Why a national online sales tax may not pass
If you start seeing new taxes on your online purchases, it’s not a mistake. States are asking some web sellers to collect taxes, despite a Supreme Court ruling. But the issue is far from settled in Congress and the courts.
The giant online retailer Amazon is in the process of charging Internet shoppers in some states for sales and use taxes for products purchased online, based on where they live.
Amazon is voluntarily charging the taxes as part of an agreement with some state governments in an effort to avert lengthy litigation. Amazon also maintains distribution facilities in some states.
Other online sellers, like eBay and Overstock, are strongly opposed to current efforts to implement online sales and use taxes. Facebook, Yahoo! and AOL are also part of an industry group called NetChoice, which opposes such measures as restrictive to small business.
In the past, online businesses cited a 1992 Supreme Court ruling, Quill Corp. v. Heitkamp, as proof that websites and online retailers don’t have to charge—and collect—sales taxes in states where they don’t have a physical business.
Quill was an out-of-state main-order house that sold products without having a store or sales staff in North Dakota.
The Supreme Court found that states had a right under the Due Process Clause of the Constitution to collect sales taxes, but the burden placed on out-of-state businesses violated the Commerce Clause.
“The State’s enforcement of the use tax against Quill places an unconstitutional burden on interstate commerce,” said Justice John Paul Stevens.
The court then placed the ball in the court of Congress, saying that the “underlying issue here is one that Congress may be better qualified to resolve, and one that it has the ultimate power to resolve.”
Two decades later, bipartisan support grew within Congress this summer of the national enforcement of sales and use taxes in the 45 states that assessed them.
The requirement of any national online sales tax measure would be to streamline the process used by any company to collect sales and use taxes across 45 states, so it isn’t a burden to conducting business.
In a tough economic climate, states want the tax revenue from online sales. Some states, like Pennsylvania, are requiring that tax payers estimate what they buy online each year as part of an annual use tax.
The National Conference of State Legislatures estimates that online sales taxes, if enforced nationally, could bring in $23 billion a year for such states.
One problem stalling congressional action is deciding on how such a bill would affect small businesses.
The primary piece of legislation is the Marketplace Fairness Act, proposed by three senators: Richard Durbin (D-Illinois), Mike Enzi (R-Wyoming) and Lamar Alexander (R-Tennessee). It would exempt a business making less than $500,000 a year from collecting sales and use taxes.
Steve DelBianco, the executive director of NetChoice (the industry group opposed to the current efforts), told the Senate in August that a proposed streamlined tax-collection process would add to the costs and complexity of running a small business.
“Congress should not sweep Quill aside without first requiring that states truly simplify their tax systems in an accountable way, while providing adequately protection for America’s small businesses,” he said.
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Supporters of efforts such as the Streamlined Sales and Use Tax Agreement, which has been adopted by 24 states, say it’s an issue of fairness, in addition to states losing out on tax revenue.
The key issue is how effectively a computerized system can be established to collect taxes not only from 45 states and the District of Columbia, but also additional local sales taxes, and get the revenue in the hands of the correct people, without imposing a huge cost on small business.
The Marketplace Fairness Act will likely face challenges in Congress before it could become a law, and then face a whole new set of legal challenges if it is passed.
A top lobbyist told The Hill that the three top supporters of the Marketplace Fairness Act will try to get the law passed before January.
David French, from the National Retail Federation, said the task will be much tougher in the House than the Senate.
Senator Jim DeMint (R-South Carolina), a powerful senator aligned with the tea party, is a vocal, public opponent of the Marketplace Fairness Act.
“If states want more taxes, they can raise taxes on their residents, but it’s antithetical to our federalist system to let states raise taxes on out-of-state residents,” DeMint said in editorial in U.S. News & World Report in August.
“Call this legislation what it is: A nationally-mandated Internet tax on small business. It’s anything but fair,” he said.
The Hill says DeMint had put the bill on his lame-duck watch list for December.
Another person on record as opposing the Marketplace Fairness Act, although not as vocally as DeMint, is Grover Norquist from the Americans for Tax Reform.
The bill’s supporters have presented the law as a states’ rights issue, which may help it get some traction, and as an effort to collect taxes and close tax loopholes. In fact, the introduction of the bill calls it an effort “to restore States’ sovereign rights to enforce State and local sales and use tax laws, and for other purposes.”
But passing the bill will be tricky in a potentially super-charged political climate after a general election and during fiscal cliff negotiations.
And the appearance of a tax hike on small businesses and consumers, even if it is presented as closing a tax loophole, will get a lot of attention in the online community.
Scott Bomboy is the editor-in-chief of the National Constitution Center.