating, local government, in an effort to boost revenues, has been playing catch-up and seeking to adapt its laws and regulations in an ever-increasing online world.

Facing a massive budget shortfall as well as newly implemented federal legislation that could starve New York of billions in formerly expected tax revenues, Governor Andrew Cuomo is again proposing an “internet fairness conformity tax” as a way to generate sales-tax revenue for the state.

New York State already collects sales tax on some internet sales. The twice-before-proposed legislation takes aim at large online marketplaces like Amazon Marketplace, eBay, and Etsy — where consumer transactions are processed by the marketplace operator for a third party — by requiring them “to collect sales tax on taxable sales of tangible personal property by third-party vendors.”

Opponents of the bill say it’s another cost that will drive up prices and hurt small business. Proponents say that the bill is not a new tax; rather, it is a known cost that has yet to be applied. They also say the proposed bill would help counties and municipalities to pay for roads and bridges and would help local business.

Douglas Kellogg, Communications Director for Reclaim New York, a government advocacy group with conservative ties, said that the proposed legislation is being sold as affecting only big online marketplaces, but, he said, those marketplaces are made up of small sellers and “those small companies are just individual people, like when you are discussing eBay.”

“The small online sellers have no duty under the federal Constitution to remit sales tax to New York,” Kellogg said. “This bill is an attempt to go around that and hit these sellers.”

Mark LaVigne, the deputy director of the New York State Association of Counties, calls it a “fairness issue.” He said that passing the proposed bill would level the playing field between the state’s brick-and-mortar stores and their online, out-of-state competitors.

Currently, brick-and-mortar stores in New York charge sales tax for goods bought on-site; the same is true if that store sells its goods online to customers in New York State. But online stores, LaVigne said, that do not have a physical presence in New York State are not collecting sales tax on the goods they sell to customers in-state. “For example, the Amazon Marketplace,” LaVigne said.

In the case of Amazon itself, sales tax is collected only on its own inventory. This leaves about half of the sales that take place through the site untaxed. This is because those untaxed sales are by third-party vendors that use Amazon as an online marketplace to sell their goods. The bill seeks to have Amazon collect sales tax from those third-party vendors and remit it to the state.

Distributing the tax wealth

Currently, New York collects the sales tax for both applicable internet and brick-and-mortar purchases. The state then sends back about half of what it collects to the county where the purchase was made.

Albany County Comptroller Michael Conners said he knows how much sales-tax revenue Albany County will receive from the state, but he doesn’t know from which local sources it comes from — brick-and-mortar store, online, or otherwise. The state’s Department of Taxation and Finance does not break down its data that way, he said.

In total, New York State collected $29 billion in sales and use tax in 2017; of the $16.6 billion in local sales-tax collections, $7.5 billion was remitted to counties, of which Albany County received about $259 million, which then distributed $103 million to local governments. A report from Thomas P. DiNapoli, the state comptroller, said that 2017 had the highest growth in local sales tax in four years.

Even with the economy humming and money rolling in, Albany County has been cautioning municipalities about their budgets; about not over-leveraging themselves by depending on sales-tax revenue. Because most municipalities receive more revenue from sales tax than property tax, which is why Albany County has some of the lowest property-tax rates in the state, Conners said.

“Local property taxes are heavily subsidized by sales taxes due to the County sharing 40 percent of the 4 percent,” a report by Conners said, referring to the county’s share of the sales tax.

At an October 2017 town-board meeting in New Scotland, Frank Commisso Jr., the director of municipal affairs for the Albany County Department of Audit and Control, told the board: “There are some warning signs that we do have significant risks that we are presented with … We think much of that is being driven by internet sales, and the growth of internet sales.”

Conners said that there are municipalities in The Enterprise’s coverage area that would be “slaughtered” with declining sales-tax revenue from brick-and-mortar retail. Most notably, Guilderland, which for every dollar of property tax it receives, it gets three dollars in sales-tax revenue (see chart).

Albany County faces challenges from the adjacent counties that are now developing their own retail centers. “We have that in Rensselaer County, we see that certainly in Schenectady County, and Saratoga County; there is significant competition that is now in place with Albany County, as a retail center,” Commisso said at the October 2017 meeting. That puts millions of dollars at risk for Albany County, and its cities, towns, and villages.

“We are at risk of losing 27.9 percent of our sales tax revenue to internet sales and retail sales outside of Albany County,” a report from Conners said.

Albany County’s largest source of revenue is sales tax; it is overly-reliant on the tax money, which could be a looming, long-term problem.

“When you have this over-concentration of revenue coming from sales tax, if there is a letup on those sales, you can have a cataclysmic effect — but it will take years,” Conners said.  

The loss of sales-tax revenue is a problem because municipal employees’ salaries only go up.

An analysis by Conners of the salary, wage, and fringe benefits of the Albany County local government workforce shows that by 2026 that cost would be almost $614 million annually; currently, the salary, wage, and fringe benefits of the workforce is about $422 million.

LaVigne said that counties and other local governments rely on sales tax to pay for infrastructure, public safety, and health programs, as well as reducing reliance on property taxes.

It’s these public services — notably infrastructure — according to NYSAC, that third-party vendors benefit from; online retailers are using local roads and bridges to deliver their products, but are not sharing the responsibility of paying for that infrastructure.

Kellogg said that there’s not a lot of merit to the infrastructure argument.

