CQ WEEKLY – IN FOCUS
April 14, 2012 – 1:00 p.m.
Tax Collection, Online-Style
By Ambreen Ali, CQ Staff
When Jeff Bezos left Wall Street to chase his startup dream out West in the mid-1990s, he skipped Silicon Valley’s burgeoning high-tech scene and drove north to Washington for one big reason: sales taxes.
The Supreme Court had ruled that retailers were not required to collect sales taxes in states where they lacked a physical presence. By locating in the Evergreen state, as opposed to the nation’s most populous state, California, the founder of Amazon.com Inc. explained later that he could sell books (and almost everything from barbecue grills and televisions to socks and potato chips to follow) to more consumers tax-free.
Today, Amazon pays sales tax in only five states, but its growing list of distribution centers and affiliate programs has spurred others to try to collect “use taxes” from the company. At least 23 states have proposed or enacted what have been collectively dubbed “Amazon laws.”
And almost two decades after its founding, the world’s largest online retailer is preparing to relinquish the price advantage that helped it steamroller its brick-and-mortar competitors. The company’s lobbyists have joined a growing effort to pass federal legislation that closes what is called the Internet sales tax loophole. It’s a move Amazon representatives say they have sought to simplify thousands of local and state sales tax laws.
Momentum for change is growing on Capitol Hill, too, as cash-strapped states seek congressional help to tap new revenue sources and technological advances ease concerns about the compliance burdens that confront smaller online enterprises.
Amazon’s lobbying push has tilted the scales in a longtime standoff between online and traditional retailers. The Consumer Electronics Association had long stayed quiet on an issue that divides its members, which include Amazon and eBay Inc., but decided to support sales tax legislation last year.
Some Internet companies remain fiercely opposed to efforts that would change the status quo. In particular, eBay has led the opposition, saying the many small vendors that use its online marketplace would suffer under the proposals being debated on Capitol Hill. It also has an industry group on its side, NetChoice, whose other members include AOL Corp., Expedia Inc. and Facebook Inc.
Still, longtime watchers of the issue say growing support for legislation may prompt Congress to act. “The storm cloud is looming. Something is going to happen,” says Kelley Miller, an associate at Reed Smith, the global law firm that monitors the issue.
Online companies have enjoyed a sales tax advantage over traditional stores since the 1992 Supreme Court decision in Quill Corp. v. North Dakota. And while most states mandate a substitute use tax levied on consumers for the goods they purchase from out-of-state retailers, few pay it.
Bills Under Discussion
That has led some lawmakers to look for ways to overrule the decision through legislation. Several bills offer a way to allow states to collect use taxes from out-of-state retailers. The Senate Finance Committee plans to discuss one such proposal, a bipartisan bill dubbed the Marketplace Fairness Act, at a hearing this month.
The House has two counterpart measures, which the Judiciary Committee reviewed at a hearing last fall. Arkansas Republican
All three bills aim to create a way for online retailers to pay use taxes, and they also seek to simplify local and state sales tax laws. Some would require states to simplify their laws before they could collect taxes. About half the states have joined the Streamlined Sales and Use Tax Agreement, a national effort to harmonize varying state laws.
Tax Collection, Online-Style
The Senate bill would exempt small online retailers who sold less than $500,000 in goods each year. Womack’s bill has a $1 million exemption, while Conyers would allow states to set it. Small retailers say none of the exemptions go far enough.
Industry groups and large retailers are rallying behind the Senate bill, introduced last fall by Democrat
“That the company that is being targeted is supporting the bill is obviously huge,” says Max Behlke, a policy specialist for the National Conference of State Legislatures, which plans to send state officials to Capitol Hill in June to lobby on the issue.
States say they have paid dearly for their inability to collect tax on online purchases. On average, states rely on sales and use taxes for almost a third of their revenue. Their inability to collect from online sales has cost more than $52 billion over the past six years, according to a University of Tennessee study. This year, states are expected to forego $11.4 billion in sales taxes on online purchases.
That figure will grow as transactions migrate to the Internet. The National Retail Federation estimates that 7 percent of retail sales occurred online in 2010, and projects rapid growth in coming years.
Behlke says he does not expect Congress to act before the November election, but says he hopes lobbying efforts will prompt lawmakers to tuck a provision into expected end-of-year legislation on other tax and fiscal matters.
Congressional committees have been slow to act thus far, and none of the bills have been marked up. Congress has hesitated to pass a bill that consumers could perceive as a new tax, even though the legislation would merely give states the opportunity to collect a tax that already exists.
Dan Head, Enzi’s press secretary, says the senator has been holding member-to-member hearings to garner more cosponsors. As states and small businesses reel from the recession, Head says many lawmakers are interested in the possible revenue stream. “The only thing that drives people to online retailers is they don’t have to pay sales tax,” he says. “It really just puts these Main Street retailers at a disadvantage.”
Retailers such as Wal-Mart Stores Inc., Target Corp. and Best Buy Co. have lobbied hard for legislation to minimize the tax advantage for online retailers.
“The Internet is no longer in diapers,” says Jason Brewer, a spokesman for the Retail Industry Leaders Association, a trade group. “This looks like the best chance we’ve had in a long time to pass legislation.”
Such Internet retailers as eBay have questioned Amazon’s motive for favoring legislation, saying the e-retailer’s business model has become increasingly similar to that of big-box retailers, given the company’s size and its far-flung distribution system that increasingly subjects it to ordinary sales tax collections.
An Exemption Debate
Some critics say federal legislation might disproportionately hurt Amazon’s online competitors. “The proponents of these bills actually want to put the burden on small businesses,” says Brian Bieron, senior director of government relations for eBay.
Tax Collection, Online-Style
NetChoice calls the $500,000 small-seller exemption proposed in the Senate bill “a laughably low number.” Steve DelBianco, the group’s executive director, says Congress should be careful not to interfere with e-commerce when many small companies use it to compete with larger retailers.
“Main Street is learning that the Internet is their last big hope against big-box retailers,” DelBianco says.
Critics of the bills want Congress to allow the Small Business Administration to set the small-seller exemption. The agency defines a small business in the Internet retailer market as one that has less than $30 million in sales.
Amazon representatives say that figure is too high, and note that small brick-and-mortar retailers must collect sales tax.
“A surprisingly large fraction of e-commerce is conducted by smaller-volume sellers,” Paul Misener, Amazon’s vice president for global public policy, said at a House Judiciary hearing last fall. Misener said an exemption for $150,000 in sales would deny states 30 percent of the revenue they hope to collect and exempt 99 percent of online sellers.
“Any higher threshold would deny the states even more revenue and keep the playing field more unlevel,” he said.
Enzi and other lawmakers are open to discussing the exemption level, according to Head, but he says $30 million is too far away from the current proposals. Whether they can settle at a number that satisfies all sides remains to be seen.
“At this point,” DelBianco says, “everyone has their initial negotiating numbers on the table.” n
FOR FURTHER READING:
The Senate bill is