Six Great Lakes states, in a ceremony signaling growing Midwestern regionalism, agreed Wednesday to cooperate to recover hundreds of millions of sales tax dollars they believe are lost each year in cross-border purchases.
"We are the first major cluster of states to enter into this kind of cooperative agreement," said Tom Johnson, Illinois director of revenue.
The agreement, signed in Chicago by representatives of Ohio, Michigan, Indiana, Illinois, Minnesota and Wisconsin is aimed at what revenue directors from the six states called "Twilight Zone" purchases. These are consumer goods, often big-ticket items, bought from merchants across state borders, through catalogues, by phone or through television marketing programs. If the merchant does not have a business address in the consumer's home state and the product is going to be shipped to the consumer, the merchant is not obligated to collect sales taxes.
But the consumers are legally obligated to pay their home states a "use tax" equal to the sales tax. In practice, that law is generally ignored.
"We're losing big bucks and the amount is growing each year," Johnson said.
$300 Million Loss Seen
The loss to the six states from catalogue sales alone is estimated at more than $300 million, according to a study by the U.S. Advisory Commission in Intergovernmental Relations.
Items most commonly purchased in cross border transactions include boats, jewelry, furniture, appliances, computers, cameras, luggage and clothing.
Midwestern states, under the new agreement, will work together to get merchants to voluntarily collect sales taxes due in the home states of consumers and they will share information to help states go after residents who make big-ticket purchases and fail to pay "use taxes."
Alleges Unfair Edge
"Companies that do not charge sales tax to their customers have an unfair competitive edge over those that do," Johnson said.
"This will provide a level playing field for competition," Sue Work Martin, Michigan's revenue commissioner, added.
Wednesday's agreement is the latest example of a regional cohesiveness developing in the upper Midwest. The states have previously signed the equivalent of regional treaties to ban oil drilling in the Great Lakes, block diversion of water from the region and to restrict the introduction of toxic substances into the water.
"Within the six states of the upper Midwest there is more cohesiveness than ever," said David Bancroft, deputy director of the Council of Great Lakes Governors. "The states are seeing that they are not just (independent) entities, but that their economic health is, to a large degree, affected by the states around them."
The six states plan to use computers to help fulfill the pact.