To Tax or Not to Tax? The Online Sales Debate

WASHINGTON – The Senate moved closer last week to passing a bill that broadens the ability of states to collect sales tax on online purchases, which may cruise through the Senate but will likely hit a hurdle in the House.

The legislation cleared the final procedural hurdle with bipartisan support Thursday evening on a 63 to 30 vote, about a dozen less than it had received earlier in the week. The Senate plans to vote on the bill after returning from recess on May 6.

A 1992 Supreme Court decision currently prohibits states from collecting taxes from business that do not have a physical presence within their borders. Although the original ruling dealt with a catalog mail-order company, it has subsequently applied to all remote sellers. The court said that the numerous state and tax systems were too complex for sellers to manage but stated that Congress could overrule the decision through legislation.

The Marketplace Fairness Act would allow states to force Internet retailers to collect taxes from their customers and remit the proceeds to state and local governments, just as brick-and-mortar retailers have done for years. Currently, online retailers need to collect sales taxes only if they have a physical location in the state. The proposed legislation exempts retailers with less than $1 million in revenue from collecting the taxes.

“The Marketplace Fairness Act is a bill whose time has come in Congress and one that is long overdue for states, local governments and small businesses,” Sen. Dick Durbin (D-Ill.), a sponsor of the bill, said in a statement.

Nevertheless, the bill may face stiff opposition in the House even if it breezes through the Senate. While Democratic leaders were able to bypass the Finance Committee and bring the bill straight to the Senate floor, the GOP leaders in the House have so far shown scant interest in the measure.

House Majority Leader Eric Cantor (R-Va.) and Speaker John Boehner (R-Ohio) have not taken a public position on the bill yet. The new chairman of the House Judiciary Committee, Rep. Bob Goodlatte (R-Va.), whose committee has jurisdiction over the issue, could play a pivotal role in the bill’s passage in the House. A Boehner spokesman deferred to Goodlatte and a spokesman for Cantor said only: “We’ll review what the Senate sends over,” as reported by the Hill. A spokeswoman for Cantor did not return a message from PJ Media seeking comment.

“I do not believe legislation like the Marketplace Fairness Act is sufficiently simplified yet,” Goodlatte said in a statement. “While it attempts to make tax collection simpler, it still has a long way to go. There is still not uniformity on definitions and tax rates, so businesses would still be forced to wade through potentially hundreds of tax rates and a host of different tax codes and definitions…. I am open to considering legislation concerning this topic but these issues, along with others, would certainly have to be addressed.”

When Amazon and Goodlatte’s office announced last year a move to build distribution warehouses in the state, the online retailer was not going to collect Virginia sales taxes. But in January, the online retailer and the state announced they had reached an agreement under which Virginia will start receiving in September sales taxes collected by Amazon.

Amazon now relies less on price than fast delivery, free shipping, and a wide selection of goods, which has led the online retailer to increase its presence across the country by expanding its number of warehouses and shipping centers. Under the 1992 ruling, online giants Amazon and eBay have avoided collecting sales taxes on many transactions.

But when it comes to the sales tax bill, the two retailers are on opposite sides of the issue.

“This is a ‘big retail battle’ in which small businesses and consumers have a lot to lose. But eBay is fighting, as we have for more than 15 years, to protect small online businesses and sellers and ensure healthy competition, value, and selection that benefit consumers online,” wrote eBay’s CEO John Donahoe in a letter asking for support from customers. Donahoe says Amazon supports the bill because “it treats [small business] and big multi-billion dollar online retailers – such as Amazon – exactly the same.”

On the other side, Amazon sent a letter thanking the Senate for the bill.

“ has long supported a simplified nationwide approach that is evenhandedly applied and applicable to all but the smallest volume sellers,” Paul Misener, Amazon’s vice president of global public policy, said in his letter to senators.

Supporters of the bill say that the legislation would have no effect on federal revenues and would simply allow for the collection of sales taxes. The National Governors Associations (NGA) said that states need the $23 billion in lost revenue and the National Retail Federation says the proposal would simply roll back the unfair advantage online stores have on brick-and-mortar retailers.

“[The Marketplace Fairness Act] rectifies the discrimination against brick-and-mortar retail outlets of all sizes. Internet sellers now receive a subsidy of 8%-10% because they don't collect sales tax on retail sales outside their states, a subsidy that harms other sellers,” said NGA’s Executive Director Dan Crippen. “Yet Internet sellers get the benefits of the world's third-largest consumer base, not to mention state roads for delivery of their products, plus the protection of the state court systems to enforce business contracts.”

Lawmakers from states without a sales tax condemned the measure, saying it would burden retailers that are not currently required to charge sale taxes to customers.

Sen. Max Baucus (D-Mont), whose state does not collect sales taxes, said the bill would hurt businesses in Montana and other small businesses in America because it forces small businesses “to play tax collector for other states.”

The anti-tax-hike group Americans for Tax Reform (ATR) echoed the senator’s remarks, saying the bill would force businesses to collect taxes for all states.

“The legislation hands a small cartel of state tax administrators the ability to reach across state borders and export the burden of tax collection onto out-of-state businesses,” said ATR’s president Grover Norquist.

ATR maintains an anti-tax pledge that nearly every Republican in Washington has signed and suggested that the legislation can only be viewed as tax increase because “it grants states new tax collection authority without removing equivalent taxing authority elsewhere.” The group has yet to explicitly say that lawmakers would violate the pledge by voting for the bill.

The NGA fired back at ATR’s remarks about the bill, accusing the organization of trying to undermine legislation that “levels the playing field between Main Street and e-street.”

“The Marketplace Fairness Act is common-sense legislation that is simply about the collection of sales and use taxes already owed. The Americans for Tax Reform may not like this legislation, but they are not entitled to their own facts,” said the NGA in a statement.

The group also argues that the online sales tax bill does not violate the tax pledge because candidates for Senate office pledge to “one, oppose any and all efforts to increase the marginal income tax...and two, oppose any net reduction or elimination of deductions or credits.”

“Marketplace Fairness does neither. It is not a new tax or a tax increase. It clearly does not violate the pledge. In fact, the Americans for Tax Reform themselves admitted to leadership of the [NGA] that this was not a violation. To say anything else is disingenuous,” said the group in a statement.

House Republicans are by no means united in opposition to the bill. The House version of the bill already has roughly two dozen GOP sponsors.

“I’m a co-signer of the [Norquist] pledge. I’m a co-signer of the legislation. We have to collect the taxes that are due,” said Rep. Austin Scott (R-Ga.).