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Featured Tax and Budget

Tax Cuts on Food, Inheritances Pushed by Haslam

Gov. Bill Haslam Tuesday afternoon introduced his 2012 legislative agenda, announcing that he will push for two tax cuts during this year’s Tennessee General Assembly session, which also began Tuesday.

The tax cuts come by way of the governor’s proposals to raise the state inheritance tax exemption from $1 million to $1.25 million and to lower the state’s portion of the sales tax on food from 5.5 percent to 5.3 percent.

A family of four spending $884 a month on groceries would save about $21 a year under the Haslam tax cut.

The proposals were something of a surprise move from the governor, who has said as recently as last month that such cuts would be unlikely this year due to the state’s tight financial situation.

The proposed tax cuts are just the beginning for the governor, who said the cuts were the first step toward his goals of lowering the food tax to 5 percent and raising the inheritance tax exemption to $5 million, to match the federal exemption mark, by the end of his first term.

Estimates are that the two-tenths of a percent decrease in the food tax will lower the state’s revenues by $18 million. For the change in the estate tax, that number is $14 million.

“I just think it’s important, if we’re to lower taxes for Tennesseans, that’s the only way to really touch every Tennessean in a significant way,” Haslam said of his decision to push for a food tax cut.

Lt. Gov. Ron Ramsey last month told reporters that he “wasn’t a big proponent” of cutting the food tax and that it probably wasn’t wise, anyway, given that sales taxes are the main revenue source for state and local governments. While Speaker Beth Harwell stood by the governor’s side at his press conference Tuesday and voiced her support for Haslam’s agenda, Ramsey did not attend but released a brief statement.

“I am excited to work with Gov. Haslam to move Tennessee forward toward more jobs, less spending and smaller government,” he said. “The governor has chosen his priorities well. This is a solid agenda that our unified Republican majority can proudly stand behind.”

Ramsey conceded that his priorities differ from the governor’s in some areas, but said he’d support Haslam’s agenda.

“I’ve always been in favor of reducing the estate tax, and so that’s one of his priorities too,” the Blountville Republican told TNReport. “So, I think if you look at the package from top to bottom, it’s something I agree with and can’t wait to help him pass it.

“[The food tax cut] has not been a priority of mine, I will agree with that, because that’s something I feel like is a stable base of revenue that we have. But reducing it from 5.5 to 5 over three years – that’s fine. It’s not like we’re trying to do away with the sales tax on food,” he said.

Haslam’s agenda did not include a push for a cut in the Hall income tax on investments, which has been a goal for some Republicans, including Ramsey.

“That fight’s not over yet either, OK,” Ramsey said. “That’s just not one of [Haslam’s] priorities.”

As for raising the state inheritance tax exemption, Haslam said he believes the move will create more revenue for the state in the long term by keeping people in the state.

“There are a whole lot of people who used to live in Tennessee who don’t anymore because it’s cheaper to die in Florida,” he said. “And I can tell you a whole lot of people who spend less than half of their year in Tennessee to avoid that estate tax specifically.”

Speaking to reporters after Haslam’s remarks, Harwell expressed her full support for the governor’s agenda and was particularly pleased with the proposed change to the estate tax. She said she was glad to see the state raising the exemption to a reasonable level and called Tennessee’s current exemption “way out of line.”

Among the other items in the legislative package were proposals to give individual school districts more autonomy with regards to salary schedules and average class size and changes to the state’s hiring and employment practices. The governor also proposed legislation that would restructure 22 state boards and commissions, which he called the “first step in an ongoing comprehensive review process.”

Andrea Zelinski contributed to this report.

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NewsTracker Tax and Budget

Taxpayers Voluntarily Forked Over $4.8 Million in Online Sales Taxes

Tennessee revenue officials say they are taking steps to ensure the public understands they’re supposed to be paying sales taxes when they shop online, although very few taxpayers do it.

Last year, the state collected $4.8 million in use taxes voluntarily paid. Economists suggest in the same period, the state was owed more than $300 million by its citizens.

After months of controversy about whether to allow Amazon.com to slide on playing tax-collector for the government in exchange for creating new jobs, Gov. Bill Haslam found a compromise. The state plans to let Amazon off the hook for sales tax collections until 2014, or until the federal government comes up with a national plan.

The governor has rejected suggestions that Amazon’s tax collections in two years will have the same effect as a tax increase on the people of Tennessee. Lawmakers have as well.

“I do not see this as a tax increase at all. They’re paying the taxes that, in my opinion, they owed anyway,” Lt. Gov. Ron Ramsey told reporters earlier this month.

Last fiscal year the state collected just over 3,000 consumer tax returns with an average of $1,500 in money to cover their tax on online purchases.

TNReport traded emails this week with Linda Kelley, the director of taxpayer and vehicle services in the Tennessee Department of Revenue, about the rules behind online sales tax collections.

TNReport: Is it illegal for customers to skip out on paying sales taxes on online purchases when the seller, such as Amazon.com, doesn’t collect the taxes?

