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Momentum Grows for Greater State Power to Collect Internet Sales Taxes Momentum Grows for Greater State Power to Collect Internet Sales Taxes

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Momentum Grows for Greater State Power to Collect Internet Sales Taxes

A sign outside eBay headquarters in San Jose, Calif.(AP Photo/Paul Sakuma, file)

July 26, 2012

As their fiscal pressures continue to grow, states may be closer than ever to persuading Congress to enact legislation that would increase their sales-tax revenues from online purchases.

But whether supporters can move the issue past the finish line in this Congress remains to be seen, given the difficulties of passing any legislation during the final months of an election year and lingering concerns that the measures could impose a heavy burden on small retailers.

“I think the bottom line is that tax-free sales on the Internet may be coming to an end,” House Judiciary ranking member John Conyers, D-Mich., optimistically declared during a hearing on Tuesday on the issue before his panel.


Conyers and other lawmakers have been pushing to close a loophole created by a 1992 Supreme Court decision, Quill v. North Dakota. In that case, the high court ruled that states can’t force retailers to collect sales taxes from customers who live in states where the companies have no store or other physical presence.

While the ruling at the time related to catalog retailers, the issue has grown in significance with the explosion of e-commerce. States argue that they are losing billions of dollars in sales tax revenues from online transactions and worry the problem will only get worse as consumers increase their shopping online. At the same time, major retailers such as Best Buy and Wal-Mart that sell goods both in stores and online argue that the decision gives their online-only competitors an unfair advantage by allowing them to sell items at a discount that is difficult to match.

“This is an issue of collection and fairness. Some retailers have to collect the tax from the consumer and some don’t, for the very same product,” Rep. Jackie Speier, D-Calif., told the House Judiciary Committee. “That’s just not fair.”

Speier has coauthored legislation with Rep. Steve Womack, R-Ark., that would authorize those states that implement a few tax-simplification measures to require online retailers to collect sales taxes from out-of-state customers. A handful of other bills aimed at addressing the issue also have been introduced, including a bipartisan Senate bill offered by Sens. Michael Enzi, R-Wyo., and Dick Durbin, D-Ill. Their measure would authorize states to require online retailers to collect sales taxes on remote sales if the states either sign on to a tax-simplification effort launched by a coalition of states, known as the Streamlined Sales Tax Project, or implement some tax-simplification steps outlined in the bill.

Supporters, particularly Republicans, have tried to spin the issue as a states’ rights issue and insist the legisalation would not impose a new tax but give states the right to collect taxes that are already owed by consumers.

“I am a Republican governor that does not believe in increasing taxes,” Gov. Bill Haslam, R-Tenn., said during Tuesday's hearing. “This discussion isn’t about raising taxes or adding new taxes. This discussion is about states having the flexibility and authority to collect taxes that are already owed by in-state residents.”

The continued budget woes of many states have prompted other governors, including conservatives such as Paul LePage, R-Maine, and Terry Branstad, R-Iowa, to call on Congress to address the problem.

A new report on the fiscal problems facing the nation’s biggest states says one of the drags is their inability to collect all the sales taxes owed from Internet sales. “States have limited authority to require collection of taxes owed on purchases made through the mail and, increasingly, over the Internet. As these sales grow, the size of the revenue deprivation will grow,” according to the report released earlier this month from the State Budget Crisis Task Force.

Estimates on how much states are losing in total each year from uncollected taxes on Internet and catalog sales range from the $11 billion cited in the task force report to the $18 billion figure given by the National Governors Association.

“It’s just getting closer to the tipping point,” former Sen. Byron Dorgan, D-N.D., said in an interview on Wednesday. Dorgan, who retired from the Senate in 2011, worked with Enzi for years to try to move Internet sales-tax legislation through the Senate without success. He pointed to the dire fiscal situation facing many states and the explosion in e-commerce as reasons why the issue finally has some momentum. “It has been a pretty heavy lift, but there’s a little more buoyancy now," he added.

In addition to budgetary woes facing the states, the issue has been propelled by a well-funded lobbying campaign by several groups that represent major retailers, including the International Council of Shopping Centers, the National Retail Federation, and the Retail Industry Leaders Association, which represents big-box stores such as Target and Lowe's. The effort also is backed by online retailing giant Amazon, which after years of fighting state efforts to force it to collect sales taxes says it favors a national solution to the issue.

Critics of the legislation acknowledge that this effort has paid off to some extent and that supporters have managed to shift momentum in their direction. This week's House Judiciary Committee hearing was the second the panel has held on the issue, and the Senate Commerce Committee is set to examine the topic at a hearing on Wednesday.

Earlier this month, Enzi and Durbin filed a modified version of their legislation as an amendment to a small-business tax-break bill, but the measure was blocked from coming to the floor for unrelated reasons. Durbin told National Journal last week that he and other supporters “wanted to raise the profile” of the issue and will be looking for other opportunities to move their legislation.

While NetChoice Executive Director Steve DelBianco, who has been critical of both the House and Senate bills, said that although he doesn’t believe Congress will pass net sales-tax legislation this year, “every Congress moves it further and further along.” He added, “The momentum and lobbying dollars just shine a brighter light on the issue, which gives Congress the opportunity to see that the [bills] don’t go far enough to simplify the crazy state sales-tax” rules.

Critics like NetChoice, which represents eBay, Facebook,, Yahoo, and others, and the Direct Marketing Association argue that none of the measures go far enough in forcing states to simplify myriad sales tax rates and rules. DelBianco said the bills should require states to set uniform definitions for what is subject to sales taxes and exempt remote sellers from having to file tax returns in all 46 states that levy sales taxes.

Critics also worry that the legislation would impose an unfair burden on small retailers, who they say are increasingly turning to the Internet to try to stave off competition from the big-box stores.

Internet powerhouse eBay has argued that the small-business exemption included in both bills is far too low. The Senate bill would exempt firms with national total remote annual sales of $500,000, while the House bill offers a $1 million threshold. The company has suggested that the Small Business Administration be tasked with setting the standard.

“A final bill that puts the same tax burden as the big guys have [on small businesses] will be bad for” small retailers, eBay’s senior director of federal government relations, Brian Bieron, said in an interview. “There needs to be a lot more knowledge among members that a lot of small businesses are using the Internet and those businesses are based … in their communities too.”

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