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Franchot: State powerless to collect most of online tax revenue

Maryland lost nearly $200 million in taxes on online and other remote sales last year, but will be powerless to collect all but a small fraction of that potential revenue on its own, according to a report released Friday by the state comptroller.

Enforcing the state’s sales tax on online sales has been a recurring topic in Annapolis for lawmakers looking for ways to bridge budget deficits in recent years. Gov. Martin O’Malley asked Comptroller Peter Franchot to study the issue in May.

Franchot wrote to O’Malley Friday that the state “should not pursue legislative remedies based upon the expectation of significant new revenue streams.”

The study found $198 million in sales tax went uncollected on online sales in 2010, and that number is expected to grow quickly, to $243 million by next fiscal year and $327 million a decade from now.

Following in the footsteps of New York and California, which have used web retailers’ affiliate marketers based in-state as a basis for taxation, would allow the state to collect between $20 million and $40 million under a best-case scenario, according to the study.

But, a far more likely outcome is the state would collect just $5 million if it taxed “digital goods” such as songs and electronic books downloaded from iTunes.

“Amazon has demonstrated in all but two states that they’ll just end the affiliate relationships in the states, and we’re back to square one,” said David Roose, director of the Bureau of Revenue Estimate’s in Franchot’s office.

“Our options are limited without congressional action,” Roose added.

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