The Week in Public Finance: States Dare Online Retailers to Sue, a Local Government Shutdown Threat and More

A roundup of money (and other) news governments can use.
by | February 26, 2016
Joey Torres, center, the mayor of Paterson, N.J., where the city government could close next week. (AP/Mel Evans)

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Don't Like It? Sue Me

Tired of waiting for Congress to approve a tax on Internet sales, more than a dozen states -- including Alabama, South Dakota and Utah -- are moving to pass bills or change regulations in ways that deliberately invite lawsuits from Internet retailers. The goal? Landing the issue before the U.S. Supreme Court.

Alabama, for its part, will start enforcing an old law it says allows it to tax out-of-state sellers. The state will audit companies that don’t file returns.

“We’re confident that some remote sellers will not comply and therefore it will lead to litigation,” Alabama Deputy Revenue Commissioner Joe Garrett told The Wall Street Journal. “We have been very open about what we’re doing.”

The move won instant praise from brick-and-mortar businesses, who say they can’t compete with online retailers who don’t collect a sales tax. A bill allowing states to collect sales taxes from online purchases has stalled in Congress for a half-decade. By some estimates, states are collectively missing out on more than $23 billion annually in potential online sales tax revenue.

“Despite the ways this disparity distorts the market, and despite pleas from Main Street retailers in every state, Congress continues to dodge the issue,” said Stacy Mitchell, co-director of the Institute for Local Self-Reliance.

But online retailers and others argue that a universal Internet sales tax wouldn't level the playing field, as some hope. Large companies that have a presence in multiple states generally have the infrastructure in place to collect a sales tax. "But it’s more challenging for smaller retailers that don’t have the computer systems and accounting staff to ensure compliance with 10,000 nationwide tax jurisdictions and 46 state tax auditors," argue NetChoice, a trade association promoting e-commerce.

If the issue does make it to the nation’s top court, it would challenge a 1992 Supreme Court decision, Quill Corp. v. North Dakota. Under the ruling, states can apply sales taxes only to companies with a physical presence in the state.

Defaulting on Mom-and-Pops

As we track Puerto Rico’s journey through its financial crisis, an interesting note emerged from one analysis this week. For the first time in decades, a government’s default on debt likely means many investors here in the U.S. and abroad will lose money.

That’s because of bond insurance.

Detroit and other bankrupt governments that defaulted on bonds had insured those bonds when they were initially sold to investors. Most investors were paid as scheduled; it was the bond insurers left holding the bag.

That won't be the story in Puerto Rico because much of the outstanding debt it's looking to restructure is not insured, wrote Matt Fabian in his weekly outlook for Municipal Market Analytics. As the island looks for ways to make cuts to its $70 billion worth of liabilities, individual investors -- also referred to as mom-and-pop investors, in part because they tend to be older -- could be hurt. Fabian suggests that defaulting on individual investors could result in their turning around and suing their broker dealers.

“The net effect,” wrote Fabian, “could be more restrictive suitability guidelines for the asset class, [even] more stringent state and federal regulatory guidelines, and another round of enhancements for municipal disclosure requirements.”

The Obama administration is backing a restructuring plan for Puerto Rico that would place the territory’s pensioners before bondholders. That format was followed in Detroit and Stockton’s bankruptcies.

Jersey Drama

For once, all eyes in New Jersey aren't on Atlantic City. Instead, the town of Paterson is garnering attention with news that it will shut down if the council rejects budget amendments that call for an overall tax hike of about 6 percent.

The New York City suburb of about 150,000 people has until the end of Monday to approve a spending plan -- even a temporary one -- or face closing the government and sending about 1,000 nonessential employees home.

If a spending plan isn't approved, Paterson Mayor Joey Torres hopes the state will intervene to help pay for police officers, firefighters and sanitation workers, as they'll still have to report for duty on Tuesday. New Jersey has already awarded Paterson $25 million in aid as part of its assistance program for financially struggling localities.

Meanwhile, Atlantic City’s finance director said Thursday that the struggling gambling town has enough cash to pay its bills until April. That includes a $600,000 debt payment due that month. Previous reports had the city running out of money by the end of March.

Atlantic City’s tax revenues have dropped dramatically in recent years as multiple casino closures have dried up the city’s chief revenue source. The state is considering a financial takeover plan.