He said, if a third-party vendor is shipping goods, then it is already paying different fees, taxes, and tolls that would be consistent with the shipping product. “Systems are already generally designed to make you pay for the infrastructure in place,” he said.

Online sales grow

According to Amazon, more than 140,000 small- and medium-sized third-party sellers surpassed $100,000 in sales each on Amazon’s marketplace in 2017, representing potentially billions in unpaid taxes.

With sales of $177.9 billion in 2017 — including third-party vendors — Amazon was the country’s largest online retailer, accounting for 44 percent of all online sales in the United States, according to One Click Retail, an e-commerce analytics company. Overall, Amazon is the seventh largest retailer in the country, according to the most recent ranking from the National Retail Federation; Wal-Mart is first, followed by Kroger supermarkets, Costco, Home Depot, CVS, and Walgreens.

A paper from the National Bureau of Economic Research disputes LaVigne’s claim that the bill would level the playing field, while confirming his argument about the need for collecting sales tax from third-party vendors. In states where a sales tax was applied to Amazon purchases, there was a 9.5-percent reduction in spending on the site. But brick-and-mortar stores did not see a spike in sales; rather, shoppers turned to third-party vendors in online marketplaces that don’t charge sales tax, like Amazon Marketplace.

NYSAC contends that online retailers gain a competitive advantage on price because they are not charging sales tax that local retailers are required to charge.

Kellogg disputes this point, saying that there is a high burden placed on out-of-state sellers that have to conform to New York tax code. He also says that, due to all of the complexities of the different tax codes in different states, it is up to Congress to find a solution.

“We’d like to see tax policy that is based on the location of the seller where everybody has just one set of taxes to comply with, and they don’t have to worry about thousands of tax jurisdictions to comply with — and that would have to be a federal solution,” he said.

A brief from the Institute on Taxation and Economic Policy notes that the concerns over tax-code complexities appear to be rapidly disappearing as technology improves, and quotes Reed Hastings, Netflix’s Chief Executive Officer, about the tax-code complexity problem: “We collect and provide to each of the states the correct sales tax. There are vendors that specialize in this ... It’s not very hard.”

LaVigne points out that every year online commerce takes up a larger percentage of the retail business, and, what the proposed legislation would do is modernize the sales-tax collection system to recognize that change.

While still only a portion of total retail sales, e-commerce has grown faster than traditional brick-and-mortar retail. In 2001, online shopping accounted for eight-tenths of a percent of total sales; by 2017, e-commerce accounted for 9.1 percent of total sales, according to Federal Reserve Bank of St. Louis.

In 2017, shoppers spent about $453 billion online, a 16-percent increase from 2016, while total retail sales in 2017 increased 4.4 percent over 2016, according to the United States Department of Commerce.

How much uncollected?

According to the governor’s budget proposal, if the proposed law were adopted, the state would receive additional an $80 million in sales tax in fiscal year 2019 and $159 million annually thereafter.

A more optimistic estimate cited by NYSAC, is in a report from the United States Government Accountability Office that estimates between $500 and $900 million annually in sales tax goes uncollected in New York because of internet-based purchases. The report notes that the estimated revenues are based on the state’s ability to require businesses to collect taxes on all remote sales, and, already New York does collect sales tax on some internet sales.

Prior to 2008, internet retailers did not collect sales taxes from customers who lived in New York. That’s because in 1992, the Supreme Court ruled in Quill v. North Dakota that a state can require a business to collect and remit sales tax only if the business has substantial presence in that state. In 2008, New York State amended its sales tax code to create what was known as the “Amazon law.”

The new law, according to the Center on Budget and Policy Priorities, required “internet retailers operating ‘affiliate programs’ in the state to charge sales tax on the retailer’s sales to New York residents. These affiliates — which can be local bloggers, newspapers, not-for-profit organizations, and other types of businesses — post on their websites links to online retailers and receive a commission when purchases are made through those connections.

New York’s law requires retailers making more than $10,000 in annual sales in the state through New York affiliates to charge New York sales tax on all sales in the state, not just those resulting from the affiliate program. The retailer can avoid this obligation, however, if it can demonstrate that its New York-based affiliates do nothing to encourage such sales other than place a link to the retailer on their websites.”

Simply put, the 2008 law required that retailers making more than $10,000 in annual sales in the state, charge the New York sales tax on all sales in the state.

In a one-year period, September 2016 to August 2017, taxable sales and purchases of electronic shopping, electronic auctions, and mail-order houses in New York State was about $6.7 billion, according to data compiled by The Enterprise from the New York Department of Taxation and Finance; in the same one-year period, Albany County had taxable sales and purchases of about $127 million.

These purchases are sorted by the North American Industry Classification System — code 45411, electronic shopping and mail-order houses, in the example above — which is an industry-classification system that groups establishments into industries based on the similarity of their production purpose.

NAICS Code 45411 is comprised of more than e-commerce; it also includes retailing all types of merchandise using nonstore means, such as catalogs, toll-free telephone numbers, or electronic media like interactive television. But the same principle that applies to e-commerce when it comes to collecting sales tax — physical presence — is also applicable to the other types of retail in NAICS Code 45411.

Since the physical presence of a retailer is the standard used to determine whether that retailer must collect sales tax in the state, the Government Accountability Office estimated that at least 80 percent of sales-tax revenue from all internet retailers is already collectable in New York. That’s because the report researched the store locations and sales-tax policies for the 100 largest internet retailers and found that approximately 85 percent of them already have a physical presence in New York State and are therefore legally required to collect sales tax.