E-Commerce Sales Tax as a Solution for Ohio Transit Funding White Paper Prepared on behalf of Laketran by

Public Financial Management, Inc. (PFM)

An analysis of the potential impact of increased tax collection on e-commerce transactions with

out-of-state retailers on Ohio’s transit funding shortfall, roadway projects and local

governments.

8/25/2015

Public Financial Management, Inc. (PFM) prepared this white paper on behalf of Laketran to

independently assess the potential revenue in the state of Ohio from increased collection of taxes on

retail e-commerce and the impact of this potential source on transit funding needs.

Portions of the analysis herein are based on certain statements, assumptions, and estimates from

various sources as noted herein. We have assumed the accuracy and completeness of all the foregoing

information, and have not assumed any responsibility for verification of such information.

With 40 years of experience serving public-sector clients, PFM is a leader in public finance and has

ranked as the top financial advisory firm in the nation for the past seventeen consecutive years by

Thomson Reuters, advising on nearly $750 billion in total debt issuance and nearly 15,000 separate

transactions during that period. Public Financial Management, Inc. is a registered municipal advisor with

the Securities and Exchange Commission (SEC) and the Municipal Securities Rulemaking Board (MSRB)

under the Dodd-Frank Act of 2010.

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Introduction – Purpose of White Paper Continued investment in transportation infrastructure is a critical enterprise for states seeking to enable

basic mobility for citizens as well as lay the groundwork for economic growth. With less clarity into long-

term federal commitment to traditional sources of transportation funding, states are increasingly acting

independently to ensure adequate funding for local needs amid shifting consumer preferences among

different modes of transport.

A number of recent studies conducted by the Ohio Department of Transportation (ODOT) show

significant gaps between the state’s funding requirements for maintaining a 21st century transportation

infrastructure and existing funding sources. Ohio ranked 38th among states based on state funding for

transit per capita in 2012, behind South Dakota and just ahead of Mississippi.1

Ohio’s recently passed 2016-2017 budget (H.B. 64) contains a provision that allows the state to require

out-of-state retailers that solicit business through Ohio websites to collect sales tax on these

transactions. The language is similar to laws in other states that followed New York’s successful 2008

implementation of the concept of “click-through-nexus” in legislation to increase collection of sales and

use tax from online transactions.

The legislation passed in the 2016-2017 budget currently allocates new sales tax revenue from e-

commerce under the “click-through-nexus” provision to the general revenue fund. However, the

revenue projections for the 2016-2017 Ohio budget do not include an estimate or a specific funding

appropriation for incremental revenue from the “click-through-nexus” measure.

This white paper has been commissioned by Laketran to evaluate the revenue potential of increased

collection of sales and use tax on e-commerce transactions as a potential dedicated funding solution for

Ohio’s transit and roadway funding shortfalls. Laketran has retained Public Financial Management, Inc.

to analyze the viability of Laketran’s proposed transportation funding plan utilizing a dedicated e-

commerce sales tax source. The objectives of the white paper are to:

1. Assess the incremental public revenue potential from increased collection of sales and use tax

on internet purchases from out-of-state vendors

2. Evaluate the impact of previously uncollected internet sales tax as a new, dedicated source of

revenue for the State of Ohio to improve public transit and roadways and assess the potential

for this revenue to meet funding gaps identified in ODOT’s 2015 “Ohio Statewide Transit Needs

Study”

3. Outline Laketran’s proposed structure for the establishment of a Surface Transportation

Infrastructure Fund (STIF) as the depository for the new revenue in order that funds can be

allocated for both operating assistance and capital improvements

4. Assess the impact for other potential beneficiaries from the collection of the new source of

revenue

The white paper draws on a number of references and assumptions, which are addressed in more detail

below.

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Ohio’s Transportation Funding Needs The strain on transportation funding across the U.S. has put a sharp focus on funding needs for state and

local transportation agencies. Both public transit and roadways require critical investment to maintain

safe conditions and keep up with expanding demand. While this white paper focuses in more detail on

the shortfall in transit funding, ODOT’s 2014 Access Ohio 2040 study identified an approximately $14

billion gap between projected highway, bridges, and state-funded transit funding needs and available

revenue between 2014 and 2040.

Ohio transit needs In early 2015, ODOT released a study of statewide transit funding needs that the agency commissioned

to identify spending needs in the capital and operating budgets of transit agencies across Ohio1. The

study compared projected spending needs over the next 10 years to historical funding sources to

analyze the shortfall in the state’s existing transit funding sources.

Simply to maintain the present level of service, transit across Ohio will require at least $1.9 billion in

capital investment over the next 10 years. Existing funding sources provide only $833 million of the

required capital investment, resulting in a roughly $1.1 billion gap. The large shortfall in 2015 is largely

attributable to a $422 million cost of backlog in facility infrastructure upgrades and replacement costs

for backlog of vehicles beyond their useful lives. For example, the study indicates at least $246 million

will be required by 2025 for replacement of aging rolling stock for the Greater Cleveland Regional Transit

Authority (GCRTA), which date back to 1983. For purposes of this white paper, we have assumed the

replacement cost of the 1983 GCRTA railcars apportioned evenly over the 10-year period from 2016-

2025. Additionally, the ODOT study assumes that operating funding will keep pace with operating

expense needs of approximately $734 million per year over the period, though many agencies are

already facing constraints on operating budgets.

