State officials made their case for the latest legislation that would allow them to collect sales taxes from online retailers at a U.S. House Judiciary Committee hearing Tuesday.

Advocates of the bill, including Tennessee Gov. Bill Haslam, reiterated a familiar argument: While brick-and-mortar retailers have to pay sales taxes, online retailers don’t -- and that’s not fair.

Haslam also tried to characterize the legislation as a states' rights issue, arguing that states should have the ability to collect sales taxes that are already on the books but are routinely ignored or overlooked by residents. Technically, online customers are supposed to pay what are known as “use” taxes to their states when they buy from online retailers. But in reality, few customers do.

"I am a Republican governor who doesn’t believe in increasing taxes,” Haslam said, adding that the legislation “isn’t about raising taxes or adding new taxes.”

The hearing examined H.R. 3179, known as the Marketplace Equity Act, introduced by Rep. Steve Womack (R-Ark.) last fall. The bill has 48 co-sponsors who include both Democrats and Republicans.

It’s one of several pieces of legislation introduced in the last year to address the online sales tax issue. Last July, Sen. Richard Durbin (D-Ill.) and Rep. John Conyers (D-Mich.) introduced similar legislation in both chambers known as the Main Street Fairness Act. In November, Sen. Mike Enzi (R-Wyo.) introduced the Marketplace Fairness Act, which Sen. Durbin supports and is seen as a successor to Durbin's bill.

Rep. Womack’s bill discussed Tuesday is the House’s answer to Enzi’s legislation in the Senate.

The bill would allow states to require online retailers to collect sales taxes and pay them to the states, similar to the way brick-and-mortar stores have done for years. Businesses that have sales of less than $1 million nationally would be exempt.

The legislation would rectify a problem that has vexed state and local governments as the prevalence of e-commerce has soared: how to generate revenue from those transactions while dealing with tax laws designed before e-commerce even existed.

A 1992 Supreme Court ruling called Quill says states cannot force catalog companies to collect and remit sales tax unless they have a physical presence or “nexus” within their borders. But that ruling also left the door open to Congress to address the situation. “This is an issue that only Congress can solve,” Rep. Jackie Speier (D-Calif.) testified at the hearing, imploring Congress not to “hide its head in the sand.”

Haslam and others emphasized that as Congress looks to cut spending, the impacts will inevitably result in less federal funding flowing to states. If that’s the case, he and others argue, then federal lawmakers should allow states to obtain all the revenue they’re entitled to. The National Governors Association has thrown its support behind the legislation.

Officials representing local governments also support online sales tax collection, though leaders at the National League of Cities (NLC) outlined some concerns with Rep. Womack’s bill. While it would allow states to collect taxes from online sales, it also gives states the option of excluding local sales taxes from that collection. Sen. Enzi’s version of the legislation preserves local sales tax collection.

Still, NLC officials say that despite their issue with Rep. Womack’s bill, it’s a step in the right direction. “We are pleased that the committee has taken this matter up,” says Lars Etzkorn, NLC's finance and economic development program director. “It’s a long time coming.”

Online Opposition

Brick-and-mortar retailers are supportive of the legislation, but many online retailers -- with the exception of Amazon -- are fighting it. NetChoice, a coalition of trade associations and some of the country’s most prominent Internet businesses -- including eBay, Facebook, LivingSocial and Yahoo -- oppose the legislation in its current form. Steve DelBianco, the group’s executive director, testified that the law could put an onerous burden on online retailers since it would be complicated to track sales tax laws across its 10,000 different jurisdictions nationwide.

DelBianco also said it would be difficult to calculate some taxes, since states have different definitions of some products. For example, a candy bar might be defined as candy in one state and food in another. And states might tax candy and food at different rates.

A group called the Streamline Sales Tax Governing Board has worked to standardize those definitions and other aspects of sales tax policy in preparation for a move to online sales tax collection. But Rep. Womack’s legislation doesn’t require states to have signed onto the group’s standardization policies in order to levy taxes.

Amazon has been a notable exception among online retailers opposed to the legislation. After years of fighting states that tried taxing its sales, the company reversed course last year and announced its support for online sales tax laws.

Click a state in the map to display estimated collected and uncollected use tax revenues, if available. Information was obtained from the following sources:

-- Uncollected use tax estimates for electronic sales and non-electronic business-to-consumer sales: University of Tennessee report (methodology begins on page 15)

-- Uncollected estimates for non-electronic business-to-business transactions: Streamlined Sales Tax Governing Board

-- Use tax collections from 2009 income returns: Minnesota state House report


Use tax for tax year 2009

Have use tax; list income return line item
Have use tax; no reporting line
Have use tax; no income tax
No sales tax
Data unavailable