KELLEY: When someone buys merchandise online or through a catalog, and the seller of the merchandise does not collect sales tax, the consumer who purchased the item has a legal obligation to file and pay use tax on the merchandise. This generally occurs when a user purchases articles from an out-of-state dealer not registered for Tennessee tax. This use tax has been on the books since 1947 and is the same rate as the sales tax. (Tennessee Code Annotated Section 67-6-203). The Department of Revenue’s Sales & Use Tax Guide provides additional information on “Who is Liable for Use Tax” on Page 9.

TNReport: How much did the state lose this year in online sales tax collections?

KELLEY: It is not possible for us to answer this question because the data is simply not available.

TNReport: How many people actually do pay their online sales taxes to online retailers? And how much did they pay last budget year?

KELLEY: During fiscal year 2011, 3,041 consumer use tax returns were filed with the Department. These taxpayers voluntarily remitted a total of $4,783,583 for the period.

TNReport: When do they pay the tax?

KELLEY: Depending on the frequency of purchases, consumers must file the use tax return and pay the taxes either monthly, quarterly, semiannually, or annually. The return is due on the 20th of the month following the close of the applicable period. Consumers can e-file their consumer use tax via Revenue’s Web site at http://www.state.tn.us/revenue/onlinefiling/salesanduse/salestaxefile.htm.

TNReport: What is the penalty for individual taxpayers for not paying the tax on internet purchases?

KELLEY: There is a range of penalties imposed, depending on the specific circumstances. Taxpayers who are delinquent in paying the tax are charged a penalty of anywhere from 5 percent to 25 percent plus interest, depending on the length of time they have been delinquent. If the failure to pay taxes is determined to be due to negligence, the taxpayer would face a penalty in the amount of 10 percent of the tax due along with interest. If a failure to pay taxes is determined to be due to fraud, the taxpayer would receive a 100 percent penalty along with the interest due.

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Business and Economy Featured Tax and Budget Transparency and Elections

Amended Amazon Pact Applauded, Panned

Tennessee Gov. Bill Haslam — with an Amazon executive and several state legislators standing with him — announced a new agreement between the state and the company Thursday calling for Amazon to collect sales taxes starting in 2014.

But the rumbling in what has been one of the state’s most controversial issues was not put to rest.

Other retailers, who have fought Amazon because of its advantage in not collecting sales taxes as an online business, immediately criticized the deal. They cited the time element, saying the deal still gives Amazon more than two years, including three holiday shopping seasons, of what brick-and-mortar retailers believe is special treatment.

“If Amazon can agree to start collecting the sales tax in one year in California, why should we have to wait one day longer in Tennessee?” asked Mike Cohen, spokesperson for the Alliance for Main Street Fairness in Tennessee, in a formal statement.

“How many Tennessee jobs are lost, how many Tennessee businesses will close because the state grants Amazon a huge price advantage by not having to charge sales taxes?”

The Haslam announcement, made at the Capitol, also brings a commitment from Amazon to create a total of 3,500 full-time jobs and thousands of seasonal jobs in the state in a $350 million investment by the company, which ups the number of 1,500 jobs originally announced.

The Haslam administration said there are some standard incentive dollars for job training and basic infrastructure for new sites Amazon will be building in the state as part of the new deal. But “there are no other incentive dollars involved,” Haslam said.

Haslam said the agreement applies unless a national solution, which would bring all states under the same framework on state sales tax collections, comes first. Many people believe Congress should act to make application of sales tax law the same for online and traditional retailers.

The new agreement is a dramatic shift from the original deal struck by the state with Amazon, in which former Gov. Phil Bredesen and his team evidently agreed to allow Amazon to forego collecting sales taxes in exchange for creating hundreds of jobs with distribution centers in Hamilton and Bradley counties.

Haslam had agreed to honor that original deal, and state officials Thursday insisted the new agreement does not mean the state has gone back on its word.

Paul Misener, vice president for global public policy for Amazon, appeared with Haslam at the announcement, as did Rep. Charles Sargent, R-Franklin, chairman of the House finance committee, who had led a legislative effort to force Amazon to collect the taxes.

“We are proud that this world-wide brand has chosen to make such a significant investment in Tennessee and that they’re committed to expanding their presence here as well,” Haslam said.

“This agreement balances several needs, the needs of the company and the needs of the state by providing certainty to Amazon and to brick-and-mortar retailers about the collection of the sales tax. And it means more jobs for Tennesseans.”

Haslam said the agreement reached with Amazon will be presented to the Legislature when it convenes in January.

That was seen as a possible nod to a state attorney general’s opinion issued in the last week that said sales made electronically do not change a retailer’s obligation to collect the tax, although the opinion acknowledged the commissioner of Revenue has wide discretion. But Haslam said the administration probably would have gone through the Legislature anyway. Haslam said the deal was 98 percent completed before the opinion was issued.

“I’ve been asked several times over the course of the last couple of months if working on an agreement like this is doing what we said we would do as a state. The answer is yes,” Haslam said. “The scope of the project has changed, with the addition of newly planned facilities here, and that conversation in the Legislature and in states across the country has had an impact.”

