Bill Introduced to Use Internet Taxes to Cut State Food Tax

Sen. Frank Niceley has filed legislation that would use any new state revenue from out-of-state retailers to lower the current sales tax on groceries.
Niceley, R-Strawberry Plains, filed the bill (SB1424) Tuesday for consideration during the 2014 legislative session that begins in January. In an interview, Niceley said he adamantly opposes legislation pending in Congress that would authorize states to collect sales taxes from their citizens buying products over the internet or via mail order from companies located in other states.
But if the law is approved by Congress, the bill declares that the state finance commissioner will make an annual estimate of “surplus Internet tax revenue” and put that amount of money into the state budget for use in reducing the tax on grocery food.
Gov. Bill Haslam, House Speaker Beth Harwell and Senate Speaker Ron Ramsey all support the “Marketplace Fairness Act,” which passed the U.S. Senate last month but is stalled in the U.S. House, and have all indicated an interest in using some of the new revenue to reduce current state taxes.

Ramsey has said his first priority would be reducing or eliminating the Hall tax on dividends and interest income. Haslam and Harwell have not been specific.
Niceley’s bill would reduce the state food tax, which will stand at 5 percent starting July 1 under legislation passed earlier this year. He said that in the highly unlikely even that the food tax ever gets to zero under the plan, reductions would then begin for the Hall income tax.
The tax on groceries is projected to produce about $500 million in state revenue next year. A National Conference of State Legislatures report says that Tennessee lost about $400 million in sales tax revenue through Internet sales in 2012. The pending bill in Congress would cover only companies with more than $1 million in gross annual sales, so some of that estimated $400 million would apparently still go untaxed under the “Marketplace Fairness Act” and there has been no publicly-available estimate of the bill’s actual impact on state revenue.
Niceley said the idea is to match “dollar for dollar” all new revenue from taxing internet and catalog sales with cuts to the tax on groceries. He said he is not trying to encourage passage of the act.
“I don’t want the federal government getting their grubby hands on the sales tax,” he said. “This is a way they’re trying to weasel their way into getting involved in the sales tax.”
The senator envisioned the federal government deeming new state revenue from internet sales as “dependent on the federal government” and thus leading to federal restrictions on use of the money.
The bill will at least provide a “revenue neutral” safeguard for Tennesseans if the bill is enacted by Congress, he said.
“The last thing we need to do in a recession is to take money out of the private sector and put it into the public sector,” Niceley said. “Anything that does that is a tax increase.”
Advocates of the Marketplace Fairness Act – including Haslam, Ramsey and U.S. Sen. Lamar Alexander – insist the measure should not be considered a tax increase because sales taxes legally should already be paid on internet sales under state law. But as a practical matter, the sales taxes are not collected from companies that do not have a store or other physical presence within the state.

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