ODOT 2015 Statewide Transit Needs Study: System Preservation Capital Funding Gap

Rural Urban:

Non-Railcar Urban: Railcar Total

2015 ($28 million) ($352 million) - ($381 million)

2016 ($16 million) ($31 million) ($25 million) ($72 million)

2017 ($16 million) ($31 million) ($25 million) ($72 million)

2018 ($16 million) ($31 million) ($25 million) ($72 million)

2019 ($16 million) ($31 million) ($25 million) ($72 million)

2020 ($16 million) ($31 million) ($25 million) ($72 million)

2021 ($16 million) ($31 million) ($25 million) ($72 million)

2022 ($16 million) ($31 million) ($25 million) ($72 million)

2023 ($16 million) ($31 million) ($25 million) ($72 million)

2024 ($16 million) ($31 million) ($25 million) ($72 million)

2025 ($16 million) ($31 million) ($25 million) ($72 million)

10Y Total ($188 million) ($666 million) ($246 million) ($1.1 billion)

Note: Original ODOT study reported figures in 2012 dollars; these original figures have been inflation-adjusted to constant

2015 dollars throughout this white paper; figures throughout this white paper may not add due to rounding

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In addition to the $1.1 billion shortfall for required investments to maintain Ohio’s transit infrastructure

in its existing condition, the ODOT study identifies a $3.7 billion gap in capital and operating funding that

would be required to expand the state’s transit service to reach a greater portion of Ohioans over the

next 10 years. Investing this $3.7 billion would add an additional 2.7 million service hours immediately

and another 4.6 million service hours by 2025, as well as establish new countywide demand-response

transit systems in the 27 counties that currently lack any form of public transportation.

Establishing service in the 27 new counties with

no current transit would account for $796

million of the $3.7 billion total, with the

remaining $2.9 billion representing service

expansion for existing transit agencies.

The $2.9 billion expansion initiative for existing

systems is roughly 82% for urban agencies and

18% for rural areas. The required investment

for urban areas is more weighted towards

capital while operating funding plays a larger

role in the gap for rural systems.

Existing federal funding outlook States across the country are facing challenges in preserving and developing adequate infrastructure

due to a structural imbalance in the funding mechanism of the national Highway Trust Fund and the

inability of Congress to find a long-term solution. The Highway Trust Fund is funded by an 18.4 cent-per-

gallon federal tax on gasoline that was last increased in 1993 and is allocated 80% to road construction

and 20% to mass transit. Because the tax is not indexed to inflation, the ability of funding to keep up

with the nation’s infrastructure needs has eroded over time. Compounding this imbalance, fuel

economy for the U.S. auto fleet has improved dramatically since the early 1990s, resulting in more miles

traveled per gallon purchased. These revenues are projected to continue to decline due to mandated

increases in the corporate average fuel efficiency standards which will increase to 54.5 miles per gallon

for cars and light trucks in 2025.

A long-term solution to this imbalance has so far eluded Congress, which since 2008 has authorized

annual transfers to the Highway Trust Fund from the general fund to stave off insolvency. With the fund

again nearing a shortfall, a potential bipartisan Senate compromise on three years of guaranteed

funding for the HTF has clashed with a preference for another short term patch in the House of

Representatives.2

State funding sources With uncertainty regarding continued support from the federal government for transportation, states

have been scrambling to fill the gap with their own revenue-raising measures from sources such as fuel

tax, sales tax, vehicle registration fees and turnpike revenue sharing, as well as allocations from the

general fund that draw on states’ broader revenue streams .

ODOT 2015 Statewide Transit Needs Study:

10Y Total System Expansion Funding Gap

Existing Urban (Capital) ($1.9 billion)

Existing Urban (Operating) ($531 million)

Existing Rural (Capital) ($122 million)

Existing Rural (Operating) ($405 million)

27 New Counties (Capital) ($192 million)

27 New Counties (Operating) ($604 million)

Total ($3.7 billion)

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Ohio already taps many of the potential funding sources available to it. The largest revenue line in

ODOT’s budget is approximately $1.8 billion annually from Motor Fuel Tax. However, the bulk of ODOT’s

budget goes to support needed maintenance and improvements in state-funded highways and bridges

rather than mass transit. In 2013, the state authorized leveraging toll revenues from the Ohio Turnpike

& Infrastructure Commission (OTIC) to fund roughly $1.5 billion in roadway infrastructure projects

outside the turnpike system from 2013 through approximately 2020.3 Revenue from vehicle license fees

is primarily distributed directly to local governments to maintain local roads and highways.

To a large degree, Ohio has relied on the state’s General Revenue Fund (GRF) to support the funding it

supplies for transit. However, the lack of a dedicated source has resulted in an erosion of state funding:

from 2000 to 2014, GRF funding for public transit fell 83% - from $43.6 million to $7.3 million. The 2015

ODOT study identified the lack of a dedicated funding source as a major obstacle for mass transit in the

state.

The state already collects many of the other taxes mentioned in ODOT’s 2015 study as potential funding

sources, but transit and transportation as a whole must contend with other critical state needs for a

share of the total. The sales tax provides the largest line item of revenue for Ohio’s state budget,

followed closely by the state income tax, which is the focus of cuts in the recently passed 2016-2017

budget. The new budget also raised per-pack cigarette taxes to $1.60 from $1.25. These taxes do not

contain a dedicated transportation component.

