When it became evident Maine wasn’t going to roll over, Cabela’s Inc. withdrew its demand for a tax exemption and is apparently moving ahead with plans for a store in Scarborough. Although state tax officials were ready to make the right decision, Congress should re-examine the sales-tax exemptions for catalog and Internet sales that led to this problem.
This summer, representatives of Cabela’s, a Nebraska-based outdoor retailer, told state officials they would scuttle plans for a 130,000-square-foot store in Scarborough if it were required to collect sales tax on catalog and Internet purchases by Maine residents.
Companies that have stores here, like L.L. Bean, the Gap and Pottery Barn, must charge sales tax when Maine residents order items from a catalog or web site. Cabela’s argued that it should be treated differently because its catalog, Internet and retail stores are separate corporations.
Cabela’s likely wasn’t worried about the $500,000 in taxes it would have to collect on the $10 million in catalog and Internet sales the company says it now receives from Maine. Instead, it was probably concerned that other states that grant exemptions may rethink their stance if Maine collected sales tax on non-store sales.
The company may get around this problem by installing Internet kiosks in its stores or establishing a small call center in Maine to prove these divisions have a physical presence here.
This wouldn’t be necessary if all companies, regardless of where their stores are located, were required to collect state sales tax. This would require action from Congress.
The U.S. Supreme Court ruled in 1992 that requiring companies without a physical presence in a state to collect that state’s sales tax was an undue burden under the Constitution’s Commerce Clause. This is because states have differing sales tax rates and assess the tax on different items. Many states, for example, do not charge sales tax on food and some do not on clothing.
Although the sales tax is not collected by the vendor it is still owed by the buyer. Hence the line at the end of the Maine income tax form called “use tax,” which is typically 0.04 percent of adjusted gross income. The federal government estimates that Maine loses between $30 million and $100 million in taxes from residents who make purchases out of state and don’t pay sufficient use taxes.
The Streamlined Sales and Use Tax Agreement, a project of the National Governors Association, National Conference of State Legislatures and Federation of Tax Administrators, aims to solve the problem by getting states to agree to common definitions of what items are subject to sales tax. Nineteen states have passed all or some of the provisions of the agreement. Maine is monitoring the agreement but has not signed on. It should.
Having more states sign the agreement will make it easier for Congress to pass a law requiring the collection of sales taxes regardless of a company’s location or connection to the state where its customers live. This will help states by eliminating the use tax and it will help businesses because they will all follow the same rules.