The U.S. Congress needs to consider alternatives to a Senate-passed bill that would require online retailers to collect sales tax based on the location of their customers, the chairman of the House of Representatives Judiciary Committee said Wednesday.
The Marketplace Fairness Act, passed by a 42-vote majority in the Senate last May, has significant problems, including the public perception that it would be a tax increase for online shoppers, said Representative Bob Goodlatte, a Virginia Republican and the committee chairman.
Shoppers in the 46 states with sales taxes are supposed to report their online and catalog purchases and pay taxes, but states don’t enforce those regulations.
“The tax is already owed, but the public still views the bill as Congress taxing the Internet,” Goodlatte said during a hearing on alternatives to the Senate bill. A June Gallup poll found 57 percent of U.S. residents opposed to the idea, he noted.
In 1992, the U.S. Supreme Court ruled that states could not require catalog businesses and other remote sellers to collect sales taxes in states where they have no physical presence, but critics say the current system is unfair to bricks-and-mortar businesses, which must collect sales taxes, and robs states of billions of dollars in tax revenue each year.
Integration costs for businesses not addressed
But the Marketplace Fairness Act, an attempt to allow states to collect online sales taxes outside their borders, doesn’t make tax collection easy enough for online businesses, Goodlatte said. “The bill required states to provide free [tax collection] software, but did not address integration costs,” which could cost businesses tens of thousands of dollars, he said.
Other critics of the Senate bill said it would open up Internet sellers to tax audits from thousands of taxing jurisdictions across the U.S.
Still, many committee members said Congress needs to deal with online sales taxes, with many states struggling to meet their budgets and retailers like J.C. Penney, RadioShack and Staples announcing store closings this year.
While opponents of the Senate bill argue it will hurt online sellers, “shouldn’t we also be thinking about the burden that we’re imposing on business owners in every corner of the country?” said Representative Ted Deutch, a Florida Democrat. “The burdens that are imposed are imposed on entire communities. When stores close ... the burden then ends up being shared not just by the owner, but by those employees who are out of work.”
Alternatives include local taxation
The committee heard from witnesses offering alternatives to the Senate bill, with two proposing that Internet sellers collect their local sales tax, instead of collecting sales taxes for approximately 9,600 taxing jurisdictions. A tax collection system based on the seller’s location, instead of the buyer’s, would be much easier for sellers to comply with, said Chris Cox, a former U.S. representative and lawyer for e-commerce trade group NetChoice.
“Most would agree it is fundamentally unfair to force a local retailer, with only one place of business in a single state, to be subject to tax compliance burdens, including the requirement to appear in person to defend a lawsuit, in each of the 46 states that have sales taxes,” he said.
An online sales tax based on the seller’s location would work much like brick-and-mortar sales taxes do today, added Andrew Moylan, outreach director at the R Street Institute, a think tank advocating for free markets. If a Washington, D.C., resident shops in Virginia, she pays Virginia’s sales tax, he noted.
But Stephen Kranz, a partner in the McDermott Will & Emery law firm and a member of the Streamlined Sales Tax Governing Board, said a tax system based on the seller’s location would be easy to game and would likely drive Internet retailers to relocate or set up ghost headquarters in the handful of states without sales taxes.
Sales tax "race to the bottom"
The proposals from Moylan and Cox would create “a race to the bottom” in state tax rates, added Representative Jerrold Nadler, a New York Democrat.
James Sutton, a tax attorney with Moffa, Gainor & Sutton, called for Congress to require remote resellers to track their remote sales and report customer names to their home states. The process would be much simpler for Internet sellers than collecting sales taxes and would allow sellers to avoid costly audits and enforcement action, he said.
“If a purchaser does not file a use tax return, then every state that has a sales tax already has a process in place to send a friendly letter to the resident purchaser reminding them to pay the use tax,” he said. “Each state could choose to be strict or lax about the use tax compliance, but the people being taxed would have a vote on the government officials representing them.”
Forcing Internet sellers to collect and share more customer information is a bad idea when there’s a constant stream of data breaches, Cox said. If officials in 9,600 taxing jurisdictions can demand customer information, “that creates an opportunity for mischief,” he said.