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.