Members of the Senate Commerce Committee Wednesday considered a bill that would grant states the authority to require online retailers to remit sales taxes on purchases shipped to their residents, even if the seller had no physical operations within that state.
Backers of the Marketplace Fairness Act argue that the measure is necessary to put brick-and-mortar sellers back on the same playing field as their online counterparts. They are quick to point out that online purchases are currently subject to taxation in states that have a sales tax, but most consumers either aren't aware of their obligation to pay or ignore it.
"This isn't a new tax. This is a tax that is already owed. The bill doesn't tax Internet use. The bill doesn't tax Internet service. The bill doesn't raise taxes. It collects what's owed by the purchasing individual," said Mike Enzi (R-Wyo.), the sponsor of the bill.
Under the current framework, codified in a 1992 U.S. Supreme Court ruling, online sellers without a physical presence in a state such as a warehouse or a call center cannot be compelled to collect taxes on purchases there, though several states have advanced novel measures in an effort to force the collection issue. The high court ruled that the issue is a matter of interstate commerce, so only the U.S. Congress could modify the physical presence requirement.
The general absence of a collection requirement on retailers has meant that states are losing out on a significant and growing supply of tax revenue as the Internet accounts for an ever-larger share of retail activity.
"State and local governments are losing billions," said Commerce Committee Chairman John Rockefeller (D-W.V.), a co-sponsor of the measure. Rockefeller warned that if states are not permitted to mandate the collection of the sales taxes, they will seek other avenues for boosting revenue, such as raising income taxes or property taxes. "That doesn't seem like the right solution to me," he said.
As of Wednesday afternoon, the Marketplace Fairness Act had 19 co-sponsors, several of whom serve on Rockefeller's committee. But support for the bill is not unanimous. In the industry, for instance, eBay has emerged as a vocal opponent, arguing that the measure would create complex new burdens for small sellers.
Meantime, some conservative lawmakers have protested against the bill for effectively levying an additional tax burden on small sellers with a Web presence. South Carolina Republican Jim DeMint suggested that the bill would create a double standard by saddling online sellers with a more complex tax calculation than their brick-and-mortar counterparts, which only have to keep track of the tax code for the area where are physically located.
"We talk about fairness, but we don't require bricks-and-mortar retailers to collect taxes based on where [their customers are] from," DeMint said. "I think what we're trying to do here is suggest that all these different business models [are] the same."
Moreover, he warned that the bill, by giving tax authorities greater jurisdiction over out-of-state businesses, could pose a troublesome threat to individual state sovereignty.
"We've got a precedent that we're establishing here that's going to open a door that we're all going to regret," he said.
In practice, the bill contains no federal mandate, but rather would authorize states to implement the tax collection requirement only after they took certain steps to simplify their tax codes. The choice of whether to do so or not would be left up to the states.
But critics counter that the simplification provisions included in the current version of the bill would still leave an overly complex patchwork of tax codes that would be prohibitively expensive for small businesses to navigate. Steve DelBianco, executive director of NetChoice, an advocacy coalition that opposes the bill, called it "token simplification."
"This legislation lets state impose their tax disaster on businesses in your state," DelBianco told the lawmakers.
DelBianco also took issue with a carve-out for small businesses in the bill that would exempt sellers with less than $500,000 in annual sales from collecting the taxes. A similar bill pending in the House sets the threshold for the exemption at $1 million.
But DelBianco was alone among the witnesses in opposing the bill. Supporters, including Steven Bercu, co-owner of a small book store in Austin, Texas, who voluntarily collects sales taxes on purchases shipped to other states, said that he uses an automated software program to calculate the appropriate amount in each tax jurisdiction.
"Collection has become radically simpler with new and cheaper software," Bercu said.
But once it was DelBianco's turn to testify, he produced a poster depicting a screen shot detailing a purchase he had made from Bercu's store earlier that day. The merchant had collected sales tax at the rate in Austin, rather than Virginia, where DelBianco's purchase was to be shipped.
Bercu could not explain the apparent error, and said he would inquire with the provider. Nevertheless, he pointed out that under the bill, retailers using tax software that their state had certified would enjoy a liability shield should the program error in its calculations.
Kenneth Corbin is a Washington, D.C.-based writer who covers government and regulatory issues for CIO.com.