Misener said the announcement was “a really remarkable event.”

“It’s a big deal for us, and I’m happy that it is also is a big deal for Tennessee,” Misener said.

The Amazon executive said his company supports efforts to streamline sales tax collections nationally.

“The sales tax issue must be resolved in Congress,” Misener said. “It’s the only way the state of Tennessee will be able to retain all the sales tax revenue that can be collected for the state.

“We are committed to going to Washington with the state’s leaders, both here in Nashville and also in Washington, to obtain that sales tax legislation as soon as possible.”

Haslam and Misener complimented Revenue Commissioner Richard Roberts and Economic and Community Development Commissioner Bill Hagerty for their work in the negotiations. Hagerty had been scheduled to speak to the Rotary Club of Dyersburg on Thursday but cancelled to be at the Nashville announcement.

Sargent commended Amazon and the Haslam administration for negotiating the deal.

“This is very consistent with what the attorney general’s opinion has been,” Sargent said.

Sen. Randy McNally, R-Oak Ridge, the Senate finance chair who had also sought legislation forcing Amazon to collect the tax, was not at Thursday’s event but is recovering from recent hernia surgery, his office said. McNally had suggested a potential two-year grace period on Amazon as a way to resolve the tax issue.

Haslam, noting that Misener is an astrophysicist, said negotiating the deal was “almost like rocket science. It was incredibly difficult.”

Haslam said the Department of Economic and Community Development is working with Amazon on the locations of its future distribution centers. The company recently announced plans to add a plant in Wilson County and is expected to have a larger presence in Middle Tennessee. Haslam said there would be two facilities in the state in addition to what is already in the works, one of those as a “sorting” facility.

House Majority Leader Gerald McCormick of Chattanooga, representing the area that has stood to benefit most in terms of jobs, had been critical of efforts to force the tax collections. But McCormick made the same announcement of the new deal in Chattanooga Thursday, emphasizing the additional jobs involved.

McCormick said there was no “arm-twisting” and that Amazon voluntarily went along with the plan. The Chattanooga Times Free Press posted a video of McCormick’s announcement.

Haslam said he didn’t believe the new deal necessarily brings additional jobs to those already planned for Hamilton and Bradley counties, but McCormick said in Chattanooga that the additional jobs would be split between Hamilton, Bradley and Wilson counties, making no mention of new Amazon sites. Haslam said there have been several communities in talks with Amazon.

“This is a significant day for Tennessee,” Haslam told reporters after the announcement. “It addresses an issue about the collection of sales taxes. This isn’t a new tax. This tax was already due. This just is a question of Amazon collecting.”

Roberts characterized the negotiations with Amazon as “challenging but forthright.”

Haslam also put Amazon’s role in online sales tax collections in perspective.

“Of the online retail sales where tax is not being collected Amazon is only about 10 percent of it,” Haslam said, adding that that is why he has called for a national solution. “It’s not just about Amazon.”

William Fox, director of economics at the University of Tennessee’s Center for Business and Economic Research, told a regional legislative conference this summer that Amazon comprises about 5 percent of e-commerce.

California recently reached a compromise with Amazon that gives the company one year before collecting sales taxes. Roberts said the California development helped the Haslam administration’s case but that conversations had progressed substantially by that point.

“Our situation is not the same as California’s,” Haslam said. “They have an existing physical presence that has been there for years. It’s really not an apples and apples situation.”

Haslam said he and Bredesen had talked about Amazon once in the last month or so.

“I just gave him an update on where we were,” Haslam said. “We talk periodically, so it wasn’t necessarily just about this.”

Haslam characterized reaction in the Legislature to the new arrangement as being a “warm reception.”

But the Alliance for Main Street Fairness said the deal will cost Tennessee almost 8,500 jobs.

“How can that possibly be anything but bad policy?” Cohen asked in the formal statement. “Our state government shouldn’t be picking winners and losers. This is the same failed policy we’re getting from Washington, and it’s not something we ought to emulate in Tennessee. Every business should be treated the same.”

The group also raised the issue of Amazon being allowed not to collect the tax given the recent attorney general’s opinion.

“Lawmakers can expect to hear from their constituents, businesses they will put at a huge disadvantage and employers that do pay the sales tax every day,” Cohen said. “It’s time for government to stop meddling in the free market by giving companies like Amazon special treatment.”

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Business and Economy

Governor Analyzing AG’s Latest ‘Nexus’ Opinion

Gov. Bill Haslam said Tuesday it was too early for him to say what the ramifications of Attorney General Robert Cooper’s latest opinion related to Amazon.com might mean for the state.

Cooper issued an opinion dated Oct. 3 that said, as a general rule, the state cannot waive a taxpayer’s obligation to collect sales taxes and that the fact sales are made electronically does not change a retailer’s liability for collecting and remitting the tax.

But the opinion also states that the Commissioner of Revenue has “substantial discretion” in determining the best measures to enforce the state’s tax laws.

Haslam told reporters Tuesday after making a speech in Nashville that he had just heard about the opinion and had little to comment on, but he said it is possible it could mean there might have to be legislative action regarding a state agreement with Amazon.

