US Congress Grapples With Online Sales Tax Quandary

by Mike Godfrey, Tax-News.com, Washington

02 December 2011

The United States House of Representative’s Committee on the Judiciary held a hearing on November 30 on the limitations on states’ authority to collect sales taxes on e-commerce, and received conflicting advice from such internet businesses as Amazon.com and eBay Inc.

Local main street retailers are looked at as having a competitive disadvantage because they must collect sales taxes at the point of sale, while out of state retailers give their customers an effective discount by collecting no state or local sales taxes. However, several states are seeking to 'level the playing field' (and replenish their coffers) by passing laws which deem an out-of-state company to be an in-state company for sales tax collection purposes if the company receives commissioned referrals from in-state resident "affiliates".

Judiciary Committee Chairman Lamar Smith (R - Texas), in his introduction, noted that the US Constitution grants Congress the exclusive power to regulate interstate commerce. A state may not unduly burden interstate commerce – a principle commonly referred to as the “dormant commerce clause”. As applied to state tax policy, the dormant commerce clause prohibits a state from taxing a person with whom it lacks a “substantial nexus".

In tax terminology, “nexus” refers to the relationship between the taxing authority and the taxpayer; and, in its 1992 decision in Quill Corporation vs. North Dakota, the Supreme Court held that, at least for purposes of collecting sales tax, a state lacks substantial nexus over a taxpayer that has no physical presence in the state; which is usually construed as a retailer having a brick-and-mortar store in that state.

Smith added that, in its decision, the Supreme Court was concerned with burdens to America’s small businesses. It reasoned that, without a physical presence rule for nexus, thousands of state and local taxing jurisdictions across America - each with their own unique tax bases and rates - would use vague concepts like “economic nexus” to impose sales tax collection requirements on businesses.

However, bills have already been launched in both the Senate and the House of Representatives to require online retailers to collect sales taxes. It is estimated that, in 2012, states across the country will lose as much as USD24bn in uncollected state and local taxes on internet and catalogue sales.

Proposed legislation would provide states who choose to use it with the clear authority to require retailers to collect sales taxes already owed; require a list of simplification requirements to ease administrative burdens for sellers; exempt small businesses from collecting sales taxes; compensate online retailers for startup administrative costs associated with collecting the taxes; and release consumers from their existing sales tax remittance obligations.

One of those bills, introduced in both the House and the Senate, has received support from Amazon, the largest online retailer in the US. In a previous letter to the Senate, its Vice President for Global Public Policy, Paul Misener, wrote that the company “has long supported a simple, nationwide system of state and local sales tax collection, even-handedly applied to all sellers, no matter their business model, location, or level of remote sales”.

In his testimony to the Judiciary Committee, Misener reiterated that “Amazon strongly supports enactment of a federal bill with appropriate provisions”, but that the company “has steadfastly opposed state attempts to require out-of-state sellers to collect, absent congressional authorization. Congress should authorize the states to require collection, with the great objects of protecting states’ rights, addressing the states’ needs, and levelling the playing field for all sellers".

Therefore, while “much attention has been paid to the size of a ‘small seller exception’ threshold in federal legislation, such a threshold, which would exempt some sellers from a collection requirement, must be kept very low to attain the (legislation’s) objectives”, Misener said.

His testimony was, however, in direct contradiction to that of Tod Cohen, Vice President and Deputy General Counsel, Government Relations, of eBay, who noted that data shows that in-store retail will represent 93% of all retail in 2012, with online retail taking just 7%, and that nearly 45% of in-store sales are web-influenced, as most large retailers operate a stores, internet and technology services.

“The world of retail is bigger than remote state sales taxes,” he stated. “When you think big picture, the higher shipping costs alone often tip the balance away from smaller retailers. There are also many direct tax benefits enjoyed by the largest retailers that never flow down to their small business competitors. These include state and local property tax breaks and sales tax exclusions.”

“Do those who want a “level playing field” demand that all small business retailers get the same tax credits, the same sales tax exclusions and the same shipping rates?” he asked. “If and when they do, we will be the first to endorse changing Quill and lifting the prohibition against remote sales tax collection and remittance.”

He concluded that, currently, a change in law “would mean that consumers would face a new tax cost on goods purchased from small remote retailers, but the consumer would not gain benefits tied to presence. This means that the shopper will be less likely to buy from small retailers on the internet. This is why these bills are anti-small business.”

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