If a new 42-state initiative taxing Internet and mail-order sales eventually becomes mandatory, Paul Krauss wants to know if Internet-based companies will try to avoid charging the tax by relocating.
"Are they all going to move to Puerto Rico?" the May graduate said. "Will Internet companies move to Canada?"
The questions come as Michigan and other states move to try to collect tax on remote - otherwise known as Internet and mail-order - purchases from out-of-state companies made by Michigan consumers.
In 2004-05, the state is predicted to lose an estimated $264 million - about one-quarter of the upcoming $1 billion budget deficit - of potential tax revenue to currently not taxable Internet and mail-order sales, according to Michigan Department of Treasury.
The combined loss to all states is estimated as high as $20 billion.
In response, 21 states, including Michigan, have passed legislation - with another 21 in the process - meant to collectively combat lost tax money from those remote sales. Michigan's laws go into effect Sept. 1, though the collective agreement won't begin for up to a year.
Called the Streamline Sales Tax Project, the movement's goal is to combat the largest portion of what is known to economists as the "underground economy" - goods or services bought or sold that should be taxed but aren't.
It's more than just remote sales, though.
Locally, the underground economy includes the $3.2 million of illicit drugs the Tri-County Metro Narcotics Squad confiscated in 2003, not to mention the 50-cent squeaky baby toy bought at a neighborhood garage sale.
For Michigan residents, the streamline project might mean buyers have to pay sales tax on products they purchase from companies in participating states that have no base in Michigan.
Any business with an office, warehouse, sales center, or any other business-related property or permanent personnel in Michigan has to charge its sales tax.
"I don't have a problem paying sales tax," said Lansing resident Monica Kwasnik, who occasionally buys books and other specialty items online. "The fact there's no sales tax isn't my driving factor to go to the Internet."
Even when the streamline project is up and running, the amount of additional tax money generated is projected to be relatively small, somewhere in the vicinity of $26 million or about 10 percent of lost tax revenue estimates, according to Dale Vettel, administrator of the office of policy and research from the Michigan Department of Treasury.
Until Congress passes laws overturning U.S. Supreme Court rulings, making it illegal for states to force businesses to pay state sales tax without some form of base in a state, the agreement won't be mandatory.
Businesses are responsible for paying sales tax, though they usually pass that cost on to consumers.
As the date of the legislation's enactment approaches, customers shouldn't expect to see tax-based changes in the price of products they buy online or through catalogs for up to a year, Vettel said.
Before the project can fully go into effect, a governing board responsible for overseeing the project needs to be formed. Besides, numerous states that have been participating in the process are having difficulty passing legislation.
"There's some real political hurdles," Vettel said. "To go back to 20 or 21 legislatures, to get them to believe in the same thing is a monumental task."
Many of the remaining states, unlike Michigan, have complex sales tax structures that involve both local and state sales tax collection and revenue distribution.
Even in Michigan, it took four years from conception to the passage of legislation.
"It took two and one-half years to get to the agreement level and it's taken another year and a half to get legislation," Vettel said. "And we're not confronted with as many changes as a lot of states are."
Like the involved states, businesses, too, need to change. In Michigan, definitions for what can be taxed will be changing. State law determines what is taxed and what isn't.
The differences are unique to Michigan, however, because the plan keeps in place the state's sovereignty to determine how to assign taxes.
The plan also changes the definitions of terms in each state's tax code to conform to each other, making it easy for large businesses with multiple locations in different states to account for their business and streamline their collection procedures, according to Vettel.
"We've tried to craft some solutions that are mutually acceptable to states and to business groups." he said. "There's a very strong business presence."
While business leaders are generally happy with the compact, many, especially small businesses owners who do their own accounting, are worried they'll be penalized for not being up-to-date on the new codes and how to report their taxes, said Barry Cargill, vice president for government relations for the 6,000-member Small Business Association of Michigan.
"It's really incumbent on the participating states to make sure this system works and this it is fair," he said. "The government needs to build the trust of small businesses.
"There will be a lot of small businesses that kind of wait and see how it's administered and how it works."
The benefit of the project for small business is increased competition from Michigan retailers for in-state customers that would otherwise buy a product online to avoid paying sales tax.
"It will help take away a competitive advantage," Cargill said. "It puts the Michigan retailers on a level playing field."
Even if most businesses eventually comply with the agreement, voluntarily or not, economists understand it's impossible to tackle all facets of the underground economy.
"A lot of it has to do with criminal activity: drugs, money laundering, loan sharking, prostitution," MSU economics Professor Charles Ballard said. "The local loan shark tends not to report his income to the I.R.S."
