Legislation that would allow states to collect sales tax from online sellers is good for consumers, because it would help them pay the taxes they already owe, supporters said Tuesday.
Many people who buy products online don't know that they're supposed to pay sales tax to their states, some supporters of the Marketplace Equity Act said during a hearing on the bill before the U.S. House of Representatives Judiciary Committee. This nonpayment of sales taxes owed in 46 states exposes consumers to potential action by state tax collectors, said U.S. Rep. Steve Womack (R-Ark.), a sponsor of the bill.
Online retailers that have no physical presence in a state don't have to collect sales tax from residents. That situation is "bad for retailers, bad for cities, counties and states who levy sales taxes and bad for consumers, who are unwittingly exposed to potentially incriminating audit issues," Womack told the committee.
The bill, which would require online retailers to collect sales taxes from customers, would not impose a new tax, supporters argued. About 1% of online shoppers now send sales tax for online purchases to their state governments.
"We're trying to help a nation of people right now who are breaking the law by not paying their taxes," said Gov. Bill Haslam of Tennessee, a Republican.
Some lawmakers disagreed with supporters' assertion that the legislation creates no new taxes.
Whether the bill would create a new tax is "in the eye of the beholder," said Joseph Henchman, vice president of legal and state projects at the Tax Foundation, a tax research group. "It's an existing tax that's not paid by the vast majority of people who should be paying it," he said. "I think a lot of people will see it as a new tax."
Rep. Hank Johnson (D-Ga.) said he supports legislation to equalize the taxes between brick-and-mortar and online retailers, but he expressed surprise that many anti-tax Republicans support the Marketplace Equity Act. The bill would give states new authority to impose taxes, he said.
"It's a new tax for those who purchase their goods on the Internet," he said.
Haslam and other supporters of the bill argued that the current system, set up by a 1992 Supreme Court ruling, is unfair to Main Street retailers that have to collect sales taxes and to state and local governments that are missing out on billions of dollars in revenue each year. Tennessee loses about $400 million a year because it cannot collect sales tax from out-of-state websites, Haslam said.
The current system hurts brick-and-mortar businesses, supporters said. Many local retailers see people come into their stores to check out a product, only to buy it online, sometimes using their smartphones to order a product online while still in the store, Womack said.
"In short, this bill levels the playing field in the world of retail sales," Womack said. "These retailers in my district, and retailers across America, are crying out for help to eliminate the loophole that chases more and more discriminate shoppers away from Main Street and to the Internet."
Local retailers are at a "6 to 10% price disadvantage" because of sales taxes, added Wayne Harper, a Republican member of the Utah House of Representatives and a member of the Streamlined Sales Tax Governing Board, a group pushing for online sales tax collection.
Several committee members said they support the bill and hope to pass the online sales tax legislation soon. Several others voiced opposition to the bill, saying it would be too difficult for small Internet businesses to collect sales tax from 9,600 taxing jurisdictions even with available software packages designed to help collection.
It would cost money to purchase and install the software, and it would be difficult even for the software to keep up with tax code changes, said Steve DelBianco, executive director of e-commerce trade group NetChoice. Several states have sales tax holidays, and taxing jurisdictions have many different lists of items that are taxed, critics said.
The legislation would be a new tax on businesses, DelBianco said. Internet sellers would be responsible for collecting the sales taxes, and states would hold them responsible for paying the bill, he said. The tax would also require catalog shoppers, often older adults, who send payments by check to figure out their sales tax rates, he added.
"It just isn't fair to ask a grandmother to fill out this form in a way that causes her to search through 46 different states and thousands of jurisdictions to find the tax rate applying to her," DelBianco said.
The bill would exempt online businesses selling less than $1 million worth of products a year from collecting sales taxes, but that exemption "isn't nearly high enough," DelBianco said. A $1 million online business may be a mom-and-pop operation with little employee support, he said.
Grant Gross covers technology and telecom policy in the U.S. government for The IDG News Service. Follow Grant on Twitter at GrantGross. Grant's e-mail address is email@example.com.