S.C. Statehouse Report
Jan. 11, 2004
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State loses millions in unpaid Internet taxes
By Andy Brack
SC Statehouse Report

JAN. 10, 2004 - - Economist Al Parish this month asked members of a Charleston Rotary Club to raise their hands if they paid state taxes on holiday purchases made through the Internet.

Of the 140 people in the room, none raised a hand, even though more than 80 percent indicated they bought gifts online.

Parish wasn't surprised. He got the same reaction last year when he asked the question to a group of tax auditors - - the people who are supposed to stick to the letter of tax laws.

In South Carolina, like most other states, you're required to pay taxes on items purchased online or through mail-order catalogs. But online merchants aren't required to add taxes to the total like merchants do in real stores in South Carolina. So that means you're supposed to write a check to the state Department of Revenue for 5 percent of the online purchase price. Guess what? Few do.



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State Department of Revenue spokesman Danny Brazell said the state lost an estimated $153 million in 2003 revenue from unreported and uncollected use taxes on Internet sales. Fortunately, the state does collect more than $180 million a year in taxes on sales via the Internet, catalogs and televised ads. That's because it has agreements with 11 other states and an in-state public education program that is having some success, Brazell said. Also, many big out-of-state vendors voluntarily pay the tax. But overall, payments from individuals who buy stuff on the Internet sales remain a problem.

"It's the state's must underreported tax," Brazell said, noting there is a line on the state tax return that allows people to itemize tax payments.

If nothing changes, the state is expected to lose as much as $525 million in unreported Internet taxes by 2006. That's because Internet sales should grow 40 percent as they have in the last couple of years, predicted Parish, a professor at Charleston Southern University's School of Business.

"You can legally require consumers to pay the tax, but that's essentially an unenforceable law," he observed.

It's unenforceable because it relies on individuals to pay the tax, not online merchants to collect it. That gives a partial competitive advantage to Internet vendors.

But Parish notes the advantage is selective. Online sales often include shipping and handling charges that generally exceed sales taxes on many items. In other words, if an item costs the same in a store or online, it's generally less expensive to buy it in the South Carolina store. So the store would have the advantage - - unless shipping and handling charges were waived, as many online merchants did during the holidays.

The Web also has an advantage for big-ticket items, like computers. A $1,000 computer certainly costs less than $50 (the amount of the tax) to ship to the state directly into someone's home.

As state lawmakers convene this week in Columbia, they'll be faced with multiple alternatives to generate more revenues for the cash-strapped state or to reconfigure the way the state collects tax money. When the General Assembly for 2004 calls it quits in June, it more than likely will be remembered as the Session of Tax Reform.

If lawmakers could figure out a way to get their arms around lost revenues from Internet sales, they'd accomplish a legislative miracle. If they could really collect the lost $153 million, they'd have enough money to pay for increased health care costs for the Medicare program for the elderly - - without raising cigarette taxes. Or, they'd have enough to pay down the deficit remaining from previous years - - without raising taxes. Or, they'd have twice as money as they need to fund state employee pay raises or a third as much as they need to meet school upgrades required by federally-imposed standards.

But there's not likely to be a miracle with Internet taxes. More than likely, the state will keep losing them to the same place socks go when they're put in a dryer. And in a sense, that's a shame because it puts South Carolina businesses at a competitive disadvantage to online merchants.

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This week's cartoon by our Bill McLemore:

1/11:Some of South Carolina's best policy/politics books

We asked a series of professors and political observers to send us some of their favorite fiction and nonfiction books on South Carolina politics and policy. While we didn't get any fiction nominations, here's a list of top books from several sources (in no particular order):

1. "Ol' Strom: An Unauthorized Biography of Strom Thurmond," by Jack Bass and Marilyn W. Thompson, Longstreet Press, 1998.

2. "Strom Thurmond and the Politics of Southern Change," by Nadine Cohodas, Simon & Schuster, 1993.

3. "The Case Against Hunger: The Need for a National Policy," by Ernest F. Hollings, Cowles Book Co., 1970.

4. "Against the Tide: One Woman's Political Struggle" by Harriet Keyserling, University of South Carolina Press, 1998. Foreward by Richard W. Riley.

5. "Banana Republic: A Year in the Heart of Myrtle Beach," by Will Moredock, Frontline Press, 2003.

6. "Porgy Comes Home: South Carolina After 300 Years," by Jack Bass, Sandlapper, 1970.

7. "South Carolina: A History," by Walter Edgar, USC Press, 1998.

8. "South Carolina Government: An Introduction," by Charlie Tyer, ed., USC Institute for Public Affairs, 2002.

9. "South Carolina Politics and Government (Politics and Governments of the American States)," by Cole Blease Graham and William V. Moore, Univ. of Nebraska Press, 1994.

10. "Government in the Palmetto State: Toward the 21st Century," Luther F. Carter and David Mann, eds., University of South Carolina, 1993.

11. "The Orangeburg Massacre," by Jack Bass and Jack Nelson, Mercer University Press, 1992.

12. "A South Carolina Chronology, 1497-1992, 2nd Ed.," by George C. Rogers Jr. & C. James Taylor, University of South Carolina Press, Columbia, SC, 1994.

13. "The Primary State - A History of the Democratic Party in South Carolina, 1876-1962," by Frank E. Jordan, Jr., Columbia, SC, 1967

14. "Red Hills and Cotton," by Ben Robertson, USC Press (reprint), 1991.

15. "Profits and Politics in Paradise: The Development of Hilton Head Island," by Michael N. Danielson, University of South Carolina Press, 1995.

Many thanks to those of you who supplied titles. If you have a book you'd like other readers to know about, send an email to: feedback@statehousereport.com

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