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US Congress Discusses Online Sales Taxes

by Mike Godfrey, Tax-News.com, Washington

27 July 2012


The United States House of Representatives Committee on the Judiciary has held a hearing to consider proposed legislation which would enable states to collect sales taxes from retailers who lack a physical presence in the state, and thereby, it is said, allow local 'Main Street' retailers to compete more effectively against out-of-state internet sellers.

Local 'brick-and-mortar' retailers are looked on, by some, 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 of up to 10% by collecting no state or local sales taxes.

Judiciary Committee Chairman Lamar Smith (R - Texas), in his introduction, noted that currently, under a US Supreme Court ruling, known as the ‘Quill’ decision, retailers are only required to collect sales tax in states where they also have brick-and-mortar stores. The burden falls to consumers, who are required to report to state tax departments any sales taxes they owe for online purchases on their tax returns (but only about 1% do so).

He pointed out that state and local governments view the taxes they cannot collect on most online sales as lost revenue. It is estimated that this ‘loophole’ will cost state and local governments an estimated USD24bn in lost tax revenue this year, with California alone expected to face USD1.9bn in uncollected sales taxes.

One of the sponsors of the proposed bill, Jackie Speier (D – California) said that “the failure of Congress to address this issue has led to more, not less confusion in the marketplace,” with some states resorting to attempted legislation, 'Amazon deals' or the interstate Streamlined Sales and Use Tax Agreement. At least 30 states have taken some action to try and increase their sales tax collections on online sales, she observed.

However, Smith added that, in the Supreme Court’s view, to force a retailer to collect and remit taxes to more than 9,000 state, county and local taxing jurisdictions throughout the country would place a serious burden on the retailer’s ability to sell in interstate commerce. “Quill’s bright-line ‘physical presence’ rule for tax collection,” he stated, “makes sense for small businesses that cannot afford to track and comply with 9,000 different tax codes as a cost of doing business throughout the country.”

The proposed bill, the ‘Marketplace Equity Act’, would replace the physical presence requirement with a requirement that state and local governments significantly simplify their tax policies if they want to collect sales taxes from out-of-state retailers. It also contains an exception from the tax collection duty for small e-retailers that do not have more than USD100,000 in remote sales in an individual state per year, or USD1m in sales nationally.

The bill would also require states that opt-in to the framework to provide technological tools and services cost-free to online retailers for them to comply and collect sales taxes.

Nevertheless, the Computer & Communications Industry Association (CCIA) has continued its opposition to tax legislation over online sales, as, with thousands of different state and local tax jurisdictions that online retailers would have to comply with, the bill would still “impose tax collection burdens on small internet businesses, which are some of the most promising candidates for future economic growth.”

CCIA President & CEO Ed Black said: “The assumption that having online retailers collect sales taxes would result in a fair balance is mistaken. The compliance burden of managing a complex system of multiple tax jurisdictions is not comparable to collecting at a physical store for just that one jurisdiction. If the burdens are different, it would only result in a new imbalance.”

“E-commerce has enabled businesses to broaden the scope of their activities beyond traditional geographic limitations. It is neither fair nor equitable to negate their achievements and place a compliance burden on online retailers for daring to utilize a new legitimate business model that does not fit well with a sales tax system based on physical location. We need policies that recognize the value of innovation and new business models like e-commerce, rather than penalizing and taking advantage of their creativity in the name of ‘fairness’ or ‘equity’.”

TAGS: compliance | tax | small business | business | sales tax | tax compliance | commerce | law | internet | e-commerce | legislation | United States | retail

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