Updated May 10, 2010

Internet Parity & Amazon

Keeping Tennessee's Money in Tennessee while Supporting Local Businesses.

The sales and use tax is the single largest source of funding for Tennessee state and local government.

In order to fund our roads, schools, parks, libraries, law enforcement, emergency response and other public structures adequately we need to be really efficient at collecting those taxes.

But according to a study done at UT, Tennessee is missing out on about $300 million of revenue from out-of-state sales to Tennesseans. Because of a Supreme Court ruling, states cannot require merchants to collect sales taxes unless they have more business connection with the state than electronic communications and delivery services. All states that have sales taxes also have use taxes that are identical except the use tax is supposed to be paid by the buyer after the point of sale.

Most Tennesseans are not aware of their use tax obligation. Of 3.1 million individual taxpayers in Tennessee, fewer than 1,400 filed use tax returns last year. Fewer than 1,100 businesses did. Many honest citizens know about the use tax but don’t keep track of their purchases well enough to prepare a return. Others figure that their out-of-state purchases are not enough to catch the attention of the Department of Revenue. Some also calculate that if the Department does pursue them, they will only have to pay the tax (no penalty), so they presume they’re better off waiting to be caught than voluntarily paying what they might never be compelled to pay.

Some out-of-state businesses exploit this situation to gain a price advantage over Tennessee businesses. By doing so, they make tax avoidance and evasion a core element of their business plans. That is unacceptable corporate behavior and must stop.

The Internet Parity Act, SB1741/HB1947, as amended, will improve collections by requiring out-of-state sellers who do not collect sales tax to notify their customers at the time of purchase that they may owe sales (use) taxes to Tennessee. They will also be required to report annually to each purchaser and to the state Department of Revenue the total of use tax-eligible purchases. These measures will provide taxpayers the information they need to pay their taxes and to monitor the compliance of the vendors they patronize. Vendors may avoid the reporting requirement by collecting and remitting the sales taxes.

The revenue this will produce can be used to avoid layoffs of state employees and cuts to critical state functions.

Purchasers who elect to patronize Tennessee businesses instead of out-of-state businesses, will help the local economy and still increase state revenue.

This is not a new tax. It is only improving collections for a tax that is already on the books. Failure to pass this bill would, in effect, be continuing to enable tax evasion.