Two States to Cut Income Tax When Federal Sales Tax Fairness Becomes Law

If the U.S. House of Representatives passes the Marketplace Fairness Act, it will trigger a lower state income tax bill for residents of Wisconsin and Ohio.

The Alliance for Main Street Fairness reported this week that a key tax provision included in the recently passed 2013-2015 biennial state budget signed by Gov. Scott Walker will automatically trigger a state income tax cut for individuals, families, and small businesses once federal e-fairness legislation is signed into law. Small business leaders in Wisconsin are calling it a “win-win scenario” for Main Street retailers and taxpayers.

“Since most small businesses pay their taxes through their personal fillings, the state budget creates the ultimate win-win scenario of tax fairness and a tax cut,” said Scott Stenger of the Alliance of Wisconsin Retailers. “Of course, we now need the U.S. House of Representatives to act to ensure Wisconsin can close this loophole and lower rates across the board.”

“We welcome competition both online and otherwise. We simply believe all businesses should play by the same set of rules,” said Alan Rudnick, owner of Rudnick Jewelers in Sheboygan. “The state budget ought to give the U.S. House of Representatives the motivation it needs to pass the Marketplace Fairness Act quickly. There is no reason to wait any longer.”

In a letter sent last month to the Wisconsin Congressional delegation, Gov. Walker outlined his support for the use of any state revenue from online sales tax collection to reduce income tax rates. The budget signing this week made that promise Wisconsin law.

In Ohio, the Ohio legislature and Gov. John Kasich have included a trigger in the state budget that reduces Ohio’s personal income tax rates after passage of federal e-fairness legislation.

“Ohio is showing the country how e-fairness legislation should be used to lower income tax rates. When Congress acts, Ohio taxpayers will have more money in their pockets thanks to this pro-growth budget,” said Gordon Gough, chair of the Ohio Alliance for Main Street Fairness. “We are one of the first states in the country to use this innovative legislative model to lower the burden on taxpayers by closing loopholes in the tax code.”

The state budget bill includes language that would bring Ohio in compliance with the Marketplace Fairness Act and would direct revenue to the income tax reduction fund. While the budget passage is encouraging, Congressional action on the federal level is still required to ensure that Ohio can level the playing field for local retailers and cut income taxes.

The Marketplace Fairness Act is pending in the U.S. House of Representatives. The bill enjoys broad bipartisan support from a number of Ohio legislators, including Ohio Senators Rob Portman and Sherrod Brown as well as co-sponsors Congressman Steve Stivers and Congressman David Joyce.

In related news, a law professor recently opined that opponents of federal sales tax fairness legislation are wrong: The Marketplace Fairness Act of 2013 (MFA) is constitutional and should be made law. This was the main thrust of an op-ed in Oxford University Press blog by Edward A. Zelinsky, the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University.

Zelinsky was responding to the Attorneys General of Oregon, Alaska, and Wyoming, who recently argued that the MFA, which would give states the right to require remote sellers to collect and remit sales tax to the state, does not stand constitutional muster.

“The three attorneys general argue that Marketplace Fairness Act would unfairly burden small Internet and mail order sellers by requiring such sellers to collect sales taxes when they ship goods to out-of-state purchasers,” Zelinsky wrote. “None of this is persuasive. The Act only applies to sellers with annual remote sales of $1,000,000 or more. Truly small businesses which remain below this remote sales threshold will still be protected by Quill’s physical presence test and thus will not collect sales taxes on their out-of-state sales through the Internet or mail order catalogs.”

Zelinsky also pointed out that MFA does not require sellers to collect and remit sales taxes for 9,600 taxing jurisdictions. “The Act specifically requires each state to designate for out-of-state remote sellers a single enforcement entity (such as the state’s Department of Revenue) to administer and enforce all state and local sales taxes within the state,” he wrote. “This single entity must issue a single tax return which remote sellers will file for their tax obligations throughout the state. In addition, each state must provide free software for use by out-of-state Internet and mail order sellers to facilitate such sellers’ compliance with the state’s sales tax collection responsibilities.”