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Loophole shows Iowa needs a modern tax system

BY DI EDITORIAL BOARD | APRIL 05, 2012 6:30 AM

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With tax season upon us, Iowans are rummaging through months worth of receipts and returns to figure out exactly what they owe. But some may not know their Iowa use tax — the ones paid for online purchases — could may be taken advantage of by out-of-state corporations.

Iowa legislators are currently concerned with a loophole that allows businesses who sell their products online to establish their distribution centers out-of-state in order to avoid charging online customers sales tax. Now, legislators are attempting to close that loophole, which essentially allows for the establishment of subsidiaries as a means for legal tax evasion.

But Iowa legislators should not only pass the bill closing the sales-tax loophole, they should update the commerce-tax code for the technological age.

Taking their cues from Texas, which in 2010 billed Amazon $269 million in wrongfully avoided taxes through the use of a subsidiary, Iowa plans to keep in front of the insidious tax loophole.

According to Iowa's current tax code, retailers must maintain a place of business in Iowa to legally be required to collect sales tax from customers and pay it on their taxable merchandise. An unfortunate loophole in Iowa law, similar to Texas law, would allow businesses to set up a subsidiary to distribute goods bought online under a different name or organizational structure.

Senate File 2330 seeks to retool the Iowa definition of a business to close the loophole and fortify the tax system.

But the Iowa Legislature should not stop there. With the globalization and the spreading of Internet commerce, dubbed by some as "e-tailers," Iowa's current sales and use tax system is outdated.

Right now, if a company or individual buys from a business that is not registered with the state, then the individual is subject to an Iowa use tax. The out-of-state company is not subject to the state tax, because it is not registered, and therefore the burden is placed directly on the resident's shoulders.

The online businesses should not get away with this. All online, transient, or out-of-state vendors should be subject to collecting their own use taxes and reporting them to each respective state — the burden should not fall to the residents or businesses of Iowa.

Sen. Pam Jochum, D-Dubuque, who voted to close the loophole in a Senate ways and means subcommittee, said the vote was for crucial Iowa residents.

"It does put Iowa retailers at a disadvantage when people are buying online and escaping our taxes," she told to the Des Moines Register.

The lack of a sales tax online means less business for Iowa retailers. Tax-free shopping is just another reason to browse a big-name webpage as opposed to the aisles of a local shop or boutique. The reality is that the loophole feeds the fire of an undeniably preferential model.

"That's not to mention that the sales tax is something that helps support all of our services, including schools at the local level and cities," Jochum said.

The Legislative Services Agency, a nonpartisan organization, estimates that the loophole results in a statewide loss of $6.8 million in tax money each year. Like any tax, sale tax finances a variety of projects, including infrastructure development and security, and it fuels the public-school system. The services afforded to community members statewide, every day, are thanks to taxation. The loophole not only hinders local business growth, but by it nature, works to slow the state's ability to function smoothly and securely.  

Customers need to be aware of the effects of tax-free shopping — the relationship between taxation and public well-being is a reciprocal one. While a sale tax-free purchase is appealing, customers are ultimately robbing themselves. The loophole not only ends up hurting state and local businesses but also the very people shopping online.

The bill passed the Senate in an overwhelming 48 to 0 vote, and the House should consider sales and use tax further as Iowa heads into a dominant technological age.


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