Ohio State Tax Sources (excluding federal aid) FY 2014 ($000s)

Major Taxes Collections Percent of Total

Sales and Use Tax $9,344.60 37.67%

Individual Income Tax $8,425.10 33.96%

Motor Vehicle Fuel and Fuel Use Tax $1,859.50 7.50%

Commercial Activity Tax $1,685.80 6.80%

Cigarette/Alcoholic Beverage Taxes $912.30 3.68%

Natural Gas, Kilowatt Hour and Public Utility Excise $726.70 2.93%

Financial Institution Tax $197.80 0.80%

All Other Taxes (see below) $1,657.20 6.68%

Total: $24,809.00 100.00%

Other Taxes Collections Percent of Total

Motor Vehicle License $800.90 48.33%

Foreign Insurance Tax $308.00 18.59%

Casino Gross Revenue Tax $273.40 16.50%

Domestic Insurance Tax $202.30 12.21%

Estate Tax $39.40 2.38%

Wireless 9-1-1 $15.80 0.95%

Severance $15.00 0.91%

Replacement Tire $7.60 0.46%

Horse Racing $5.50 0.33%

Dealers in Intangibles Property Tax $0.50 0.03%

Corporation Franchise Tax -$11.20 -0.68%

Total All Other Taxes: $1,657.20 100.00%

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Two untapped taxes commonly used by other jurisdictions that could be options for Ohio to expand its

transportation revenues are a rental car tax and a parking tax. Currently only Cleveland has a parking

tax which is 8% and used to help fund the debt service payments on the Cleveland Brown’s football

stadium. While they may represent an incremental positive if tapped for dedicated transportation

funding, this white paper does not investigate the revenue-raising potential from these or other sources.

The scope is instead focused on the impact of the dedication to transportation purposes of incremental

revenues associated with increased collection of sales and use tax on internet transactions.

The concept of dedicating a portion of state sales tax revenue to transportation is not a new concept.

Indiana set up the Public Mass Transportation Fund (PMTF) in 1980 to promote and develop public

transportation with a portion of the state’s sales tax. The Indiana State Legislature is responsible for

making biennial funding appropriations to the PMTF program, and the Indiana DOT is charged with

administering the funds under capital and operating grant programs applied for annually.

More recently, Virginia passed 2013 legislation that raised the statewide sales tax to 5.3% from 5% and

dedicated .175% of the sales tax to transportation. The law also added an additional 0.7% sales tax

earmarked for transportation in certain Northern Virginia and Tidewater-area regions.

Additionally, the same Virginia legislation separately changed the way the state assessed gasoline fuel

tax from a fixed price per gallon to a 3.5% sales tax on the wholesale price of fuel. In recognition of the

impact of federal inaction on internet sales tax legislation on local transportation funding, the Virginia

legislature included a provision that automatically increased the fuel tax rate to 5.1% if the U.S. Congress

did not pass the Marketplace Fairness Act by the end of 2014. Other states have recognized the linkage

between inaction at the federal level and their ability to collect sales tax as well, with Maryland capping

inflationary increases to its fuel tax at a lower level in the event that the U.S. Congress passes the

Marketplace Fairness Act. The Marketplace Fairness Act is discussed in more detail on Page 7.

Internet Sales Tax Background This white paper presents an analysis of the additional revenue potential of increased collection of sales

and use taxes associated with online purchases. In this section, we will explore the differences in

collection for e-commerce sales as opposed to sales at a brick-and-mortar establishment and examine

historical efforts at the state and federal level to pursue taxes due on internet-based transactions.

E-commerce and the distinction between sales and use taxes While taxes levied on the purchase of goods or services are commonly referred to as a “sales tax,” these

transactions are typically subject to two complementary tax components: a sales tax and a use tax. The

45 U.S. states that charge sales tax also levy a use tax on out-of-state purchases by residents to maintain

parity with the sales tax collected by in-state merchants. Both sales and use tax generally apply at the

same rates to the same transactions. For example, Ohio law provides that all tangible personal property

stored, used or otherwise consumed in Ohio, along with certain taxable services used in Ohio, are

subject to use tax unless Ohio sales tax has been paid or a specific exemption applies to the transaction.4

Though assessed on the same types of transactions, the responsibility for reporting and collecting sales

and use tax is different:

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Sales Tax

Applies to sales of goods and services for transactions at a location within a state’s boundaries

Typically states require resident merchants to report, collect and remit to state

Use Tax

Applies to purchases of goods and services by the resident of a state when applicable sales tax is not collected

Typically states require resident consumers to report, collect and remit to state (via annual tax return)

When use taxes are applied to purchases made by the resident of one state from a vendor in another

state, the purchaser’s state does not have the jurisdiction to require the out-of-state seller to collect and

remit the sales tax on its behalf. Therefore, responsibility for reporting and paying use taxes falls on the

consumer.

Though in theory this approach ensures that a state will receive the applicable revenue for all

transactions made by residents, in practice compliance with use taxes is much lower than for sales taxes.

Enforcement of consumer reporting on annual state tax filings is more difficult than of in-state

merchant-collected sales tax because of the sheer number and small scale of filings.

As cross-state internet transactions consume a rising share of consumer purchasing dollars, this

enforcement challenge for use taxes has an increasing impact on states’ ability to raise the revenue from

existing sales and use taxes.

