House Debate Points to Further Delay in Unified Plan for Collection

Chicago Tribune By Daniel Rothberg March 12, 2014

Seeking to end the long-running political battle over how to tax e-commerce, the House Judiciary Committee on Wednesday debated several possible compromises, including two that would tax Internet sales based upon the retailer’s home state, rather than the buyer’s.

Proponents said such a system would be easier for Web-based retailers to implement since they would only need to consult a single tax rule, rather than comply with more than 9,600 local and state tax jurisdictions nationwide.

“The way to level the playing field is to make sure that every business — bricks-and-mortar or online — is required to do things the same way and follow the same rules,” said Chris Cox, counsel to NetChoice, an advocacy group that represents eBay, Overstock.com and other online sellers.

Small online retailers have been at the forefront of opposing proposals to allow each state and locality to require that Internet retailers collect sales taxes on behalf of the state’s residents. Cox noted that the proposal, known as an origin-based tax, mirrored the method of tax collection for traditional bricks-and-mortar retailers.

Under a 1992 Supreme Court ruling, states are permitted to collect a sales tax only from retailers with a physical presence in their state. With the rise in e-commerce, states have complained they are losing $23 billion a year in sales tax because the court decision exempts many Internet transactions.

Yet despite general agreement that Congress should regulate how Internet retailers collect sales tax, Wednesday’s hearing — the latest of more than 30 held by Congress on the issue — offered little hope that the dispute over Internet sales taxation was any closer to a consensus.

The Senate approved bipartisan legislation last year, allowing states to collect a sales tax on large Internet retailers regardless of their physical location.

But in the Republican-controlled House, the bill stalled, facing opposition from anti-tax advocates and small online retailers, who fear burdensome compliance rules. Large online retailers, like Amazon, initially resisted the Senate bill but now support it.

Critics of the NetChoice idea to collect taxes based on the retailer’s location said it would “upend” the current system and result in a tax on production, rather than consumption.

Stephen Kranz, a tax attorney, said such a system could create loopholes for companies seeking to avoid sales tax altogether. “Great tax lawyers other than myself will help companies figure out how to game an origin system very easily,” Kranz said.

Others said such a system would drive Internet retailers to relocate to states that have no sales taxes.

Given expanding online retail sales, which now account for almost 6 percent of all sales, the National Retail Federation, which represents bricks-and-mortar businesses, urged the committee to end the “unfair price and market advantage” online retailers enjoy by not having to collect sales tax on all purchases.

State governments also are anxious for Congress to act. California lost about $2 billion in out-of-state electronic sales in 2012, according to data from the National Conference of State Legislatures.

During the hearing, Rep. Steve King, R-Iowa, said his state’s governor intends to use the new revenue to provide tax cuts. Other states say they need the tax revenue for infrastructure development.

Rep. Jackie Speier, D-California, who is sponsoring a House version of the Marketplace Fairness Act, said congressional action is needed to provide parity for online and traditional retailers. “(When) you look at it in the cold light of day, you cannot somehow suggest that it is fair that some retailers have to collect the sales tax and others do not,” she said.