“That could be one of the outcomes, that we’d have to have some legislation passed to set up whatever the new arrangement ends up being,” Haslam said.

The Haslam administration has been involved in talks with Amazon for a long-term understanding of where Amazon stands on having to collect the state’s sales tax. The administration of Gov. Phil Bredesen agreed to allow Amazon to build two distribution centers in the state without collecting sales taxes, in exchange for their bringing hundreds of jobs to the state.

Haslam said any long-term agreement his administration were to make with Amazon would include as part of the deal that the state can publicly say what is in the agreement.

“It has become such a big deal, I think it’s important that when we do come to an agreement we be able to talk about it,” Haslam said. “So that would be part of the agreement we make with Amazon.”

Commissioner of Revenue Richard Roberts has said he cannot publicly discuss any arrangement with Amazon — or even if a deal exists with Amazon — because of privacy elements of the law.

Haslam’s comments Tuesday indicate that the public interest would be so high that his administration would feel compelled to make it part of the deal that the agreement be public. Lack of transparency has been one of the primary points of contention about the Bredesen deal with the Internet retail company.

Haslam did not address Amazon in his speech to the First Tuesday lunch group of Republicans. But he covered several other issues, including the fact he believes the outcome of the state’s request for a waiver from the federal government on the No Child Left Behind law will probably not be known until late November or early December.

He was asked why it would take so long for a decision.

“I actually don’t know the answer to that. I was initially hopeful, quite frankly, when we went up there, we’d hear an answer by late October, early November,” Haslam told reporters after his speech. “I understand now it’s about 30 days past that. I don’t really know that. I wish I did.”

Haslam also addressed the affirmation of the state’s bond ratings. After a recent trip by state officials to New York to state Tennessee’s case for strong fiscal management, the major rating agencies announced this week that Tennessee maintains its current ratings.

The state keeps its AAA rating from Moody’s Investor Service and Fitch, and it retains its AA+ rating from Standard & Poor’s. Standard & Poor’s gave the state a positive outlook, but Moody’s put the state on “negative outlook,” which is believed to be tied to concerns about the effect on states by the overall national economy.

The attorney general’s opinion that could affect Amazon appears to say that a retailer cannot dodge tax collection simply because its transactions are online.

In the analysis of the issue, the attorney general says:

“In cases where nexus (physical presence) does exist, the retailer is liable for collecting and remitting Tennessee sales taxes regardless of the method by which the retailer accepts orders for goods sold to Tennessee customers. If the retailer’s in-state activities are sufficient to establish nexus, the fact that orders are placed by electronic means, such as by telephone or the Internet, does not affect the retailer’s state sales tax obligations.”

The opinion says if a distribution house is owned by a retailer’s subsidiary that nexus exists only if the subsidiary’s activity is “significantly associated” with maintaining a market in the state.

The attorney general’s analysis further states:

“We refer you to recent Attorney General Opinion No. 11-55, in which this Office stated that, where legislation unambiguously imposes state sales tax obligations relative to specific transactions, the State of Tennessee cannot contractually waive a taxpayer’s obligation to pay the tax. … In reiterating this principle, however … we note the Commissioner of Revenue must necessarily possess considerable discretion in determining the appropriate measures to take to administer and enforce Tennessee’s tax laws.”

“…The Commissioner’s exercise of discretion is particularly appropriate when the enforcement of a tax may be debatable and must be balanced and coordinated with the Commissioner’s other duties and priorities in administering all of the taxes entrusted to him.”

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Press Releases

AMSF: Claims Amazon.com Deserves Special Treatment ‘Intellectually Insulting’

Press Release from The Alliance for Main Street Fairness in Tennessee; Oct. 4, 2011: 

Tennessee Attorney General States Amazon Has Nexus; If Internet Retailer Can Collect In Golden State, It Can Collect In Volunteer State? 

Nashville, TN – The Alliance for Main Street Fairness (AMSF) in Tennessee today issued the following statement in response to an opinion issued by the state’s attorney general demonstrating under current law Amazon.com clearly has nexus or a physical presence in Tennessee and therefore must abide by the law just as retailers in the state do every single day. This opinion follows news from California where Amazon has conceded it can and will collect sales taxes.

“As more facts and information are made public, it is becoming increasingly clear that Amazon.com’s argument against sales tax collection is evaporating. A recent opinion by Tennessee’s attorney general proves that under the law as written Amazon has a physical presence in the state and should be collecting sales taxes when its distribution centers open,” said Mike Cohen, spokesperson for the Alliance for Main Street Fairness (AMSF) in Tennessee. “Amazon first stated they couldn’t collect sales taxes, then stated it was unconstitutional, and now, in California, they have conceded they can, should and will collect. Amazon is building the same distribution centers in California that they are in Tennessee, and they should play by the same rules in our state. Any claim by Amazon that they merit a special deal in Tennessee is intellectually insulting and just plain wrong. Amazon must follow the law and collect sales taxes just like every other retailer in the state.”

To view the attorney general’s opinion, click here.

