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Lawmakers hope Arizona can cash in on California Internet tax

California’s loss could be Arizona’s gain, if some legislators have any say about it.

With the outcry from some businesses about the Golden State’s newly-passed “nexus tax” on some online retailers, Rep. Tom Forese, R-Gilbert, has proposed that Arizona take advantage of the discontent and try to recruit the angry businesses to Arizona, which has no such tax.

The catch is, not everyone is on board with the idea.

Many small business groups have long opposed sales tax exemptions for Internet purchases, claiming the practice puts them at a competitive disadvantage since customers at their members’ stores ultimately end up paying more for the item than they pay online.

If economic development groups and the Legislature actively recruit more online businesses, it would result in even more competition for those brick-and-mortar stores.

Under the Arizona measure passed during the 2011 session, consumers are required to keep track of their Internet purchases and report them on their tax forms. But small-business advocates argue that the change is not enough, as the law is largely unenforceable.

Michelle Ahlmer, executive director of the Arizona Retailers Association, said in an email that hearing about a press conference in which Forese and other legislators intended to invite California businesses upset by the nexus tax into Arizona made for “quite a fire drill” for her group as she and other groups scrambled to call Forese and others to express their concern.

Forese’s press conference initially scheduled for July 20 was cancelled within three hours. The lawmaker said it was scuttled due to the immediate backlash from small-business groups.

“The real reason why it got postponed is because I did not have the support I thought I had,” he said.

But Forese isn’t swayed by the lack of support, and said he still hopes to hold the press conference and get the word out to businesses in other states — although by his own admission, he might be pretty lonely in that opinion.

High-profile business groups like the National Federation of Independent Business and the Arizona Chamber of Commerce and Industry have opposed the inequality created between online retailers and brick-and-mortar stores when online sales aren’t charged sales tax.

“We are very concerned about how this is affecting businesses that are located here and have been doing business here for decades,” said Suzanne Taylor, lobbyist for the Arizona Chamber.

Senate Majority Whip Steve Pierce,

R-Prescott, was originally scheduled to speak with Forese at the press conference. It’s certainly low-hanging fruit for Arizona, he said.

Joseph Vranich, a California relocation coach who has been tracking businesses leaving California for the past three years, has reported that businesses are leaving California in 2011 at five times the rate they were leaving in 2009. The primary reasons they report for moving are an undue tax burden and onerous regulatory environment.

With the new Internet sales tax, Amazon has threatened to cut ties to its California affiliates, which might mean more businesses seeking a tax harbor.

And even if these businesses don’t have to pay sales tax, if they’re buying warehouses and storage facilities, Pierce points out that they would be paying property tax to the state, filling some of the empty commercial real estate properties and creating jobs.

But after the outpouring of concerns from business groups, he acknowledged that the situation is more complicated than it first appeared.

“It’s a boon, it will bring jobs, it will help bring property taxes,” he said. “But we will have to do something to make it fair to everyone.”

But Forese argues that the answer is not to implement new taxes, but simplify and reduce the ones that are already in place.

“The question should not be parity and fairness through taxation, it should be parity and fairness through tax reduction,” he said. “In other words, don’t tell me to raise taxes on your competitor, ask me to reduce taxes for you.”

Rep. Justin Olson, R-Mesa, has been looking at ways to address the inequality of the tax code, recognizing the problems for local businesses with storefronts in Arizona.

He said that while the underlying prospect is a good one, the way Forese has suggested doing it isn’t taking the entire picture into consideration. Before bringing in new online businesses and exacerbating the problem of inequality in sales tax, he said, the state needs to take a look at the tax code.

“If there is an opportunity to entice retailers to Arizona for whatever reason, we need to seize that opportunity,” Olson said. “But this is a critical issue of equality in the tax code so as not to penalize those who have already invested in Arizona.”

Even setting aside the controversy, using the state’s lack of an Internet sales tax as a selling point might be misguided, said John Lenio, director of CB Richard Ellis’ economic incentives division.

The overall idea of attracting business leaving California due to over-regulation is a strong strategy, he said. But it has to extend beyond retailers who are fleeing the Internet sales tax.

Several other states have been implementing sales taxes on Internet purchases, and Arizona has toyed with the idea as well, he pointed out. A bill during the 2011 session, sponsored by Rep. Jim Weiers, R-Phoenix, would have implemented a tax almost identical to California’s.

“For a small piece of the pie, a good incentive might be the nexus tax issue,” he said. “But you have to consider the cost benefit of attracting new retailers versus how do you encourage long-term growth in the state.”

But Forese said he would resist any legislation that would tax Internet purchases in Arizona, no matter what the national trend is.

“It reminds me of something my mom used to say,” he said. “If 49 states jumped off the Golden Gate Bridge, would Arizona do it too? Along those lines, if 49 states taxed online purchases, should we do it? I would be happy to be the one state that didn’t, and would welcome those businesses.”

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