Lawmakers Introduce Online Sales Tax Bill

Congress could grant states the ability to collect sales taxes from e-retailers -- a power that has eluded them for years.
by | August 2, 2011

A group of bills moving its way through the House would restrict the ability of state and local governments’ to tax various industries, Governing reported last week.

But now, some hope may be on the horizon for those who think state and local governments are getting short shrift. Last week, federal legislators introduced a bill that would give states and localities a power they've always lacked: the ability to collect sales tax from online retailers.

And the legislation is enjoying an endorsement from an unlikely source – Amazon.com, the online retailer that has become famous for its high-profile battles with states over the tax.

On Friday, Sen. Richard Durbin (D-Ill.) and Rep. John Conyers (D-Mich.) introduced similar bills that would give states that are members of a special association the ability to collect sales tax from online and catalogue retailers.

The legislation is a response to a 1992 Supreme Court decision that found a retailer isn't required to charge its customers a state’s sales tax if the business lacks a physical presence in that particular state. Part of the reasoning was that the 50 states’ sales tax codes are so different that it would be a burden to force a company to track and pay all of them. The decision, however, noted that Congress could specifically authorize those taxes.

Technically, since many online retailers like Amazon.com typically don't collect sales tax from customers, the customers themselves are required to pay those sales taxes to their state and local governments. In reality, hardly any customers actually do this, which is why state and local governments want to collect money directly from the retailers.

The Durbin and Conyers bills would require that online and catalogue retailers collect sales tax for states that are members of the Streamline Sales Tax Governing Board, a coalition of states that have worked to simplify and unify their sales tax codes in an effort to make them easier for online retailers to pay.

Currently, 44 states are members, though only 23 have completed the full legal process of officially joining the compact. The new legislation would only grant the taxing authority to states that are in the compact, which would likely increase that number who officially join.

The coalition seeks to provide uniformity to mundane issues that can cause confusion when it comes tax time. For example, a product that may be defined as "candy" in one state might not be "candy" in another; that would also likely mean it would be taxed at a different rate. If customers from 50 states buy the product, the situation becomes complicated.

Organizations like the National Conference of State Legislatures and the National Governors Association, which helped create the streamlines sales tax board, are also backing the legislation. Sales tax is a serious revenue source for states, comprising 32 percent of their total tax collections, second only to income tax as a revenue source.

Next year, states will lose an estimated $23.3 billion for out-of-state sales, including more than $11.3 billion alone from e-commerce transactions, according to a University of Tennessee cited by NCSL. Supporters of the bill have framed the legislation as a mechanism to help states collect money they’re already owed, not as a tax increase.

Rep. Heath Shuler (D-N.C.), one of the cosponsors, said in a statement that the bill won’t increase taxes for any consumers, though that’s somewhat misleading. If the proposal succeeds, millions of people will have to start paying sales tax to online retailers who historically haven't collected it.

The legislation is actually being endorsed by Amazon.com which, in the past, has fought efforts from state governments to collect sales taxes. This year the company made headlines for suing North Carolina when the state requested names and addresses of customers. It shut down affiliate programs in Colorado and California when those states took steps to attempt sales tax collection. And it announced plans to close a distribution center in Texas when that state refused to budge on the tax issue.

The company, experts say, likely realizes that the tide is turning on the issue and knows that as online commerce continues to grow, states will eventually find a way to collect sales tax with or without Amazon's cooperation.  Given those circumstances, the company may be figuring that at least it ought to have a seat at the table.

“They understand there comes a point in time that this is absolutely mandatory,” says Scott Peterson, executive director of the streamlined tax board. “At some point, everybody is an Internet retailer.” Peterson says Amazon has been helpful in pointing out areas that are in need of simplification, such as issues involving different time zones during state sales tax holidays.

It’s worth noting that there’s nothing preventing online retailers like Amazon.com from collecting and paying sales tax right now, if they want to. There are 1,400 retailers who collect sales tax for states in the compact under a voluntary system.

Last year, the sales tax bill died in the House Judiciary Committee, though its supporters hope that some small tweaks have made it more attractive this go round.

Brick-and-mortar retailers are among the bill's biggest supporters.  They’ve argued that they are at a competitive disadvantage to online retailers, whose goods can be sold to customers at a much lower price than.

But other online retailers oppose the deal. NetChoice, a coalition of trade associations and e-retailers such as AOL, eBay and Overstock.com calls the legislation “job-killing” and argues the expense of developing systems to pay the taxes is too high, especially for smaller businesses. The federal legislation calls for compensation for retailers as they adjust to the new system, though the exact amount will be decided by the board and isn't specified in the legislation.
 
The association argues that states could instead recoup revenue by working harder to enforce existing tax rules.

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