Background of inter-state cooperation efforts and federal legislation

Legal obstacles to inter-state enforcement

The current legal framework that limits states in mandating that out-of-state merchants collect and

remit sales tax actually predates the evolution of e-commerce into a standby of mainstream retail. The

U.S. Supreme Court case Quill Corp. v. North Dakota (1992) involved an attempt by the State of North

Dakota to force mail-order retailer Quill to collect North Dakota’s state sales tax on transactions made

by North Dakota residents. The court ruled that a state may not unilaterally act to force a vendor

without a “substantial nexus,” or physical presence, in that state to perform administrative functions of

collecting and remitting sales tax. However, the court explicitly recognized that Congress has the power

to resolve this issue through legislative action on the federal level.5

Streamlined Sales and Use Tax Agreement (“SSUTA”)

One of the key elements of the Quill ruling was that the complexity of varying state tax laws constituted

a substantial burden to impose on out-of-jurisdiction businesses. In response, individual states began

organizing in 2000 to coordinate and streamline their sales tax codes to reduce the burden of cross-state

tax compliance for merchants on a voluntary basis. The effort resulted in the Streamlined Sales and Use

Tax Agreement adopted in 2002. Currently, 24 states have signed the agreement and revised their state

sales and use tax laws to conform to its standards.6 Some of the elements targeted by SSUTA members

include uniformity of state and local tax bases, participation in a central electronic registration system,

simplified exemptions and tax returns and uniform sourcing rules for all taxable transactions.

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Marketplace Fairness Act

Legislation at the federal level has been introduced but

has stalled a number of times. The Marketplace Fairness

Act of 2015, referred to the Senate Finance Committee in

March, is the latest iteration of previous bills that failed

to pass in 2013 and 2011.7,8,9 The current legislation

would authorize member states of the SSUTA to require

sellers with annual gross receipts of total U.S. remote

sales of more than $1 million to collect and remit sales

tax under the terms of the SSUTA. The legislation has

garnered support of several prominent Democrats and

Republicans and numerous brick-and-mortar retailers

such as Wal-Mart Stores, The Home Depot, Barnes and

Noble, Inc., as well as Amazon.com, which has been

building out its physical distribution center presence in

states. Prominent opponents include eBay.com.

Individual state actions and impacts In the absence of comprehensive federal legislation, states have taken action on their own to enlist

merchants in collecting sales tax on e-commerce transactions. These state-level legislative efforts are

often popularly known as “Amazon laws,” for their focus on Amazon, the leading online retailer. The

laws require internet retailers that use “affiliates” to solicit business in a state to collect and remit sales

tax on purchases. The key innovation in this legal approach is the concept of “click-through nexus,”

which expands the definition of a retailer’s in-state presence to include solicitation activities by in-state

website owners on its behalf.

An alternate approach is Colorado’s 2010 law that added disclosure requirements for out-of-state

retailers about Colorado customers’ purchases over $500. The approach of the legislation is to enable

state tax collectors to pursue unpaid use tax directly from consumers rather than require out-of-state

vendors to collect and remit a sales tax. The law has been the subject of an ongoing court battle since

inception, and in March 2015 the U.S. Supreme Court sent the case back to Colorado federal court. As

this methodology is still legally unproven, our focus in this white paper is on the New York approach.

New York led the way in 2008 with the implementation of “click-through nexus” legislation, which

applies to out-of-state online retailers using New York-based affiliates that solicit more than $10,000 in

annual sales from New York residents. Amazon challenged the law in court and was joined by

Overstock.com in a case that was ultimately appealed to the New York State Court of Appeals. Amazon

and Overstock lost their appeal in early 2013, and the U.S. Supreme Court declined an appeal in

December 2013.10-11

Several other states have since followed New York’s approach, with 15 other states implementing

legislation to establish “click-through-nexus” requirements and 12 others establishing policies to that

effect. Vermont also passed legislation in 2011 that provided for “click-through-nexus” tax collection

SSUTA Members Arkansas Georgia Indiana Iowa Kansas Kentucky Michigan Minnesota Nebraska Nevada New Jersey North Carolina

North Dakota Ohio Oklahoma Rhode Island South Dakota Utah Vermont Washington West Virginia Wisconsin Wyoming Tennessee*

*associate member

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responsibilities to take effect once 15 other states had passed similar legislation. However, the Vermont

governor has called on the state legislature to delay the law after Amazon preemptively terminated its

affiliates in the state in January 2015.12

The language of many of these new laws closely mirrors that of New York – likely in an attempt to enjoy

a halo effect from the success of the New York law in withstanding appeals up to the U.S. Supreme

Court. Louisiana is among the latest states to consider “click-through-nexus” legislation requiring sales

tax collection. Gov. Bobby Jindal recently vetoed H.B. 555, which would have mandated that

independent Louisiana affiliates with more than $50,000 of annual gross receipts collect and remit the

state sales tax.13-14

With nearly four times the internet retail sales of the next largest

competitor15, Amazon’s cooperation alone can have an appreciable

impact on state sales tax revenue. Amazon currently collects sales

tax on transactions in 25 states, including 8 states that have not

enacted “click-through-nexus” policies. Many of these jurisdictions

have reached some level of agreement with Amazon, often in

connection with a planned distribution expansion. The company

plans to commence sales tax collection and remittance on South

Carolina transactions commencing in 2016.16-17 Amazon began

collecting sales taxes in Ohio on June 1, 2015 ahead of a planned

expansion of its physical distribution facilities in the state.18

Without access to granular, company-level sales tax collection data, it is difficult to pinpoint exactly how

much revenue the new laws are responsible for raising. For example, variations in sales tax revenue

coincident with internet legislation are complicated by the recession in New York and overall economic

recovery in other states that have since enacted legislation. However, some reference points can be

found. In 2012, New York’s Department of Taxation and Finance identified $360 million in additional

sales tax collected since 2008 due to the internet sales tax legislation.19

Ohio legislation

Ohio recently became the latest state to enact “click-through-nexus” legislation, which was included as

part of the 2016-2017 budget (H.B. 64). The language is along the lines of the New York model, applying

to retailers with affiliates that produce more than $10,000 annually in sales. The provision takes effect

July 1, 2015. The legislation currently allocates new sales tax revenue from e-commerce under the

“click-through-nexus” provision to the general revenue fund. However, in the event that national

legislation along the lines of the Marketplace Fairness Act is passed, the legislation specifies that remote

seller revenue be redirected from the general revenue fund to the income tax reduction fund.