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Business and Economy Liberty and Justice Tax and Budget Transparency and Elections

Retailers’ Group: $3 Billion At Stake in Online Sales Tax Issue

A brick-and-mortar retailers’ group has warned that the state could lose out on $3 billion in revenue and more than 10,000 jobs over the next five years if online retailers continue not to collect sales taxes.

The projections are in an study commissioned by the Alliance for Main Street Fairness, a national organization made up of retailers ranging from small businesses to Wal-Mart.

“From the Alliance point of view, this really tells us the Amazon deal is a bad deal for Tennessee. It’s going to cost us more jobs than it’s going to gain,” said Mike Cohen, the organization spokesman, said during a press conference at Cumberland Transit bike shop in Nashville.

The Alliance opposes a deal the Bredesen administration struck with online retailer Amazon.com, which promised to build distribution centers in Hamilton and Bradley counties under an agreement the company would not have to collect sales taxes.

Gov. Bill Haslam has said the state should honor the deal, but that he wants Amazon to collect sales taxes on its transactions in Tennessee in the future, and his administration is currently negotiating with Amazon to find a long-term solution. As of last week, Haslam said he had nothing new to report.

The Legislature is generally split about what the state should do. Sen. Jim Kyle, the top ranking Senate Democrat, is too.

“It will take the local business community to drive that Amazon issue,” Kyle said during a stop outside the University of Memphis during the Democratic Jobs Tour Monday. “There are two sides to it. One is keeping your word and the other is, doing what’s the right thing to do. The unfortunate thing here is when you’re keeping your word, you’re not doing the right thing.”

The Alliance’s study leaned heavily on a report out of the University of Tennessee, which found the state would miss out on collecting as much as $456.1 million in local and state sales taxes next year on online purchases. Taxpayers last year paid more than $8 billion in state and local sales taxes, according to documents from the Department of Revenue.

Younger Associates, which performed the analysis for the Alliance, asserts there is a direct relationship between state and local government spending and the number of jobs supported. If retailers like Amazon.com are not forced to collect sales taxes, about 6,900 jobs would be lost next year, leading to a loss in wages and decreases in consumer spending to purchase other taxed items such as gas, cars, alcohol, tobacco and amusement.

The study says that would translate to additional lost sales tax collections — in total, $480.7 million in 2012, followed by a loss of $3.02 billion in taxes and 10,567 jobs in five years.

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Business and Economy Tax and Budget Transparency and Elections

Amazon’s Tax Treatment Draws Barbs from Women’s Business Group

Advocates for small retail businesses say instead of focusing on big splashy job creation announcements, Tennessee policymakers should wake up to potential job losses resulting from those splashes.

As Tennessee launched its latest back-to-school sales tax holiday for the weekend, the president of a national nonpartisan group supporting women-owned businesses and a Tennessee small business owner held a teleconference Friday trying to draw attention to the adverse impact of e-commerce on the state.

Barbara Kasoff, president of Women Impacting Public Policy, and Maggie Jetter, owner of the Tweed Baby Outfitters store in Nashville, made their pitch for economic fairness and fielded questions from reporters Friday about the sales tax holiday. The looming figure in the discussion was Amazon.com.

Amazon has become a white knight in the eyes of people trying to create lots of jobs in a short amount of time, with the online retail giant recently launching three large distribution centers in the state, and the possibility of even more. But at least some small businesses don’t see Amazon that way.

“I know they’re speaking about creating 1,500 new jobs, but you also have to keep in mind that with Amazon bringing a large company to Tennessee that’s not paying sales tax, you’re definitely coming close to putting out a lot of small businesses and losing even more than 1,500 jobs,” Jetter said.

Jetter and Kasoff offered no numbers in Friday’s conference call to back up the claim that job losses match the job gains, but Kasoff said small businesses create 93 percent of all new jobs.

“If small business retailers such as Maggie are not able to add jobs, that’s going to have a far-reaching and very significant impact on the economy,” Kasoff said.

Small retail advocates say it’s not simply that the brick-and-mortar stores are losing business to big online retailers but that losses in small businesses can hurt an entire community. When online retailers are exempt from collecting sales taxes, it puts a dent in the revenue streams for small governments and by extension, the services they provide.

Jetter said she can literally see the impact of online retailers on her store, which carries apparel for children, diaper bags and other baby products. She sees people come in so they can look, touch and feel the merchandise, then exit to go buy it online with no sales tax.

“I see it especially with this generation of parents,” she said. “A lot of the grandparents do shop here, but a lot of parents have all the online blogs and websites to find their deals, to register on Amazon, to get their diaper bags on there, which are one of our higher-priced items, which helps us pay the rent.”

Jetter said she is aware of Tennessee Gov. Bill Haslam’s offer to lead the call for national action urging Congress to level the playing field for states. But Kasoff was asked if it’s realistic to believe Congress would act to force handing over more taxes.

“Now that the (debt-reduction) votes of the past week are behind us, we hope that focus is going to be on building economic stability,” Kasoff said. “I think they’re going to take a hard look at this. I think the state legislatures across the country are going to be taking a hard look.

