Local Leaders Lobbying for Internet Sales Tax

As states and localities face shortfalls, officials say revenue could help close the gaps.
by | March 6, 2012

Local leaders from across the country are in Washington, D.C. this week, where they'll be lobbying federal lawmakers on a bevy of priorities. Chief among them: a sales tax on Internet purchases.

Technically, supporters argue, the tax already exists, but a 1992 Supreme Court ruling means that many Internet retailers don't have to collect the tax and remit it to states. Instead, individual consumers are supposed to track and pay the relevant sales taxes to their state and local government. It reality, that's hardly ever done. 
 
As a result, states and localities lose out on billions of dollars every year in sales tax revenue that they'd be entitled to if customers had purchased the very same goods in stores as they buy online.
 
Enter the Marketplace Fairness Act, the latest and most successful effort to date to create a mechanism that would allow states and localities to collect sales tax on online purchases. The bill has achieved bipartisan support -- its 10 cosponsors are split evenly between Democrats and Republicans -- and its architects have touted it as a way to help state and local governments close their budget holes. 
 
As the National Association of Counties meeting in Washington Tuesday morning, two of the bills' biggest proponents, Sens. Richard Durbin (D-Ill.) and Mike Enzi (R-Wyo.) urged county officials to lobby their Senators to support the bill. NACo leaders say that's exactly what they intend to do while in Washington. 
 
A widely-cited University of Tennessee study says that this year, states and localities stand to lose out on more than $11 billion in sales tax they're owed on e-commerce. That amount of money would put a sizable dent in the budget shortfall facing states as the 2013 fiscal year approaches in July. So far, 29 states are addressing shortfalls totaling $47 billion, according to the Center on Budget and Policy Priorities. The new revenue could be used to reduce college tuition, hire more teachers in states that have made education cuts, or reduce sales tax or property tax rates, Enzi said.
 
The bill's supporters have also portrayed it as a way to provide equity for brick-and-mortar stores, who are unable to avoid the sales tax and suffer from a competitive disadvantage to online retailers who can under-price them because of the policy. "This is the backbone of the economy," Durbin said of small businesses. "We're creating an unfair advantage on the Internet side."

Although many counties don't collect sales tax, NACo officials tell Governing that their members still want to see the bill become law since it would help states. That's because when states make painful budget cuts due to inadequate revenue, it's often local jurisdictions that feel the pain.

The legislation is supported by the major groups representing state and local governments, and when the National League of Cities holds its conference in Washington later next week, its members will likely lobby Congress on the same issue. Enzi described passage of the bill as "one of the most critical actions" needed to aid state and local governments and said now that it has received the support of Internet retail giant Amazon, it may have the momentum it needs (other online retailers still oppose the legislation).
 
Senate Majority Leader Harry Reid (D-Nev.) had said that if the bill can get 60 supporters -- the total needed to prevent a filibuster -- he'll bring it to the Senate floor for a vote. But it could face serious hurdles. Durbin said that its biggest challenge will come from Grover Norquist, the powerful head of Americans for Tax Reform, who has convinced the majority of Congress to sign a pledge that they won't vote to raise taxes.
 
"[T]axpayers will pay more in taxes following the passage of this bill, rendering false any claim that this is not a tax increase," the organization says of the bill. A better policy, ATR argues, would be to guarantee tax cuts elsewhere to compensate for the revenue the Marketplace Fairness Act would generate.

The battle has become one of semantics. Supporters like Durbin argue that it's not a new tax, since the money is technically owed to states and localities anyway. But opponents say that, for all intents and purposes, it is a new tax since few people actually pay it.

The issue has become so thorny, Enzi said, that some senators have privately pledged to vote for the legislation but are unwilling to be listed as cosponsors for fear of enduring negative attacks by anti-tax groups.

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