What's Ahead in the Online Sales Tax Debate

By Kenneth Corbin
EcommerceBytes.com
April 29, 2013


After a week of inconclusive debate and considerable frustration vented on the Senate floor, lawmakers in the upper chamber have postponed a final vote on a controversial online sales tax bill, with Majority Leader Harry Reid announcing plans to put the Marketplace Fairness Act to a final vote May 6, when members return from a one-week recess.

That move follows a series of procedural votes last week to advance the measure, which the sponsors had hoped to vote out of the Senate before the break, but formal debate was stalled as opponents of the bill blocked consideration of amendments.

At the forefront of the opposition to the Marketplace Fairness Act was Democrat Max Baucus, the chairman of the Senate Finance Committee, who objected to the measure both on procedural grounds and out of concern for its impact on small businesses, particularly those in his home state of Montana, which has no sales tax.

"This bill should go through committee," Baucus said on the Senate floor, complaining that the legislation is riddled with problems that members and staffers could work through with the aid of a hearing and committee markup.

"You don't look for solutions on the floor of the Senate. You just make speeches," Baucus said. "This is a travesty the way this bill's being considered in the United States Senate."

He promised that, if given the chance, the Finance Committee would bring the bill to a markup in the next working period, with the presumption that some form of the legislation would be reported to the full Senate.

Backers of the bill countered that Baucus had plenty of time to give the online sales tax proposal a hearing in his committee, but did not.

Final passage appears likely, given the strong support senators showed for the Marketplace Fairness Act in its procedural votes last week, and a lopsided vote last month to include the measure as a nonbinding budget resolution.

The Obama administration has also weighed in with support of the bill, saying that it would "level the playing field for local small business retailers that are in competition every day with large out-of-state online companies."

The core provisions of the bill are not new, and have indeed been the subject of congressional consideration for more than a decade as some lawmakers have worked to close what they see as a tax loophole that unfairly benefits online retailers.

The bill would authorize state governments to require online sellers beyond their borders to collect and remit sales taxes for purchases their residents make, regardless of whether the merchant has a physical presence within the state.

At present, retailers generally only collect sales taxes for purchases made by customers in states where they are based or have a store, warehouse or some other permanent operation.

The taxes are still owed, but since they're not collected at the time of purchase, shoppers who live in sales-tax states are expected to keep track of their online purchases and report them with their annual state tax returns. Most people either don't know about that obligation or ignore it, which has resulted in billions of dollars of uncollected revenue for the states.

"It's really an honor system - that's what it comes down to. Though there's a legal obligation, there's no enforcement," said Dick Durbin (D-Ill.), one of the backers of the legislation. "Most people aren't aware of it."

The Marketplace Fairness Act has created a rift within the retail industry, with intense lobbying coming from both supporters and opponents. Online giant Amazon is a vocal advocate of the bill, as are trade groups like the National Retail Federation and the Retail Industry Leaders Association.

On the other side, eBay has been perhaps the most outspoken critic of the bill, warning that giving states the authority to compel online sellers to calculate and collect sales taxes in accordance with the rules of the nearly 10,000 state and local jurisdictions throughout the country would impose an inordinate burden that could put many out of business.

The Marketplace Fairness Act would require states to sign onto to a framework to simplify their tax codes before they can require out-of-state retailers to collect the taxes, and it would exempt businesses with less than $1 million in annual remote sales. But eBay CEO John Donahoe, making his case Tuesday in an op-ed in the Wall Street Journal, argued that the threshold for the exemption should be set at $10 million, echoing the message eBay delivered to thousands of users in a mass email last weekend.

"The trouble with the bill is that it treats mom-and-pop businesses the same way as it does multibillion-dollar retailers," Donahoe wrote. "Yet a small business with a dozen employees simply can't be lumped in with national behemoths such as Amazon and retail chains that have warehouses and stores around the country."

Sen. Mike Enzi (R-Wyo.), the lead sponsor of the bill, maintained that $1 million is a fair cutoff. He argued that retailers with sales higher than that mark should be able to manage the new tax obligations, and dismissed calls for elevating the exemption threshold to $10 million or even higher. "That's the big retailers who just don't want to do it," he said.

Durbin also noted that states that choose to adopt the tax-collection mandate would be required to distribute free accounting software to merchants to help them manage the taxes.

"This is free to the retailers, and it allows them to collect the sales tax and then remit the sale tax," Durbin said.

Aside from the potential burden for small businesses, the Marketplace Fairness Act came under fire from several senators representing states with no sales tax, including Montana's Baucus and Jeanne Shaheen, a New Hampshire Democrat.

"The businesses in my state of New Hampshire are going to be affected," Shaheen said, speaking in support of an amendment that would exempt sellers in tax-free states like hers. "This is a proposal that fundamentally violates state sovereignty. It enables one state to impose the enforcement of its laws on the 49 other states and territories without their approval."

The states-rights argument cuts both ways. While Shaheen, Baucus and other opponents see the Marketplace Fairness Act as an unreasonable incursion into their states' sovereignty - by pressing sales tax obligations into tax-free jurisdictions - supporters counter that the bill would create no new mandate, but rather give states new, voluntary authorities. (A 1992 U.S. Supreme Court ruling held that states could only collect sales taxes from retailers with a physical presence within their borders, but affirmed that the U.S. Congress could grant them that authority as a matter of interstate commerce.)

Transactions executed between merchants in tax-free states like New Hampshire and residents of those states would remain tax-free under the Marketplace Fairness Act. But if an online retailer based in New Hampshire (or any other state) wanted to sell to a consumer in Illinois, Durbin's home state, the seller would be responsible for collecting and remitting the sales tax.

"My answer to that is if you want to do business in Illinois," Durbin said, "you have to play by Illinois' rules."

Senators also raised questions about the bill's effect on sales executed between overseas retailers and U.S. buyers. Christina Mulka, a spokeswoman for Durbin, clarified that foreign sellers would be held to the same sales-tax collection requirements as U.S. merchants under the bill.

"The Marketplace Fairness Act treats foreign corporations the same as it does domestic corporations. All online retailers that make over $1 million in remote sales, regardless of where the retailer is located, must collect and remit sales tax to states that require it," Mulka wrote in an email. "States currently have and exert tax jurisdiction over foreign companies. In fact, states collect different types of taxes from foreign companies, even when those companies are exempt from federal taxation."

About the author:

Kenneth Corbin is a freelance writer based in Washington, D.C. He has written on politics, technology and other subjects for more than four years, most recently as the Washington correspondent for InternetNews.com, covering Congress, the White House, the FCC and other regulatory affairs. He can be found on LinkedIn here.




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