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Devil’s in details of Internet sales tax


To hear supporters of a national law regarding taxing Internet sales tell it, the issue is one of simple fairness, to put online retailers and bricks-and-mortar stores on a level playing field.

But testimony at a House Judiciary Committee hearing on the issue in Washington this week suggests the devil will be in the details—and that it might take quite some time to work those details out.

The question of how—and whether—to tax online sales has been gaining attention in recent years as online sales have exploded.

Current rules, based on a years-old court ruling, bar states from collecting sales tax from retailers without a “physical presence” in their states.

That means most Internet retailers do not collect sales tax on their goods. Most states—including Virginia—require state residents to take the initiative to send the state the sales tax they should owe on purchases made on the Internet. But most people don’t do that.

This essentially makes many Internet purchases tax-free for customers, which makes it cheaper to buy something online. Retailers with physical stores, which do have to collect sales tax, say that gives online retailers an unfair advantage.

It’s those retailers, along with many states that would like to recoup the sales tax revenues they’re losing to online sales, who have been pushing for a change in the rules.

Such a change would be best done at the federal level, say groups on both sides of the issue, so that it would apply to all states and online retailers wouldn’t have to contend with different rule sets in the 45 states that impose a sales tax.

But how to do that fairly—when local governments in many states also charge sales taxes, when small online sellers don’t have the employees to track sales tax rules in different states—is an issue that, judging by the Judiciary hearing, is still unresolved.

The committee heard more than two hours of testimony—shown on C–SPAN—on one of several bills on the subject currently before Congress. This one, HR 3179, the Marketplace Equity Act, is sponsored by Rep. Steve Womack of Arkansas and Rep. Jackie Speier of California.

Speier said that Commerce Department numbers show that e–commerce has increased 300 percent over the past eight years, and is expected to nearly triple again over the next eight years, taking it to about $600 billion in economic activity. At that level, she said, e–commerce would outstrip bricks and mortar sales by 2020.

Those supporting the bill at the hearing—including the governor of Tennessee, a Republican—said passing a federal law on the matter would be good for all businesses and for states.

Utah state legislator Wayne Harper—who also said he was a Republican—called Internet sales taxes “one of the most challenging issues regarding state authority over their taxes.” He said that under the current system, “government is picking winners and losers.”

Harper also said he rejects arguments that this would be a new tax, since the sales tax already exists and simply isn’t being collected.

“How is paying a tax you now owe but are not paying a tax increase?” he said.

Others who testified, however, said requiring Internet retailers to collect sales tax and send it to different states will be a burden—and a new cost—to those retailers.

Steve DelBianco, of NetChoice, representing a group of catalog and mailer companies, said the bill “would authorize a uniquely complex new tax burden” for online and catalog retailers. He said a good bill on Internet sales taxes would include more simplifications of how such taxes should be paid and assessed.

“These tax fairness bills aren’t so fair after all, in that they would unmistakably create a new tax on America’s businesses,” DelBianco said.

The bill as proposed by Speier and Womack does have an exception for small retailers whose sales are less than $1 million (another bill has a $500,000 threshold) and lets states decide whether to apply a “blended” rate to online retailers that would include the state tax rate and an average of local rates.

Members of the committee had numerous questions for those testifying, and said the bill—and issue—need additional work.

Rep. John Conyers Jr. of Michigan, who said he’s been working on this issue for years, said he hopes both sides will help work on the bill.

“The bill isn’t perfect. Most bills when they’re finished are not perfect, much less when they start out,” Conyers said. “The fairness issue overrides everything we’re here for.”

Rep. Bob Goodlatte, R–Virginia, said he worried the legislation would actually provide more help to businesses outside the U.S., which still wouldn’t be subject to state sales taxes, and had issues with providing exemptions to small retailers, since small bricks-and-mortar stores aren’t exempt from sales taxes.

Some states, he said, are working together on a streamlined sales tax project, but other states haven’t agreed to it—and so, Goodlatte said, those states haven’t agreed to some uniformity for online interstate commerce taxation.

“I think we’re on a road toward making progress on cooperation but I don’t think we’re there yet,” Goodlatte said.

Chelyen Davis: 540/368-5028