Spitzer Tax Plans Worry Business Leaders

By GRACE RAUH, Staff Reporter of the Sun
January 23, 2008

Business leaders are decrying Governor Spitzer's plan to collect more than $1.1 billion through a series of fees and tax changes, warning it poses a potential threat to the economy.

Under the plan, New York City residents making purchases from major Internet retailers such as Amazon.com would face an 8.375% sales tax. Mr. Spitzer had been planning to collect the Internet sales taxes last fall, but abandoned the idea, at least for the Christmas season, following a report in The New York Sun in November.

Internet retailers have been held to the same sales tax standards as mail-order vendors, requiring sellers to collect taxes only in states where they have physical presences.

To collect sales taxes from e-retailers headquartered outside the state, the Spitzer administration is honing in on a program used by many online vendors, under which they have other Web site operators promote their products in return for a sales commission. The state is saying that for tax purposes, the online pitch will be treated as though the company has an in-state sales representative, thus subjecting the company to state sales tax rules.

Other proposals in the budget, which Mr. Spitzer presented yesterday in Albany, range from plans to reclassify malt beverages so they are taxed as liquor rather than beer (expected to generate $15 million), to a proposal to classify little cigars as cigarettes (estimated to pull in $3.6 million next year).

One proposal would allow the state to tax illegal drugs that are confiscated by police. Anyone caught in possession of marijuana would be taxed $3.50 a gram, and other illegal drugs would be taxed at $200 a gram. A budget official said more than 20 states have similar rules in place.

Other expected money-makers include a plan to subject out-of-state credit card companies to state taxes on revenues from New York merchants and buyers, a move seen pulling in $95 million next year, and a call to end the state roll-over of certain federal deductions for manufacturers and press and broadcast companies, which would bring in another $56 million.

The governor defended his budget proposal yesterday, saying it contains no new taxes.

"I don't see any new taxes there," Mr. Spitzer said. "The distinction is clear between taxes and loophole closures."

In the face of an economic downturn, however, business leaders said portions of the proposal could harm the city's competitiveness as it vies with other cities for business investment and jobs. Britain, home to one of the city's fiercest competitors, London, is reducing its corporate tax rate this spring, a factor that businesses will likely consider when deciding where to locate.

"If ours is going up and theirs is going down, it's just a matter of, 'What is the straw that breaks the camel's back?'" the president of the Partnership for New York City, Kathryn Wylde, said. "For the loophole closures, can we really be sure this is not the straw?" A spokesman for the Business Council of New York State, Matthew Maguire, said his organization is assessing the effects of the possible tax loophole closures on its members.

"A new hit of $1 billion or more is unwelcome and in our view unwise," he said. "This is already the most heavily taxed states."

State officials also are planning to improve their efforts to collect unpaid taxes through audits and other measures, such as an initiative to allow delinquent taxpayers to avoid criminal prosecution and civil penalties if they voluntarily come forward and pay off their debt.

Mr. Spitzer is calling for a set of new fees and fines that are expected to bring in $305 million next year.

Spitzer Tax Plans Worry Business Leaders

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