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Internet sales tax bill key part of state transportation plans


RICHMOND—One of the biggest funding sources in Gov. Bob McDonnell’s transportation plan relies on an unpassed bill that no one in Virginia government has power over.

It’s the federal Marketplace Equity Act, one of several bills in Congress that would allow states to start collecting sales tax on Internet sales.

Although the bills haven’t been passed by Congress, McDonnell hopes they will be and wants to pre-emptively direct more than $200 million in a year in anticipated tax collections toward state transportation needs. Over five years, his administration believes, collecting sales tax on Internet sales could generate more than $1 billion for state transportation needs alone.

Without that federal law, the other components of McDonnell’s plan provide about $600 million a year, rather than the $844 million he anticipates by 2018.

So what would it do? And why can’t the state collect that sales tax now?

Many states, including Virginia, have laws requiring residents to count up and send to the state the sales tax they would owe on items they buy online.

But that honor system doesn’t work very well. Most people don’t pay that sales tax, and states like Virginia would far prefer to have online retailers collect the tax themselves at the time of purchase, and send the money to the state.

Current rules, based on a years-old court ruling, bar states from collecting sales tax from retailers without a “physical presence” in their states. 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 the sales tax, say that gives online retailers an unfair advantage.

The federal bills would essentially repeal the court ruling.

Bricks-and-mortar retailers have been pushing that for years, while online retailers have resisted. Amazon, after all, doesn’t benefit from sales tax paid by a customer from Maine.

Also, online retailers have argued, 45 states impose a sales tax, with varying rules and rates, and local governments in many states also charge sales taxes.

How to resolve that problem is one reason why the bills in Congress haven’t passed yet, despite pressure from state governors—like McDonnell—who want to more easily collect those millions of dollars in unpaid taxes. Last month, according to, the National Conference of State Legislatures held its first single-issue lobbying day, sending hundreds of state legislators to Congress to push for online sales tax collection legislation.

McDonnell, in introducing his transportation proposal with the federal bill wrapped into it, said he is hopeful that Congress will pass a bill on the issue, and McDonnell staffers said they’ve heard positive indications from Washington about the legislation’s future.

There’s now a new Congress, and increasing pressure from states and retail groups to do something. But the concept is complicated, and while it could become part of a larger discussion of tax reform, the issue is by no means settled. Questions about how to keep sales tax requirements from burdening small sellers and how the mechanics of collection would work will still have to be answered before a bill is passed in Congress.

Chelyen Davis: 540/368-5028