Analysis of Potential Incremental Revenue for Ohio In advance of the first year of Ohio tax receipts from e-commerce, this white paper seeks to estimate

the range of incremental sales and use tax revenue the state could potentially realize from previously

uncollected sales and use tax on internet transactions. Using 2014 data as a base year, we estimated

Amazon Sales Tax Collection in States Without “Click-Through-Nexus” Policies

Florida Indiana Kentucky Massachusetts Texas Virginia West Virginia Wisconsin South Carolina (2016)

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the tax revenue potential under existing sales and use tax rates for both Amazon, the largest internet

retailer, and other top 500 U.S. e-commerce firms that have not historically collected Ohio sales and use

tax.

Methodology One of the key aims of this analysis was to avoid “double-counting”

revenue from e-commerce retailers that already collect and remit

sales tax to Ohio as “new revenue” that would be brought in from a

legislative change. Many of the largest U.S. e-commerce retailers are

also major brick-and-mortar companies in their own right. Existing

sales tax revenue baselines would therefore already include the sales

tax collected and remitted on the internet sales of such vendors as

Walmart, Sears, and other companies that have existing physical

locations within Ohio.

Therefore, our approach sought to screen the 500 largest U.S.

companies by internet sales (as defined by Internet Retailer’s “Top

500 Guide” 2015 Edition) for the likelihood that they already collect

and remit Ohio sales tax on internet transactions. Our incremental

revenue estimate used only sales tax revenue for those firms assumed not to have previously collected

and remitted sales tax. To arrive at the estimated Ohio sales tax potential from each firm, we pro-rated

the firms’ 2014 U.S. internet sales by Ohio’s share of U.S. disposable income, based on available Census

Bureau data. From this perspective, we believe the estimates below are conservative, as the $256.3

billion in 2014 U.S. e-commerce sales for the top 500 U.S. firms reported by Internet Retailer

represented approximately 86% of the $298.3 billion reported by the Commerce Department for the

total e-commerce retail trade category in 2014.

After estimating the potential Ohio internet sales from retailers not previously required to collect and

remit sales tax to the state, we applied Ohio’s weighted average sales tax rate to this total to arrive at

the total revenue potential for uncollected sales tax in 2014. We also applied the applicable existing tax

rate of each county and transit agency to determine the allocations to these entities and to the state.

Potential impacts Based on the methodology described above, we arrive at the following estimates for uncollected sales

taxes that would have resulted from Ohio e-commerce in 2014:

2014 Base Pro rata Ohio

untaxed internet sales

Potential incremental

internet sales tax revenue

Allocations of total internet sales tax revenue

Counties portion

Individual transit agencies

portion

State portion (proposed for

STIF)

Amazon $1.7 billion $119 million $19 million $4 million $96 million

Other e-commerce firms

$1.6 billion $111 million $17 million $4 million $90 million

Combined $3.2 billion $230 million $36 million $8 million $186 million

Top 10 U.S. Firms by Internet Sales

1. Amazon.com 2. Apple Inc.* 3. Walmart* 4. Staples* 5. Sears* 6. Netflix* 7. Macy’s* 8. Office Depot* 9. CDW* 10. The Home Depot*

*Collects Ohio Sales Tax on E-Commerce as of 12/31/14

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The sum of the sales tax potentially available via Amazon and other e-commerce firms shows the

incremental amount of annual revenue the state and its component entities could potentially realize

from the federal legislation along the lines of the Marketplace Fairness Act, allowing states to fully

enforce the provisions of SSUTA.

Assuming 6% annual growth in e-commerce sales, the $186 million of incremental sales tax revenue

identified for 2014 would increase to $198 million for 2015 and $209 million for 2016. The 6%

assumption for growth in annual e-commerce sales does not include the impact of inflation and we

believe it is a conservative assumption. From 2009-2014 the 5-year compound annual growth rate

(CAGR) for U.S. retail e-commerce was 15%, compared to 5-year CAGRs of 5% for total retail sales and

2% for inflation over the same period.20

Projections of Potential Incremental Tax Revenue from Previously Uncollected Sales & Use Tax on E-commerce

Total

Allocations of total internet sales tax revenue

Counties portion

(existing 0.5%-1.5%

rates)

Individual transit

agencies portion

(existing 0.25%-1.0%

rates)

State portion

proposed for STIF

(existing 5.75% rate)

2014 $230 million $36 million $8 million $186 million

2015 $244 million $38 million $9 million $198 million

2016 $259 million $40 million $9 million $209 million

2017 $274 million $43 million $10 million $222 million

2018 $291 million $45 million $10 million $235 million

2019 $308 million $48 million $11 million $249 million

2020 $327 million $51 million $11 million $264 million

2021 $346 million $54 million $12 million $280 million

2022 $367 million $57 million $13 million $297 million

2023 $389 million $61 million $14 million $315 million

2024 $412 million $64 million $14 million $334 million

2025 $437 million $68 million $15 million $354 million

Note: Assumes 6% annual growth in internet retail sales, excludes impact of inflation

It is unclear how much of this projected revenue would be captured by “click-through-nexus” legislation

such as that contained in the Ohio 2016-2017 budget. Of the top 500 U.S. internet retail firms, at least

373 used an affiliate marketing program in 2014, according to Internet Retailer, but data on the state-

by-state presence of these affiliates is not available. In past instances in which states passed “click-

through-nexus” legislation, online retailers have terminated affiliates in that state to avoid establishing

nexus. It is difficult to predict each individual company’s possible reaction to such legislation in Ohio.

