In search of more revenues, the General Assembly recently enacted legislation requiring more companies to collect Rhode Island’s seven percent sales tax on items ordered on the internet. This legislation is a result of a 2018 U.S. Supreme Court decision allowing states to require companies to collect sales taxes on items sold on the internet.
Previously, in 2017, Rhode Island enacted a law that required companies with a physical presence in Rhode Island to collect a sale tax on goods ordered on the internet. These two laws were forecasted to raise over $45 million. Not only has the sales tax been expanded to cover sales on the internet, but since 2011, more goods and services are now subject to the sales tax.
While the sales tax has been expanding, the sales tax rate of 7 percent has remained the same. Instead, as the sales tax has been expanding, the tax rate should have been lowered to make Rhode Island more competitive with its neighboring states. In fact, because federal law now permits Rhode Island to require companies to collect a sales tax on goods sold on the internet, current state law indicates that the sales tax should be lowered to 6.5 percent.
Generally, over the last decade, the sales tax has gradually been broadened to cover more goods and services. This expansion began with the election to the governorship of Lincoln Chafee, who campaigned for an expansion of the sales tax. In 2011, Chafee proposed a dramatic expansion of the sales tax designed to raise about $157 million. Chafee proposed a two-tier system in which some goods and services would be subject to a 6-percent sales tax, and other items, which had been exempt from the sales tax, would be taxed at 1 percent. In addition, Chafee recommended that if federal law permitted states to require companies to collect a sales tax on goods sold on the internet, the new 1-percent sales tax would be eliminated.
Chafee’s plan generated widespread opposition. Recognizing the public outcry, the General Assembly rejected it. But, needing more money, they still accepted parts of it. The General Assembly kept the sales tax at 7 percent and expanded it to cover more items such as nonprescription drugs and downloaded computer software to raise over $15 million. The General Assembly also enacted a law providing that if federal law changed so that companies selling goods on the internet were required to collect state sales tax, the sales tax would be reduced from 7 percent to 6.5 percent.
Still in need of more revenues, in 2012, the sales tax was expanded to include taxicab services, pet services and clothing and footwear costing over $250 in order to generate about $10 million. But the new law also indicated that all clothes and footwear would again be exempt from the sales tax if federal law allowed states to require companies selling goods on the internet to collect sales taxes.
The sales tax expansion continued under Gov. Gina Raimondo. In 2015, the sales tax was expanded to cover the rental of vacation homes and certain other rentals to raise about $7 million. In 2018, the sales tax was broadened to include software services and security services to raise $14.5 million. This year, Raimondo proposed expanding the sales tax to cover such items as the digital downloads of movies from Netflix and services such as interior design in order to raise over $10 million.
In the last decade, the most significant expansion of the sales tax was to items sold on the internet. However, this expansion should have triggered a reduction in the sales tax rate. Currently, state law mandates that a “six and one-half percent (6.5%) rate shall take effect on the date that the state requires remote sellers to collect and remit sale and use taxes.” Despite calls by Republican legislators and the R.I. Center for Freedom and Prosperity, State House politicians seem unwilling to reduce the sales tax and fulfill the promise made years ago. This would not be the first time State House politicians have broken their promise on reducing the sales tax.
During the 1960s, politicians promised a sale tax reduction if a state income tax was approved. In 1961, Gov. John Notte Jr. offered a reduction in the sales tax from 3 percent to 2 percent if a state income tax was adopted. In 1968, Gov. John Chafee recommended a reduction in the sales tax from 5 percent to 4 percent if a state income tax was implemented. But in 1971, when a state income tax was imposed, the sales tax was not reduced.
In 1990, as Rhode Island was entering a recession, Gov. Edward DiPrete and the General Assembly raised the sales tax from 6 percent to 7 percent. The tax increase was supposed to be temporary. The law required the sales tax to be lowered to 6.5 percent on July 1, 1991, and then 6 percent on July 1, 1992.
Unfortunately, in Rhode Island, taxes are rarely temporary. In 1991, the Rhode Island Share and Deposit Indemnity Corp (RISDIC) collapsed. To pay back the credit union depositors, Gov. Bruce Sundlun and the General Assembly agreed not to reduce the sales tax. Instead, approximately 0.6 percent of the sales tax went to pay for the bonds of the Depositors’ Economic Protection Corporation (DEPCO). Taxpayers spent about $290 million for DEPCO. In 2002, DEPCO dissolved, but the sales tax was not decreased.
Over the past decade, Rhode Island politicians have learned to impose more taxes and avoid public opposition by gradually expanding the sales tax. One way to slow the expansion of the sales tax is to hold State House politicians accountable for the promise to reduce the sales tax to 6.5 percent, once the sales tax was placed on sales on the internet. Unless the public insists on a lower sales tax, little by little they will be paying a sales tax on more and more goods and services.
Steven Frias is Rhode Island’s Republican National Committeeman, a historian and recipient of The Coolidge Prize for Journalism.