Online Sales Tax Effort Gains Momentum

House lawmakers this week revisited the contentious issue of establishing new provisions for states to collect sales taxes on purchases residents make online from out-of-state retailers as they considered a legislative proposal that has drawn sharp divisions even within the ecommerce community.

At a hearing before the Judiciary Committee, many members on both sides of the aisle expressed support for the Marketplace Equity Act, a measure backed by Reps. Steve Womack (R-Ark.) and Jackie Speier (D-Calif.) that would authorize states to begin requiring Internet retailers to remit sales taxes on purchases shipped to their jurisdiction, provided that they take steps to simplify their tax codes.

Supporters of the measure claim that imposing the same requirements to pay sales taxes that brick-and-mortar retailers face on their online counterparts would level the competitive playing field, arguing that at present many shoppers prefer to make their purchases online simply to avoid paying the tax.

“I think the bottom line is simply this: Tax-free sales on the Internet may be coming to an end. And this could mean a very large boost in revenue. I think it would help the economy. And I suggest it would probably also help by creating more jobs,” said John Conyers (D-Mich.), the ranking member on the panel. “Competitors should compete on things other than sales-tax policy. So for those arguing for more of a free market, they should support eliminating any competitive advantage based on sales-tax policy.”

Conyers announced at Tuesday’s hearing that he was throwing his support behind the Womack-Speier bill over an alternative measure that he had introduced to expand states’ sales-tax collection authorities, and he urged co-sponsors of his legislation to do the same.

As of Tuesday, 48 co-sponsors had lined up behind the Marketplace Equity Act.

The issue of online sales taxes has been muddied to some extent by a confusion of terms. Opponents of legislation to impose the remittance obligation on ecommerce vendors have often characterized such efforts as establishing a new tax. But people who live in states with sales taxes are currently required to pay taxes on purchases that they make online when that tax is not collected at the time of purchase, but most shoppers either don’t know about that requirement, known as use tax, or they ignore it. As a result, an estimated $20 billion of revenue goes uncollected by the states each year.

Only one witness at Tuesday’s hearing, Steve DelBianco, the executive director of NetChoice, a coalition of businesses and trade groups opposing online sales-tax requirements, claimed that the bill under consideration would amount to a new tax.

“It is absolutely a new tax,” said DelBianco, arguing that to shift the onus of collection from the states, where it currently resides, to businesses would amount to a significant new burden, posing the greatest harm to smaller sellers. DelBianco argued that redesignating use-tax obligations as sales taxes would indeed constitute a new tax.

eBay, a member of NetChoice, has been one of the staunchest opponents of the various sales-tax proposals that have emerged in the U.S. Congress, pitting the auction pioneer against Amazon, which has been lobbying in favor of a national sales-tax framework over the numerous state-level measures that legislatures have advanced in an effort to address the tax shortfall.

Like other critics of federal sales-tax laws, eBay has argued that the complexity of the more than 9,600 state and local tax codes would pose a formidable administrative and compliance burden on the smaller sellers that populate its marketplace.

The various proposals on the table include steps to address those concerns, but opponents say they do not go far enough. For instance, the bill the Judiciary Committee considered on Tuesday would require states to streamline their tax systems under a single tax authority with one statewide sales and use-tax return for remote online sellers. It would also carve out an exemption for smaller vendors with less than $1 million in annual revenue.

In a statement, eBay called the exemption “extremely inadequate,” a refrain echoed by other tech stakeholders.

“We are disappointed that the continued effort to increase the burdens on online retailers is once again rearing its ugly head,” TechAmerica President and CEO Shawn Osborne said in a statement. “Unfortunately, an Internet sales tax, which is what this bill would [proposes], is a step backwards that would only hinder our economic recovery.”

A similar bill to the Womack-Speier measure in the Senate includes a stingier small-seller exemption of $500,000 in annual revenue.

Supporters of new sales-tax collection requirements argue that such measures are necessary to correct a competitive disadvantage that brick-and-mortar retailers face or to address the significant budget shortfalls that states are facing by enforcing a law that is already on the books.

They cite the emergence of new software applications that can help businesses automate the assessment and collection of the taxes. Opinions vary widely on the cost and effectiveness of those programs, however.

“It’s expensive,” said Joseph Henchman, vice president at the Tax Foundation, a Washington research group. “Now that may change as technology goes forward, but of course the simpler we make sales-tax systems by setting federal standards, the cheaper [the software will be].”

Henchman pointed out that even if the tax rates within states were harmonized — the trigger for the collection authority in the Womack-Speier bill — numerous other complicating factors could remain, such as tax holidays and different classifications of the same good in various jurisdictions that impact tax rates.

Womack pointed to a provision in the bill that would direct participating states to provide the tax-software to affected merchants, and other lawmakers suggested that the measure could incorporate language directing states to compensate sellers for the administrative costs of collecting the taxes, as some already do for brick-and-mortar retailers.

Kenneth Corbin is a Washington, D.C.-based writer who covers government and regulatory issues for CIO.com.

Follow everything from CIO.com on Twitter @CIOonline, on Facebook, and on Google +.