DFLers suggest sales tax on Internet sales, music downloads

Sen. Tom Bakk, DFL-Cook, said it will take a variety of tax increases to raise the $2 billion in new revenue that Senate Democrats included in their plan to balance the state's budget.

Among the options, he said, are creating a new income tax bracket for the wealthiest Minnesotans, increasing income taxes to 1990 levels and taxing Internet sales and music downloads.

"Our sales tax is eroding with all of these Internet transactions, and we have to figure out a way to get our arms around that -- especially with companies that have nexus in Minnesota," said Bakk.

Bakk said the final decision on which tax increases are in and out may not come until next month.

Senate Democrats are proposing a budget-balancing plan that relies on $2 billion in new revenue and a 7 percent across-the-board spending cut.

In the Minnesota House, Rep. Loren Solberg, DFL- Grand Rapids is also proposing a tax on Internet sales.

Solberg, who chairs the powerful House Ways and Means Committee, said Minnesota is one of several states that is pursuing the option after New York imposed an Internet sales tax last year.

Solberg said Minnesota law already requires Minnesota-based businesses to collect sales taxes on Internet purchases, but businesses that don't have physical operations in the state are not required to collect the tax.

Solberg said requiring all businesses to pay the tax would make things fairer for businesses that sell things the old-fashioned way, face to face.

"It really puts a small-town business person, a business person from the state of Minnesota who is following the law, at a big disadvantage," said Solberg.

An estimate by House Research found that taxing Internet sales would generate about $50 million for the state over the next two years. But the amount would increase as more people purchase goods over the Internet.

Minnesotans are already supposed to pay taxes on any Internet purchases that total $770 over the course of a year. But Buzz Anderson, with the Minnesota Retailers Association, said he doesn't think many Minnesotans are reporting the tax.

Anderson said his members are willing to support the legislation, as long as it doesn't interfere with federal efforts to require companies to collect sales taxes.

"They have a whole bag of tax increases that they're apparently looking at, and it all adds up to a bad deal for the people of Minnesota."

"They would all like Internet sales to be taxed. I think the question for them is, how do you allow that to happen? Does it have to take an act of Congress or can states do it individually?" said Anderson.

That question is currently being considered by the courts in New York State. Amazon.com is challenging New York's law that taxes Internet sales.

Amazon's Patty Smith said the company believes New York law is unconstitutional because it violates the interstate commerce clause. She said a 1992 Supreme Court ruling found that mail-order companies don't have to pay sales taxes if they don't have a physical presence in a particular state.

"We believe that the states should follow the U.S. Supreme Court's ruling on this," said Smith. "What they're attempting to do, by having the states enact their own legislation, is in violation of what the Supreme Court upheld."

The way New York and other states get around the Supreme Court ruling is by arguing for a broad interpretation of what constitutes a "physical presence."

Smith wouldn't say if Amazon would file a similar lawsuit in Minnesota. She may not have to worry about it.

Gov. Pawlenty's spokesman Brian McClung said the governor does not support the idea. In fact, McClung shot down most of Bakk's suggestions to raise revenue.

"They have a whole bag of tax increases that they're apparently looking at, and it all adds up to a bad deal for the people of Minnesota who are already under a lot of pressure, who are already worried about their jobs, who already have a bunch of bills to pay," said McClung. "From Gov. Pawlenty's perspective, we don't need to wallop people with more tax increases."

Pawlenty's revised budget does not increase taxes, but does rely on about $1 billion in borrowing against future tobacco payments. He has also been criticized for using one-time money to erase the state's deficit.

McClung said the one-time money will help Minnesota get through the economic downturn. Democrats in the House and Senate say Pawlenty's budget creates significant problems in future years.

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