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Congress Urged to Close Online Sales-Tax Loophole Congress Urged to Close Online Sales-Tax Loophole

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Congress Urged to Close Online Sales-Tax Loophole


Rep. Mike Pence, R-Ind.(Chet Susslin)

State officials and some retailers urged Congress on Wednesday to finally close a loophole that they say benefits online retailers by allowing them to avoid collecting sales taxes from out-of-state customers.

The issue the House Judiciary Committee examined relates to a 1992 Supreme Court decision in Quill v. North Dakota that found catalog and other retailers do not have to collect sales taxes from customers in states where they do not have a physical store or other facility. Since then, online retailers have used the loophole to their advantage, something state officials say has cost them billions in lost revenues.


“It is estimated that currently in the state of Texas between $600 million and $800 million is not collected on out-of-state sales.… That points out to me the unfair competition that my storefronts are competing against,” state Rep. John Otto, R-Texas, told the committee.

Even some tax-averse lawmakers such as Rep. Mike Pence, R-Ind., said they believe congressional action is warranted. “I don’t think Congress should be in the business of picking winners and losers. Inaction by Congress today results in a system today that does pick winners and losers,” Pence said.

State calls for congressional action on the issue got a big boost earlier this month when Amazon, after years of battling state efforts to address the loophole on its own, endorsed bipartisan online sales tax legislation introduced by Sens. Mike Enzi, R-Wyo., Dick Durbin, D-Ill., and others. The Senate bill would authorize states that meet certain minimum standards to require online retailers to collect sales taxes from customers even in states where those firms have no store or other facility. A similar bill has been introduced in the House by Reps. Steve Womack, R-Ark., and Jackie Speier, D-Calif. CEO Patrick Byrne told the panel that his company opposes both the House and Senate bills because they would unfairly shift the burden of tax collection to online retailers and stifle the growth of e-commerce.

Much of the debate at Wednesday’s hearing, however, did not focus on whether Congress should address this loophole but on how to address it. Several members questioned whether small businesses should be exempt from having to collect taxes from out-of-state customers and if so, which businesses should be considered small. 

The issue sparked several back-and-forth exchanges between Amazon and eBay, which opposes both the House and Senate legislation because it says the small-business exemptions in those bills are too low. EBay Vice President Tod Cohen argued for a much bigger exemption, as high as $30 million in total annual sales for small businesses, a standard he said is used by the Small Business Administration. Cohen said that big e-commerce companies like Amazon and brick-and-click retailers like Wal-Mart and Target already enjoy huge economies of scale and that Congress could help small online retailers compete by allowing them to maintain the sales-tax exemption. 

Amazon Vice President of Global Public Policy Paul Misener, however, said if eBay is so concerned about the bill’s impact on small businesses, it could help them comply with the proposed federal law. He said Amazon prefers a much lower small-business exemption. 


“While Amazon is prepared to make its technology available as a service to help sellers by collecting sales taxes for them, eBay seeks to avoid any role in collection, claiming small-volume sellers will be burdened and implicitly that eBay’s technology is not capable of helping its largest sellers to collect,” Misener said. 

Cohen accused Amazon of taking full advantage of the current loophole by trying to claim some of its facilities do not constitute a physical presence in some states. “Amazon’s position two years ago was that they shouldn’t have to collect those sales taxes,” Cohen said. 

Womack said he does not know when or if the committee will mark up his legislation. “My sense today is there is general agreement we have a problem. We all know Congress is the only one who can remedy this terrible inequity,” he said after the hearing.

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