Online Sales Tax Law Closer To Reality?

    March 26, 2013
    Chris Crum

Last week, Senators Mike Enzi and Dick Durbin were accused of trying to “sneak” through legislation similar to the controversial Marketplace Fairness Act as a budget amendment. They succeeded in getting that through the Senate.

The basic premise of the legislation is that it would enable state governments to collect sales tax from online retailers that don’t reside in their state for purchases from residents in their states. As previously noted, the main difference between the actual Marketplace Fairness Act and what was just passed in the Senate, is that the amendment doesn’t include mandatory simplification, and is non-binding. Still, supporters of the Marketplace Fairness Act are considering it a win.

Would such a law be good for businesses? For consumers? Share your thoughts.

CNET’s chief political correspondent Declan McCullagh put it well: “It appears to be intended as a clever political hack: secure plenty of votes on a non-binding Internet tax amendment, then use those vote totals to argue there’s sufficient support for S.336 when it’s up for a binding vote later.” This is a sentiment shared by opponents of the legislation, such as eBay.

Wired quotes Durbin as saying, “Today’s vote proves that an overwhelming majority of Senators support this bipartisan legislation to level the playing field for brick-and-mortar retailers.”

It’s important to note that the Senate didn’t just vote on this issue. It was only one of many amendments to the bigger budget proposal, so it’s hard to say how much real support there was for this legislation itself.

Chris Morran at The Consumerist said on the day the vote took place, “The amendment is one of numerous budget amendments being put before the Senate and passed late Friday afternoon by a vote of 75 to 24. If that number maintains through the voting process on the actual Act, it means that opponents would not have the numbers to force a filibuster. However, it is worth noting that today’s vote does not bind the senators to voting the same way if and when the Act comes up for debate.”

The Alliance for Main Street Fairness, a coalition supporting the Marketplace Fairness Act, shared some reactions to the vote from small business owners:

“It’s about time small business owners like me got some good news from Washington,” said Tee Miller, owner of Black Mingo Outfitters in Georgetown, South Carolina. “Now that the Senate has voted in support of the Marketplace Fairness Act, it’s time for Congress to act quickly and pass this much-needed legislation so I can finally compete fairly with online-only retailers who have enjoyed an unfair price advantage for far too long. Thank you, Senator Graham for showing South Carolina retailers and small businesses your support.”

“I want to applaud Senator Jerry Moran for standing up for Main Street businesses by voting in favor of the Marketplace Fairness Act,” said Wayne DeBey, owner of The Floor Nook in Salina, Kansas. “Today’s vote is a good step toward providing a level playing field for our small businesses and the thousands of retailers across Kansas. It’s important that we promote competition and fairness in the marketplace by closing the online sales tax loophole.”

“Thank you to all of the Senators who showed their support for e-fairness today – and especially to Senators Sherrod Brown and Rob Portman for siding with Ohio’s small business owners,” said Jayson Waits, owner of Bloomtastic Florists in Columbus, Ohio. “Small businesses are the economic backbone of our communities, and when Congress closes the Internet sales tax loophole these businesses will finally have the chance to compete on a level playing field with online-only retailers. It is crucial that fairness and competition are promoted in the marketplace and Ohio took a big step toward in that direction today.”

“Today, Senators Warner and Kaine voted with Virginia’s local businesses to close the online sales tax loophole,” said Sarah Pishko, owner of Prince Books in Norfolk, Virginia. “Their vote in support of the Marketplace Fairness Act is the first step to ensure taxes are applied fairly and government isn’t picking winners and losers by making some businesses collect taxes while others get a free pass. I want to thank them on behalf of Virginia business owners for voting to support Main Street.”

The coalition itself calls the vote a “win” on the Marketplace Fairness Act. Again, this topic was only one of many amendments.

R Street, a Washington-based think tank, has an open letter to Congress calling for opposition to the Marketplace Fairness Act (via Forbes). It was written earlier this month, before the vote. Here’s a sample from that:

Despite what some supporters claim, this legislation is bad news for conservative principles and the cause of limited government. It would dismantle proper limits on state tax collection authority while causing serious damage to electronic and interstate commerce.

S. 336 would countenance an enormous expansion in state tax collection authority by wiping away the “physical presence standard,” a baseline protection that shields taxpayers from harassment by out-of-state collectors. Current law dictates that a state can only require a business to collect its sales tax if it is physically present within its boundaries. Far from a “loophole” intended to advantage the Internet, it is the result of a Supreme Court decision grounded in a bedrock foundational principle of tax policy: states must not be allowed to extend their taxation and regulatory authorities beyond their borders. Dismantling this protection for remote retail sales would create a very slippery slope for states to attempt collection of business or even income taxes from out-of-state entities.

Furthermore, the bill would create a decidedly “unlevel” playing field between brick-and-mortar and online sales. Brick-and-mortar sales across the country are governed by a simple rule that allows the business to collect sales tax based on its physical location, not that of the item’s buyer. Under the “Marketplace Fairness Act,” that convenient collection standard would be denied for online sales, forcing remote retailers to interrogate their customers about their place of residence, look up the appropriate rules and regulations in thousands of taxing jurisdictions across the country, and then collect and remit sales tax for that distant authority.

Imposing this unworkable collection standard on remote retail sales but not on brick-and-mortar retail sales would not only be unfair, it would result in enormous complexity while damaging interstate commerce. Online sellers would be weighed down by substantial compliance burdens associated with the existence of over 9,600 separate taxing jurisdictions, each with its own unique definitions, holidays, and rates. The bill’s paltry “small seller exception” of just $1 million (when the Small Business Administration sets the limit as high as $30 million in some cases) in remote sales does little to mitigate the damage.

In addition to R Street, it has signatures from American Commitment, Americans for Prosperity, Americans for Tax Reform, Campaign for Liberty, Center for Freedom and Prosperity, Center for Individual Freedom, Competitive Enterprise Institute, Digital Liberty, FreedomWorks, The Heartland Institute, Institute for Policy Innovation, Less Government, National Taxpayers Union, Rio Grande Foundation and Taxpayers Protection Alliance.

If it becomes law, the Marketplace Fairness Act would only allow states to determine whether or not they want online businesses to collect tax. It would not require states to collect sales tax from online businesses. Either way, it’s going to amount to more taxes for online shoppers. Some believe it’s unlikely that it will make it to law given the fierce debate.

Should this become law? Do you think it will? Let us know what you think in the comments.


Chris Crum
Chris Crum has been a part of the WebProNews team and the iEntry Network of B2B Publications since 2003. Follow Chris on Twitter, on StumbleUpon, on Pinterest and/or on Google: +Chris Crum.