Tax experts urged a Senate panel on Wednesday to close a loophole that allows some online retailers to avoid collecting sales taxes, saying Congress needs to step in to ensure that states can collect all the taxes they are owed.
States have been asking Congress for years to close a loophole created by a 1992 Supreme Court decision that found states can’t require retailers to collect sales taxes from customers in states where the stores have no physical presence. The Senate Finance Committee examined the issue as part of a broader hearing focused on federal tax proposals that affect the states.
“As more sales get done on the Internet … I think state and local governments are going to be at a disadvantage, and so congressional action to help coordinate this seems like a no-brainer,” Kim Rueben, a senior fellow at the Tax Policy Center, told the committee.
Sanford Zinman, a New York accountant who testified for the National Conference of CPA Practitioners, agreed. “There is a strong need for federal oversight of state sales and use taxes to ensure all states are able to collect proper tax revenue,” he said.
Many brick-and-mortar retailers complain that they are losing business to Internet retailers who can offer their products at a discount because, in many cases, they don't have to collect sales taxes. States note they are losing billions of dollars a year in uncollected taxes from Internet sales, a problem they say will get worse with the growth of e-commerce.
A handful of bills have been introduced in Congress to close the loophole, including a Senate measure offered by Sens. Michael Enzi, and Dick Durbin, D-Ill., that would authorize states that meet certain criteria to require online retailers to collect sales taxes from out-of-state customers.
The issue has divided tech firms. After opposing efforts by some states to try to close the loophole on their own, Amazon last fall endorsed the Enzi-Durbin bill, while eBay and Overstock.com are among the leading opponents.
Sen. Ben Cardin, D-Md., a cosponsor of the Enzi-Durbin bill, chided critics who say the bill would burden online firms by requiring them to comply with the thousands of different tax rates and policies across the country. Cardin noted that under the Enzi-Durbin bill, states would have to provide online retailers with free software to help them comply with differing state tax rates.
“This is being used as an excuse for inaction,” he said. “It’s not a problem that can’t be overcome.”
Tax Foundation Vice President Joseph Henchman argued that Congress must do more to push states to simplify their tax rates. He said that even an organization such as his own that is focused on tax issues has a difficult time tracking state tax changes. “It’s not an excuse for inaction,” he said. “It’s excuse for the right kind of action.”
Meanwhile, Sens. John Thune, R-S.D. and Ron Wyden, D-Ore., made a plug for their bill that would set rules for which states are allowed to tax digital goods such as music downloads or mobile applications.
Wyden also urged action on his wireless tax legislation, which would impose a five-year moratorium on new state or local taxes on wireless services unless those taxes are also imposed on other goods and services. He noted that mobile-phone services are taxed at much higher rates in many states than other goods and services.
“We have smartphones and dumb tax policies,” Wyden said.