However, Amazon’s intent to establish data and distribution centers in Ohio would establish nexus that

is not contingent on the company’s internet affiliates policies.

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Application to Ohio Transit Funding Gap Laketran proposes that the state’s portion of the incremental internet sales tax revenue be specifically

allocated to transportation uses via a dedicated Surface Transportation Infrastructure Fund (STIF). The

revenues for this fund could be passed on directly to transportation needs on an annual basis or used to

secure bond payments to provide upfront proceeds. Based on Laketran’s proposal, the working

assumption in this whitepaper is that 50% of the Surface Transportation Infrastructure Fund would be

earmarked for roadways and bridges while 50% would be allocated to mass transit. The following

diagram illustrates the allocation of internet sales tax revenue under Laketran’s proposal:

While a number of scenarios are possible, the following table illustrates the impact of the incremental

sales tax revenue on the funding gap identified in the transit needs study. As shown below, incremental

internet sales tax revenues constitute a funding source sufficient to bridge the 10-year shortfall for

capital system preservation and provide an additional $17 million to $78 million in annual funding for

state assistance to transit. This additional annual revenue could be applied to operating or capital

assistance for both urban and rural transit agencies for the restoration, preservation and expansion of

service. The sources of funds come from annual payments from the Surface Transportation

Infrastructure Fund and an assumed 2016 bond issuance to be repaid with a portion of STIF revenues

over a 20-year term.

*6% annual growth assumption **Bonding assumptions for illustrative purposes

$1.6 B (2015-2025 total)

$1.1B (2015-2025 total) $500M (2015-2025 total)

$3.7B ($244M-437M annually 2015-2025*)

$569M

($38M-68M annually 2015-2025*)

Counties (existing 0.5%-1.5% sales tax)

$3.0B

($198M-354M annually 2015-2025*)

State (existing 5.75% sales tax)

$128M

($9-15M annually 2015-2025*)

Transit agencies (existing 0.25%-1.0% sales tax)

Surface Transportation Infrastructure Fund (STIF)

$2.5B

($198M-301M 2015-2025*)

Annual revenues

(net of bond payments)

$651M**

(Debt Service Payments $31M-$95M 2016-2035)

2016 bond proceeds

Transit support

$1.6 B (2015-2025 total)

Existing gap (2015 ODOT study)

System Preservation Additional System Restoration,

Expansion, Operations, etc.

Ohio E-commerce sales tax revenue potential

Roadway Support

81% 16% 3%

100%

85%

15%

50%

50%

50%

50%

12 | P a g e

Projections: Transit Portion of STIF

10Y Incremental E-Commerce Sales Tax Revenue vs.

System Preservation Capital Funding Gap

STIF Annual

Revenue (Net of Debt Service)

Transit Portion

(50%)

STIF 2016 20Y Bond

Proceeds

Transit Portion (50%)

Total

System Preservation

Capital Funding Gap

STIF Revenue Available for

Additional Transit Assistance

2015 $99 million $326 million $425 million ($381 million) $44 million

2016 $89 million - $89 million ($72 million) $17 million

2017 $94 million - $94 million ($72 million) $22 million

2018 $100 million - $100 million ($72 million) $28 million

2019 $106 million - $106 million ($72 million) $34 million

2020 $112 million - $112 million ($72 million) $40 million

2021 $119 million - $119 million ($72 million) $47 million

2022 $126 million - $126 million ($72 million) $54 million

2023 $134 million - $134 million ($72 million) $62 million

2024 $142 million - $142 million ($72 million) $70 million

2025 $150 million - $150 million ($72 million) $78 million

10Y

Total $1.3 billion $326 million $1.6 billion ($1.1 billion) $498 million

Note: Assumes 6% annual growth in internet retail sales, excludes impact of inflation (constant 2015 dollars)

The unfunded $381 million up-front need identified from the

ODOT study is the result of deferred maintenance accumulated

due to the long-term underfunding of Ohio transit. Once this

backlog is addressed through bonding, the assumptions above

show the state’s transit systems moving to a more sustainable

pay-as-you-go model with revenues applied to capital funding

needs on an annual basis. In the chart above, we have shown

proceeds from the assumed 2016 bond issuance as allocated to

this 2015 backlog.

The $498 million available from STIF after covering critical system preservation needs could be used as a

component, in combination with available federal and local funds, of addressing a portion of the $2.9

billion in statewide system expansion initiatives for existing transit systems identified in the 2015 ODOT

study.

In addition to the state assistance from the STIF, Ohio’s eight individual transit agencies would see an

additional $9 million to $12 million from the incremental sales tax collections flow through annually to

their budgets under their existing local sales tax rates.

