Idaho tax collectors face a tough time getting revenue from Internet sales and can't take taxes on many services with tax exemptions, but Idaho state senators are considering expanding the state tax base to these two areas. The Senate Local Government and Taxation Committee approved two measures that wouldn’t have an immediate effect on state revenues, but could broaden state taxes down the road.

Idaho loses roughly $30 million a year in Internet sales, and Idaho Sen. Mike Jorgenson, R-Hayden, wants the state to take steps to recapture some of that money and help brick-and-mortar stores in Idaho. He’s proposing that Idaho join the Streamlined Sales Tax Compact, a multi-state effort to simplify sales taxes and collect from businesses located out of state. Gov. Dirk Kempthorne signed an executive order in 2005 to participate in the program, but that expired last year.

“The ultimate purpose of this bill is to begin to close a giant tax loophole,” Jorgenson said. He said collecting Internet sales tax would help main street businesses, which have become demonstration spots for products that people test out before buying online for a cheaper price. “Right now, Idaho is in a condition that it needs to consider something like this.” Under current law, Idahoans should be paying sales tax for Internet purchases – there’s a line on state tax forms for people to declare such items – but the State Tax Commission has no clear way to enforce the requirement.

Most of the Senate committee members approved the measure. “There’s value in this for Idaho businesses,” said Sen. Joe Stegner, R-Lewiston. “I’ve never considered this to be a tax generation issue as much as a fairness issue.”

Only Sen. Shirley McKague, R-Meridian, opposed the plan. “To me this is an additional tax and I don’t think it’s the right time to do this,” she said. However, the effort could face more opposition in the House. That’s because, under the Idaho Constitution, all new revenue laws must start in the House, not the Senate.

“Why should we continue to do this if we know that the [House] is going to think that we’re going to push this constitutional issue,” said Sen. Tim Corder, R-Mountain Home, who voted for the plan. Jorgenson said he’s fine with moving on the plan in the Senate because he doesn’t consider it a new tax, and said he hasn’t heard of a similar proposal that would get a hearing in the House this session. Other lawmakers understood the constitutional issue, but still supported the measure.

“I’m not particularly troubled by what the body across the rotunda will do at this point,” Stegner said.
 
Another proposal coming out of the committee would require lawmakers to look at all the state sales tax exemptions once every five years. The legislation from Sen. Chuck Winder, R-Boise, would give every exemption a five-year time limit unless the Legislature approved an extension. Sales taxes exemptions account for $1.7 billion in potential tax revenue this year, according to the Legislature’s Fiscal Facts. The sales tax brings in $1.2 billion. Most of the exemptions are for services. It’s unclear whether lawmakers would repeal some of the biggest exemptions, including those on health and medical services, construction, or production equipment.

Winder said it would be a good idea to dust off every exemption every five years to make sure it serves a purpose. “This does need to be looked at,” he said. “I think the public expects it to be looked at.”

The Senate committee unanimously approved sending the legislation to the floor for a full vote, though Stegner said it may not be the right way to examine exemptions. He said that looking at all the exemptions at once would be the best policy. “I am convinced that it needs to be done with a broad brush,” he said. He said he favors reducing the number of exemptions to broaden the tax base and then lower tax rates.

Sales tax exemptions have been a common topic this legislative session as lawmakers look to find alternative revenues to compensate for lagging tax collections. A proposal in the House from Rep. Wendy Jaquet, D-Ketchum, would create a 16-member Tax Review Commission to study exemptions. Jaquet introduced that plan in January but it hasn’t made it out of House committee.

Read Jorgenson’s Streamlined Sales Tax legislation here and Winder’s tax exemption legislation here.