“We have to stabilize the economy. We have to bring some sense of stability and confidence back to consumers.”

Kasoff said sales tax holidays are an example of putting small retailers on a level playing field. While there is constant debate as to whether people are boosting business or simply shifting the timing of their purchases, Jetter said she definitely expected to see more business because of the brief sales tax break.

“This is just our second year as a brick-and-mortar store, but I do expect to see a lot of families here,” Jetter said. “I expect to see a good 10 to 20 percent more shopping because of tax-free items.”

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Business and Economy Featured News Tax and Budget Transparency and Elections

GOP Showing Little Taste for Lower Food Tax

Now that Tennessee Republicans are “large and in charge” of state government, as minority Democrats like to snidely put it, they seem to have lost their appetite for cutting the state’s sales tax on food.

Even though Tennessee is looking at $62.3 million in excess revenues over the last 11 months, lowering the tax isn’t likely to happen any time soon, say powerful majority-party politicians.

Nevertheless, Tennessee Democrats are floating a plan to give part of the overage back to taxpayers — by reducing the 5.5 percent tax on food and making additional funds available for “needs-based” college scholarships.

The Volunteer State now charges a 7 percent sales tax on items other than food and is one of seven that offers a reduced rate on groceries, although 31 states exempt most non-restaurant food purchases from sales taxes.

Republicans, who consolidated their political power in the 2010 election promising a more fiscally disciplined, taxpayer-friendly state government, last month scoffed at Democrats for offering up a plan to reduce the tax on food.

“It’s just irresponsible,” House Republican Leader Gerald McCormick told TNReport. His preference is the state keep any extra tax collections safely locked up in the government’s savings account for spending later in leaner times, like when Washington starts ladling out smaller helpings of federal largess.

Lt. Governor Ron Ramsey claims he’d “love to eliminate the food tax.”

Not now, though.

“I hope and pray that Tennessee will soon be in a position to do just that,” the Blountville Republican said in an e-mailed statement shortly after the Democrats served up their tax-cut idea. “But a revenue blip does not a surplus make.

“While the new revenue numbers are encouraging, the last few years have taught us that we cannot afford to be cavalier with the contents of our treasury,” he said.

Ramsey, who recently proclaimed that “a basic philosophical difference between Democrats and Republicans” is that the latter favor taxpayers keeping their own money in times of revenue surplus, accused Democrats of “craven political posturing” for proposing a tax cut on groceries in the current fiscal climate.

Requests through Ramsey’s spokesman for further comment and explanation from the lieutenant governor went unanswered.

Republicans didn’t used to be so hostile to the idea of a tax cut for Tennesseans who purchase food. Indeed, some, like Kingsport Rep. Tony Shipley, once upon a time got elected promising to push for food-tax relief.

In 2007, Sen. Mae Beavers was at the forefront of the legislative effort to reduce the food tax, ultimately by half a cent. At the time, she complained that wasn’t enough. But now she’s just irritated the matter has popped up again.

“I really take offense to (Democrats) making a political issue out of it this time when they had a chance to take it all off a few years ago,” said Beavers.

Gov. Bill Haslam was more conciliatory towards the proposal, saying he “100 percent” agrees with Democrats’ desire to reduce taxes on groceries when the state collects excess money from taxpayers.

In principle, anyway. He questions though whether tens of millions of dollars in over-collections truly represents a “surplus” at this time.

“If we had a surplus, we should not be keeping the money. I couldn’t agree more,” the governor told TNReport. “It’s just way too early to say that because I have a feeling we’re going to have to make some hard calls.”

The catch, Haslam says, is state government would need to consider cutting millions of dollars in services now covered with $160 million in one-time money, address rising education costs and weather instability from the economy and federal government in order to reduce the tax.

“There’s a whole lot of stuff in there I can guarantee the Democrats and most of the Republicans don’t want to cut,” Haslam said. “My first word would be to the Democrats, how do you feel about that $160 million in services? Are you ready for all of those to go away, because our overage is not enough to do both.”

Rep. Craig Fitzhugh, the leading Democrat in the House, says he sees nothing particularly ludicrous about proposing to cut “one of the highest sales taxes on food in the entire country.”

“If that’s absurd, well, we need more absurdity in government, because I think that’s an excellent option that we may have,” said the Ripley Democrat.

Lawmakers this year considered a plan to raise the tax on soda in exchange for lower food taxes, but that issue went nowhere. Lawmakers did manage to lower taxes on investments for some senior citizens by raising the income benchmark by $10,000 to exempt more individuals and couples from paying the Hall income tax.

While legislators play political ping-pong over the excess taxpayer dollars, state government observers of various ideological stripes agree the partisan bickering ought to be set aside in favor of a serious policy-driven conversation.

“It’s not enough to rely on the whims of either political party to return excess revenue to taxpayers,” said Justin Owen, executive director of the Tennessee Center for Policy Research, a free-market think tank which has advocated a reduction in the grocery tax.

What the state should do is automatically kick any excess revenues back to the public at the end of each fiscal year, he said.