Bonding Assumptions

Portion of Annual Incremental Revenue for Debt Service

15%

Issuance Year 2016

Term 20

Assumed Rate 5.00%

Upfront Proceeds $651 million

Transit Portion $326 million

13 | P a g e

Other reference points for revenue potential The widely cited 2009 University of Tennessee study contains different assumptions about the potential

incremental tax revenue from e-commerce sales. The methodology applied in the 2009 study resulted in

a higher projection of the revenue potential of fully collecting sales tax on internet transactions. Should

the state realize this higher level of revenue, the STIF could produce $5.9 billion for transit funding over

the 2015-2025 period under the same assumptions detailed above, rather than the $1.6 billion estimate

identified in this white paper.

The Ohio Department of Taxation estimates the amount of uncollected tax on internet sales at $350

million annually, compared to our estimate of $230 million. The 2015-2025 revenue potential under the

assumptions detailed above would be $2.4 billion at these levels.

Conclusions This white paper is intended both to highlight the need for and illustrate a potential solution for

additional mass transit funding in Ohio. However, Laketran’s proposed funding mechanism contains not

only benefits for mass transit, but for a variety of other stakeholders as well.

Summary of benefits Public transit would benefit from Laketran’s proposal in a number of ways. In summary, these include:

Budgetary stability and consistency from dedicated source of funding from STIF

Revenue stream increases with sales tax growth, accommodating impact of inflation

Ability to bridge statewide 2015 capital backlog funding gap of $381 million

Ability to cover $72 million annual capital gap for system preservation over next 10 years

(includes rural and urban needs and GCRTA railcar replacement)

Annual capital and/or operating assistance estimated between $17 million to $78 million over

next 10 years for restoration, preservation and expansion of service for urban and rural agencies

State roadways would also benefit from Laketran’s proposal, under a 50% allocation of STIF revenues

and bond proceeds. Benefits to Ohio’s highways and bridges include:

Additional $1.6 billion revenue source over next 10 years to complement state fuel tax revenues

and bond proceeds

Long term budgetary stability and consistency from dedicated source of funding from STIF

Revenue stream increases with sales tax growth, accommodating impact of inflation

Counties will see an increase in funds via the impact of increased collections under their existing sales

tax levies. Please see the appendix for the assessment of revenue potential by county for 2014 internet

sales. The long-term impacts include:

Incremental revenue of an estimated $40 million to $68 million annually over next 10 years

All 88 Ohio counties projected to realize portion of benefit

Corrects impact of declining sales tax revenues from rising proportion of online shopping in

consumer spending

14 | P a g e

Another point to highlight is that Laketran’s proposal achieves the increase for transportation funding

through the expanded enforcement of existing tax requirements rather than any hike in tax rates. Ohio

has levied a use tax since 1936 on the transactions encompassed by the new collection standards

requirements. The resulting increase in collections is simply an example of more efficient application of

longstanding state law. The revenue estimates in this whitepaper assume no increase to existing sales

tax rates.

Next steps Achieving the benefits proposed by Laketran and analyzed in this white paper would require further

action by the state legislature. The framework of our analysis above reflects the following assumptions

not present in existing legislation, which have been proposed by Laketran:

1) Designation of a new fund (illustratively referred to as the Surface Transportation Infrastructure

Fund, or STIF, herein) as the depository for the state’s share of new sales tax revenue collected

from e-commerce after the passage of the 2016-2017 state budget’s “click-through-nexus”

legislation.

2) Allocation of 50% of the new STIF revenue to highway and bridge improvements and 50% for

public transit capital and operating assistance in both urban and rural areas.

3) The 10-year revenue projections (20 years for bonding purposes) assumed in the incremental

revenue analysis for transit are dependent upon a continuing revenue stream from previously

unremitted sales tax on e-commerce transactions. Under existing Ohio legislation, the passage

of federal legislation along the lines of the Marketplace Fairness Act would earmark this revenue

stream for the income tax reduction fund.

The deficit in the current funding approach to transit has already been identified in numerous previous

studies. We hope this white paper represents a contextual framework that applies a quantitative

methodology to Laketran's proposal.

Appendix

Transit Agency Portions of Projected Incremental Sales Tax Revenue (2014 Base)

Agency Tax Rate Agency Portion

Central Ohio Regional Transit Authority 0.50% $ 1,902,264

Greater Cleveland Regional Transit Authority 1.00% $ 3,896,547

Greater Dayton Regional Transit Authority 0.50% $ 726,894

Laketran Transit Authority 0.25% $ 167,888

Metro Regional Transit Authority 0.50% $ 835,534

Portage Area Regional Transit Authority 0.25% $ 96,031

Stark Area Regional Transit Authority 0.25% $ 267,288

Western Reserve Transit Authority 0.25% $ 165,203

Total $ 8,057,649

County Portions of Projected Incremental Sales Tax Revenue (2014 Base)

