House Looks for Best Way to ‘Level the Playing Field’ With Online Sales Taxes

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Alex Brown
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Alex Brown
March 12, 2014, 10:40 a.m.

Tax law­yers and House mem­bers wrestled with how to best tax pur­chases made over the In­ter­net on Wed­nes­day, mulling such op­tions as levy­ing taxes based on the re­tail­er’s loc­a­tion in­stead of the pur­chaser’s ad­dress.

Ju­di­ciary Com­mit­tee Chair­man Bob Good­latte star­ted by de­clar­ing that the Mar­ket­place Fair­ness Act the Sen­ate passed last year — which au­thor­izes states to com­pel on­line busi­nesses to pay sales taxes — is a non­starter in the lower cham­ber. He went on to say he wants to start “win­now­ing down” al­tern­at­ive pro­pos­als to put on­line re­tail­ers on an even foothold with brick-and-mor­tar stores.

Cur­rently, tax laws re­quire busi­nesses to have a phys­ic­al pres­ence in a state to col­lect sales taxes on pur­chases made there. Good­latte ac­know­ledged loc­al busi­nesses could be hurt as con­sumers take their shop­ping on­line to avoid pay­ing sales tax.

“Many ar­gue that un­fair sales-tax laws are con­trib­ut­ing to [the de­cline of tra­di­tion­al re­tail­ers],” the Vir­gin­ia Re­pub­lic­an said. “The com­mit­tee is sym­path­et­ic to the plight of tra­di­tion­al re­tail­ers. It is ser­i­ous about search­ing for a solu­tion that the vari­ous parties can ac­cept.”

Good­latte did not lay out a timeline for le­gis­la­tion, but Demo­crats urged quick ac­tion.

“This is­sue is a prime op­por­tun­ity for all of us to work in a bi­par­tis­an basis on le­gis­la­tion,” rank­ing mem­ber John Con­yers said. “But it is im­per­at­ive that we do so this year.”

The Michigan Demo­crat said he would have pre­ferred to mark up the Sen­ate bill, but was pleased the is­sue was be­ing ad­dressed.

Op­pon­ents to the Sen­ate bill have ar­gued it would bur­den on­line re­tail­ers with meet­ing tax re­quire­ments for the coun­try’s nearly 10,000 tax­ing jur­is­dic­tions, and the tax law­yers who spoke Wed­nes­day said their op­tions would solve that con­cern.

One al­tern­at­ive — ori­gin sourcing — would levy state sales taxes based on the re­tail­er’s loc­a­tion rather than the pur­chaser’s ad­dress.

“Simply treat­ing re­mote sales in the same way that we already treat brick-and-mor­tar sales would level the play­ing field in an hon­est way,” said the R Street In­sti­tute’s An­drew Moylan.

De­tract­ors said such a pro­pos­al could set off a “race to the bot­tom,” caus­ing re­tail­ers to rush en masse to es­tab­lish loc­a­tions in the five states that don’t cur­rently col­lect sales tax. Oth­ers ar­gued for keep­ing con­sumers’ tax con­tri­bu­tions loc­al.

“If I buy something in Wash­ing­ton, I don’t want to pay Wash­ing­ton,” said Re­pub­lic­an Rep. Spen­cer Bachus of Alabama. “I want to pay where my kids go to school.”

An­oth­er pro­pos­al floated by the Si­mon Prop­erty Group’s Wil­li­am Moschella would simply ban trans­ac­tions that don’t meet the sales-tax laws of the state to which the product is shipped.

Oth­ers touted the Stream­lined Sales Tax Pro­ject, a 24-state ef­fort to make sales taxes sim­pler and more uni­form in or­der to pave the way for a na­tion­wide on­line sales tax.

Con­sumers are tech­nic­ally ob­lig­ated to pay a use tax on sales-tax-free on­line pur­chases, es­sen­tially giv­ing their state gov­ern­ment an equi­val­ent amount. But few­er than 2 per­cent of on­line shop­pers pay the tax, and some es­tim­ates peg the lost rev­en­ue to state gov­ern­ments at $23 bil­lion. Many gov­ernors have ex­pressed a de­sire to col­lect that ex­tra cash flow, and some have pledged a re­duc­tion in oth­er taxes if on­line sales tax rev­en­ues start rolling in.

Mean­while, tra­di­tion­al re­tail­ers have backed the Sen­ate bill, as has Amazon — which has an in­creas­ing foot­print as it ex­pands its ware­houses in­to more states. EBay has led much of the op­pos­i­tion to le­gis­la­tion.

The chief is­sue raised by op­pon­ents is the dif­fi­culty for on­line re­tail­ers — es­pe­cially smal­ler ones — in cor­rectly as­sess­ing sales tax for buy­ers all over the coun­try. Com­pli­ance is­sues could lead to out-of-state audits and cause ex­pens­ive lit­ig­a­tion for re­tail­ers, some mem­bers said.

Ad­voc­ates said those con­cerns are over­blown, re­spond­ing that simple soft­ware could make com­pli­ance easy. But that didn’t sat­is­fy some Re­pub­lic­ans, who said the Af­ford­able Care Act’s rocky rol­lout has made them leery of gov­ern­ment-touted soft­ware fixes. “We can’t com­pute our way out of a pa­per bag,” said Re­pub­lic­an Rep. Blake Far­enthold of Texas.

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