Ben Cunningham of Tennessee Tax Revolt said it seems obvious to him “any surplus ought to be returned to the taxpayer.”

“The time to give tax revenue back to the families to put back in the family budget is in the good years, this way you even out the ups and downs of tax revenues and you better control the size of government,” said Cunningham, a prominent voice in Tennessee’s tea-party movement.

Tennesseans for Fair Taxation, a coalition of liberal activists, unionized workers and progressive advocacy groups, has long pushed for reducing Tennessee’s reliance on a sales tax. TFT argues Tennessee’s tax on food is perniciously high — that it, in essence, constitutes a “tax on life.”

“Groceries represent a much bigger portion of low-income families’ budgets while it only represents a small fraction of most high-income families’ budgets,” argues TFT. “By eliminating the tax on food, the average family would save enough annually to buy a whole month’s worth of groceries.”

TFT’s preference for instituting a state income-tax to offset reduced revenues from a lower or eliminated grocery-tax doesn’t seem likely to gain much traction in the GOP-dominated Legislature, where the wheels are in motion to constitutionally ban an income tax.

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Improving Revenues Prompt House Democrats to Float Food-Tax Cut, Scholarship Bump

Tennessee House Democrats have seized on the recent string of positive revenue collections and see them as a way to reduce the state sales tax on food and provide more college scholarships — at a time the economy overall continues to sputter and Gov. Bill Haslam has warned of less money coming from Washington.

Democrats held a press conference at Legislative Plaza on Thursday to announce a bill meant to bring economic relief to families struggling to buy groceries and pay for burdensome college tuition rates.

The legislation could not be taken up until lawmakers reconvene in January, but proponents of the bill said the time to talk about it is now.

“When folks see revenues better than expected, you’ll have special interest groups lining up to catch the governor’s ear, to catch legislators’ ear,” Rep. Craig Fitzhugh, D-Ripley, the House minority leader, said.

“We’re trying to say we’re taking a stand on what we believe to be a broad-based possible use of what we hope to be excess revenues beyond what was budgeted in 2011-12.”

The state recently released tax collection figures for June, representing consumer spending in May, and they were shown to be above estimates for the 11th consecutive month.

Sales tax collections specifically exceeded estimates for the 15th straight month. But even with the rally in revenue collections, Finance and Administration Commissioner Mark Emkes expressed concern in the latest report about recent national economic indicators and said revenue collections will have to be closely watched.

The Democrats chose optimism on revenues.

“The estimates upon which our budget was based have been exceeded thus far,” Fitzhugh said. “We are optimistic and think that our economy is recovering. We expect that to continue.”

The measure (HB2164), as proposed, would nail down the amount of surplus funds — those that come in above official state estimates — and devote one-half of those funds to need-based scholarships. The other half would go toward a reduction of the state sales tax rate on food for the next fiscal year. If the bill were adopted by the legislature it would go into effect July 1, 2012.

Under the proposal, each April, the heads of the finance and revenue departments would certify the exact amount of surplus revenue the state had collected, and from that total half would go to an account with the Tennessee Student Assistance Corporation to be used to help families on college costs. The University of Tennessee recently increased tuition at its campuses by 9.9-15 percent, and the Tennessee Board of Regents raised tuition at its schools by 8.8-11 percent.

The other half would be used to adjust downward the sales tax rate on food. The rate would be determined by the size of the surplus and would remain at the lower rate until either the Legislature raised the rate or it fell again under the proposed legislation. The current state sales tax rate on food is 5.5 percent.

“As you know, we continue to struggle in Tennessee. Our unemployment rate remains high, our sales tax rate is high. We’ve just raised tuition on our college students, in double-digits mainly, across the board,” Fitzhugh said.

The state Department of Labor and Workforce Development announced Thursday that Tennessee’s unemployment rate for June was 9.8 percent.

A spokesman for Republican Gov. Bill Haslam said it’s a bad time to spend more money.

“The governor has talked about the ‘new normal’ we are operating government in, and now isn’t the time to start spending money,” David Smith, press secretary for Haslam, said.

“With the federal government in the midst of debating the debt ceiling issue, there is an expectation there will be significant impacts on state governments in the form of a continued decline in federal funding to the states.”

Haslam has made that case recently to Tennesseans. Governors at a recent meeting of the National Governors Association had the same take on the subject. U.S. Sen. Bob Corker, R-Tennessee, told TNReport last week it is “way, way, way premature” to discuss what the long-term effects of the budget issue in Washington would have on states.

But bond rating agencies are beginning to back up concerns that states could be affected by the federal picture. Moody’s Investors Service recently said five states with top bond ratings, Tennessee among them, could face downgrades in their own ratings due to their dependence on federal funds.

House Majority Leader Gerald McCormick gave the Democratic proposal a thumbs-down. He said in a formal statement the Democrats “are finally starting to realize lower taxes are the key to economic growth. However, given the fact they are consistently in favor of higher taxes and a state income tax, I think it’s apparent they’re just playing political games once again.”

Rep. Johnnie Turner, D-Memphis, and Sen. Reginald Tate, D-Memphis, introduced a bill in February that would have repealed the sales tax on food and would have established a graduated income tax. But the bill was quickly withdrawn.