County Tax Rate County Portion County Tax Rate County Portion

Adams 1.50% $76,057 Logan 1.50% $177,784

Allen 1.00% $306,069 Lorain 0.75% $537,513

Ashland 1.25% $144,860 Lucas 1.25% $1,579,359

Ashtabula 1.00% $201,727 Madison 1.25% $116,893

Athens 1.25% $155,938 Mahoning 1.00% $660,813

Auglaize 1.50% $164,446 Marion 1.50% $195,241

Belmont 1.50% $338,458 Medina 1.00% $453,502

Brown 1.50% $94,938 Meigs 1.50% $48,324

Butler 0.75% $731,285 Mercer 1.50% $138,687

Carroll 1.00% $75,387 Miami 1.25% $319,486

Champaign 1.50% $104,932 Monroe 1.50% $55,715

Clark 1.50% $464,857 Montgomery 1.00% $1,453,788

Clermont 1.00% $472,222 Morgan 1.50% $31,893

Clinton 1.50% $153,049 Morrow 1.50% $69,271

Columbiana 1.50% $321,419 Muskingum 1.50% $351,608

Coshocton 1.50% $111,300 Noble 1.50% $52,908

Crawford 1.50% $106,898 Ottawa 1.25% $158,156

Cuyahoga 1.25% $4,870,684 Paulding 1.50% $35,575

Darke 1.50% $156,613 Perry 1.50% $74,472

Defiance 1.00% $106,448 Pickaway 1.50% $150,270

Delaware 1.25% $965,381 Pike 1.50% $79,671

Erie 1.00% $423,103 Portage 1.00% $384,125

Fairfield 1.00% $374,965 Preble 1.50% $102,039

Fayette 1.50% $160,055 Putnam 1.25% $87,026

Franklin 1.25% $4,755,659 Richland 1.25% $410,487

Fulton 1.50% $139,318 Ross 1.50% $282,041

Gallia 1.25% $91,249 Sandusky 1.50% $209,929

Geauga 1.00% $258,279 Scioto 1.50% $232,438

Greene 1.00% $474,430 Seneca 1.50% $161,659

Guernsey 1.50% $197,158 Shelby 1.50% $191,003

Hamilton 1.00% $2,927,447 Stark 0.50% $534,576

Hancock 1.00% $254,322 Summit 0.50% $835,534

Hardin 1.50% $79,935 Trumbull 1.00% $481,725

Harrison 1.50% $110,597 Tuscarawas 1.00% $243,920

Henry 1.50% $75,081 Union 1.25% $264,476

Highland 1.50% $122,561 Van Wert 1.50% $82,285

Hocking 1.25% $70,995 Vinton 1.50% $24,811

Holmes 1.00% $127,633 Warren 1.00% $683,830

Huron 1.50% $182,735 Washington 1.50% $250,169

Jackson 1.50% $102,348 Wayne 0.75% $202,713

Jefferson 1.50% $235,702 Williams 1.50% $112,889

Knox 1.00% $131,774 Wood 1.00% $390,604

Lake 1.00% $671,553 Wyandot 1.50% $77,522

Lawrence 1.50% $172,246 Total $35,829,664

Licking 1.50% $580,822

Sources 1 Ohio Department of Transportation, Nelson / Nygaard Consulting Associates. 2015 Ohio Statewide Transit Needs Study 2 The Bond Buyer. “Senate Highway Plan Hits Wall as House Members Seek Short-Term Fix”. Jim Watts. 7/22/2015. http://www.bondbuyer.com/news/washington-infrastructure/senate-highway-plan-hits-wall-as-house-members-seek-short-term-fix-1079792-1.html 3 Ohio Department of Transportation. 2013 Annual Report 4 Ohio Department of Taxation. Information sheet. “Ohio Use Tax” 5 QUILL CORP. v. NORTH DAKOTA. 504 U.S. 298 (1992). https://supreme.justia.com/cases/federal/us/504/298/ 6 Streamlined Sales Tax Governing Board Inc. website 7/8/15. “Streamline Sales Tax State Members” http://www.streamlinedsalestax.org/index.php?page=state-info 7 S.689 – Marketplace Fairness Act of 2015. 114th Congress (2015-2016). https://www.congress.gov/bill/114th-congress/senate-bill/698?q=%7B%22search%22%3A%5B%22marketplace+fairness+act%22%5D%7D&resultIndex=4 8 H.R.684 — Marketplace Fairness Act of 2013. 113th Congress (2013-2014) https://www.congress.gov/bill/113th-congress/house-bill/684 9 S.743 – Marketplace Fairness Act of 2013. 113th Congress (2013-2014). https://www.congress.gov/bill/113th-congress/senate-bill/743 10 Overstock.com, Inc. v New York State Dept. of Taxation & Fin. http://www.courts.state.ny.us/REPORTER/3dseries/2013/2013_02102.htm 11 McDermott Will & Emery “U.S. Supreme Court Denies Certiorari to Review New York’s Click-Through Nexus Law” http://www.mwe.com/US-Supreme-Court-Denies-Certiorari-to-Review-New-Yorks-Click-Through-Nexus-Law-12-05-2013/ 12 Burlington Free Press. “Amazon retaliates against Vermont sales tax law.” http://www.burlingtonfreepress.com/story/money/2015/01/07/amazon-ends-vermont-affiliate-program/21405205/ 13 Letter. Bobby Jindal. Re: House Bill No. 555 by Representative James Fannin. 6/19/15. 14 HOUSE BILL NO. 555. 2015 Regular Session 15 Internet Retailer. “Top 500 Guide.” 2015 Edition

16 Amazon Help & Customer Service webpage. “About Sales Tax.” Visited 6/16/15. http://www.amazon.com/gp/help/customer/display.html?nodeId=468512 17 The Wall Street Journal. “Which State Make You Pay an Amazon Sales Tax.” Greg Bensinger. 10/1/14.

http://www.wsj.com/articles/states-that-make-amazon-pay-sales-taxes-1412185657

18 The Columbus Dispatch. “Amazon to start collecting sales tax on Ohioans' purchases.” Mark Williams.

5/29/15. http://www.dispatch.com/content/stories/business/2015/05/29/amazon-to-collect-sales-

tax.html

19Albany Times Union. “State taps Internet to reap sales tax.” Rick Karlin. 9/12/2012. http://www.timesunion.com/business/article/State-taps-Internet-to-reap-sales-tax-3861067.php 20 Commerce Department and Bureau of Labor Statistics