Minimal Fanfare, Much Controversy, Surround Federal Online Tax Proposal

Minimal Fanfare, Much Controversy, Surround Federal Online Tax Proposal
August 17, 2011

On the sweltering Friday afternoon of July 29, all of Washington and most of the nation was fixated on the political drama over raising the federal debt ceiling.

Few may have noticed that same afternoon also marked U.S. Sen. Dick Durbin’s (D-IL) introduction of the Main Street Fairness Act (S. 1452), which would give the federal government’s backing to the Streamlined Sales and Use Tax Agreement (SSUTA). This compact would empower lower-level governments to collect sales taxes from online retailers that have no physical presence in their state. The House companion is H.R. 2701, written by Rep. John Conyers (D-MI).

Supporters Cite Competition

Supporters of S. 1452 and H.R. 2701 argue “brick and mortar” stores cannot compete with online and mail-order outfits unless these operate under the same tax regime that traditional stores do.

“Consumers shouldn’t have to face the burden of reporting all of their online purchases,” Durbin said. “Main Street retailers collect sales taxes on behalf of consumers, why shouldn’t online retailers do the same?” The SSUTA must clear some hurdles to make that happen.

The U.S. Supreme Court has held (in Bellas Hess v. Illinois and Quill v. North Dakota) that previous attempts at forcing businesses to remit taxes from “remote sales” (such as out-of-state mail order and Internet purchases) are unconstitutional.

Opponents Cite Extra Burdens

Opponents of the bill bring additional challenges. For one, critics contend, the Main Street Fairness Act places a bigger burden on online retailers than on standard retail businesses. Instead of one set of sales taxes to collect like a brick and mortar establishment, online firms could face compliance with as many as 15,000 different tax rates. Furthermore, though the Durbin/Conyers bill allows for a “small sellers” exemption, the terms of this protection would be left to the administrators of SSUTA.

eBay is one critic of the bill, and is not impressed with the exemption: "The small seller exception in the Internet Sales Tax bills offers no real protection to small businesses; instead it tips the balance away from small business innovators and entrepreneurs that use technology to challenge the retail status quo and serve consumers in new ways,” said Brian Bieron, eBay’s senior director of federal government relations and global public policy. “Preserving the core principle that businesses and consumers owe tax duties to governments where they live and work will keep the Internet open to ecommerce innovation at all levels, benefiting consumers and small business job creators."

Opponents also point to the variety of taxes online sales already face. Retail remote sales are subject to “use tax” on the part of the purchaser, while sales tax is already remitted on Internet transactions between a buyer and seller in the same state, which is not uncommon in places such as California and Texas.

Both Bricks and Clicks

In addition, the “click and mortar” model, where large firms such as Target and Wal-Mart allow online shoppers to make returns and exchanges at retail outlets, meets the physical presence test and therefore incurs sales tax obligations. Online businesses and customers also pay many traditional levies such as property, profit, and payroll taxes, plus certain levies that don’t hit conventional stores as hard (such as fuel taxes associated with shipping orders to recipients).

But critics’ greatest worry about the Main Street Fairness Act is its chilling effect on the “laboratory of the states,” in which governments’ tax policies beneficially compete with each other.

“This legislation could provide cover for high-tax states, whose political powers-that-be refuse to provide their constituents with an economic climate that would allow businesses to flourish and jobs to be created,” said National Taxpayers Union Executive Vice President Pete Sepp. “Overspending, not undertaxing, is the primary cause behind state and local budget shortfalls.”

Alternatives include programs to inform customers of use tax obligations (as in Alabama), which have met with success while avoiding punitive new collection burdens. H. Res. 95 would affirm Congress won’t give states the authority to impose any new burdensome or unfair tax collecting requirements on small online businesses. The heated battle over this legislation will determine which approach wins out.

Douglas Kellogg (dkellogg@ntu.org) is communications manager for the National Taxpayers Union.