In a statement released Thursday night, Lt. Gov. Ron Ramsey, R-Blountville, dismissed the Democrats proposal as “typical craven political posturing by a minority trying desperately to maintain the semblance of relevance.”

“While the new revenue numbers are encouraging, the last few years have taught us that we cannot afford to be cavalier with the contents of our treasury,” said Ramsey. “I’d love to eliminate the food tax and I hope and pray that Tennessee will soon be in a position to do just that. But a revenue blip does not a surplus make.”

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No Sales Tax for Amazon in SC

South Carolina lawmakers have blinked in a stare-down with Internet sales giant Amazon.com over sales taxes, a development that could reverberate in Tennessee.

The House and Senate in South Carolina have voted to give Amazon a five-year exemption from collecting sales taxes, a move that comes after the company stopped a project in South Carolina because of the tax dispute.

Amazon has said South Carolina mistakenly thought the company was bluffing about stopping its activity in the state.

Amazon has reportedly made a similar threat to shut down new sites in Tennessee, where it is building distribution centers in Chattanooga and in Charleston in nearby Bradley County. The chairmen of the House and Senate finance committees in the Tennessee General Assembly — Sen. Randy McNally, R-Oak Ridge, and Rep. Charles Sargent, R-Franklin — proposed legislation this year aimed at requiring sales tax collections on the Internet sales, but both deferred the legislation until 2012.

Amazon, based in Seattle, has begun its Tennessee hiring process for its distribution centers, including a series of hiring events across the state this week.

Advocates for allowing Amazon to forgo sales tax collections are looking at the company’s presence for its value in creating jobs, which have been scarce in the troubled economy. Reports have put an estimate of 1,400 jobs on the two facilities in East Tennessee, after an investment by Amazon of $139 million.

The Tennessee State Funding Board on April 12 approved $4 million for infrastructure and $599,500 for job training for the Amazon site in Chattanooga. The same day the board approved $2.2 million in infrastructure and $102,500 in job training for Amazon in Charleston.

The original Amazon deals in Tennessee were struck during the administration of then-Gov. Phil Bredesen, although lawmakers have had difficulty finding out details of those agreements. Gov. Bill Haslam has said the state should honor its commitment to Amazon.

At issue is whether Amazon should have to collect the state sales tax of 7 percent along with the additional 2.5 percent local option sales tax, which combined make Tennessee’s sales tax among the highest in the nation.

Amazon says it is protected under the U.S. Constitution’s commerce clause from having to collect the Tennessee sales tax because its distribution centers do not constitute substantial presence, or “nexus” in the state. The company’s position is that it does not have a retail presence in Tennessee, that its “fulfillment centers” simply distribute the goods and do not conduct sales.

Some Tennessee lawmakers believe the centers do create sufficient nexus to require collection of the taxes, as do a vast number of brick-and-mortar retailers in the state. Lawmakers have requested an opinion on the issue from Tennessee Attorney General Robert Cooper.

A compromise was struck in the South Carolina legislature that provides a five-year exemption but says Amazon must include language in confirmation emails to customers on sales that the customer may owe a state tax on the transaction. At the same time, an Internet link must be provided the customer by Amazon to the South Carolina Department of Revenue. In addition, Amazon would have to inform customers of the yearly total of tax they owe on their Amazon purchases.

Amazon officials have reportedly said they will renew their construction on their South Carolina site when the legislative action becomes law.

In its most recent annual report to stockholders (pdf), Amazon said its fulfillment centers and customer service centers could result in greater tax obligations. The report notes that Supreme Court rulings have protected Amazon from sales tax collections.

“However, a number of states, as well as the U.S. Congress, have been considering or adopted initiatives that could limit or supersede the Supreme Court’s position regarding sales and use taxes on Internet sales,” the company report said.

“If these initiatives are successful, we could be required to collect sales and use taxes in additional states or change our business practices.”

Amazon has voiced its support for federal efforts to create a streamlined sales tax system that would address Internet sales tax issues, an approach Haslam has said is a better answer than having a single state tackle the matter. But questions have been raised about the willingness in Congress to enact such a measure, because it would clearly be viewed politically as a large tax increase on consumers.

Amazon has had a similar spat with Texas, where the company has yanked an expansion operation in a disagreement over collecting taxes. Texas has said it is owed $269 million. According to Site Selection magazine, which covers economic development issues, Amazon collects taxes in several states, including Kansas, Kentucky, New York, North Dakota and Washington. It does not collect sales taxes in Arizona, Indiana, Nevada, Pennsylvania and Virginia. The company has cut off arrangements in Rhode Island, North Carolina, Hawaii and Colorado, the magazine reported.

Amazon has more than 50 fulfillment centers.

Amazon has said it hopes to bring several fulfillment centers to Tennessee, which it says could mean an additional 1,500 jobs in Nashville and Knoxville. Should the state agree to allow Amazon to avoid collection of sales taxes at its two East Tennessee sites, the precedent could factor in on future arrangements under the Haslam administration.