Online Sales Tax Bill Hits House

Legislation grants congressional approval to a national compact among states to levy taxes on Internet sales.
Posted October 2, 2003
By

Roy Mark


WASHINGTON -- Colorado Gov. Bill Owens told a House Judiciary subcommittee Wednesday that the Streamlined Sales Tax Project (STTP), which would require online retailers to charge and collect sales taxes, would negate one-third of President Bush's federal income tax cut of 1991.

Owens, who admitted the majority of the nation's governors support the STTP, also said the plan would "fundamentally alter" e-commerce and was unfair to rural and senior Internet users.

"With Internet sales being just one percent of total sales, I don't think this is the time to burden this burgeoning business," Owens told the Subcommittee on Commercial and Administrative Law.

The Republican governor came to Capital Hill to oppose H.R. 3184, which grants congressional approval to a national compact negotiated among state governments to streamline and simplify more than 7,500 diverse sales tax laws among state and local governments. The legislation would have the practical effect of allowing states to enforce sales taxes on online sales.

The bill was introduced last week by Rep. Bill Delahunt (D.-Mass.) and co-sponsored by Rep. Ernest Istook (R.-Okla.). Similar legislation is expected to be introduced in the Senate by Mike Enzi (R.-Wyo.) and Byron Dorgan (D.-N.D.).

"The SSTA marks a significant departure from the sales and use tax system now in place," Delahunt said. "Under the Commerce Clause of the U.S. Constitution, Congress has the sole authority to regulate commerce among the states."

Currently, sales and use taxes are owed on all online transactions, but states are prohibited from requiring remote sellers to collect and remit those levies. A 1992 U.S. Supreme Court decision said states can only require sellers that have a physical presence or "nexus" in the same state as the consumer to collect so-called use taxes.

The court ruled that the current patchwork of taxing jurisdictions across the country is too complex and burdensome for online retailers to charge and collect sales taxes. In order to collect the taxes, the court ruled, states would need to first simplify the existing system.

Spearheaded by the National Governors Association (NGA), states and local governments, with input from the private sector, have been working for three years to overhaul the nation's sales tax structure. Last November, delegates from 32 states approved a model interstate agreement that establishes uniform definitions for taxable goods and requires participating states and local governments to have only one statewide tax rate for each type of product by 2006.

To date, 34 states have agreed to enter into the compact, and 20 states have already passed implementing legislation. Under the bill, these states would be permitted to enforce sales tax laws on merchants who ship goods into their state and have over $5 million in gross annual sales. The legislation also requires states to compensate retailers for their costs in collecting sales taxes.

Supporting the legislation is a coalition of national retailers as well as the National Governors Association, the National League of Cities, National Council of State Legislators, National Association of County Officials, National Association of Real Estate Investment Trusts, International Council of Shopping Centers, the National Retail Federation, and the International Mass Retail Association.

"Remote sellers have claimed for years that state sales tax systems were too complicated for a retailer in one state to know what sales tax to charge a customer from another state," Maureen Riehl, vice president and state and government relations counsel for the National Retail Federation, told the subcommittee. "That's no longer true. The states have been busy simplifying their sales tax systems and there's no longer any excuse for not collecting the sales tax customers owe."

In addition to traditional brick-and-mortar merchants, who have long complained of the pricing advantage online retailers hold since they do not have to charge sales tax on purchases, a number of major e-commerce players, including Wal-Mart, Staples and Target, have begun charging their customers sales taxes on almost all online purchases.

Jack Vanwoerkom, EVP and general counsel for the Framingham, Mass.-based Staples, said Delahunt's legislation is "critical to end the current inwquity whereby Staples.com is required to collect and remit sales taxes because Staples has made a commitment to be present in local communities."

Vanwoerkom added, "Pure Internet retailers do not bear the same burden of collecting and remitting sales taxes."

A report by the University of Tennessee last year estimated that all 50 states could collectively lose more than $45 billion in Internet sales tax revenue in 2006.

The study, commissioned by the Institute for State Studies and prepared by the University of Tennessee with data collected by Forrester Research, shows the revenue impacts for states are significant. Nearly half of state revenues come from sales taxes and more than 40 percent of state spending is dedicated to education, law enforcement, and transportation projects.

According to the study, in 2001, inability to tax e-commerce likely cost state and local government revenue a loss of $13.3 billion. By 2006, the loss will more than triple to $45.2 billion; and in 2011 the loss will be $54.8 billion. The cumulative total of losses between 2001 and 2011 is $439 billion. The report also shows how much each individual state will lose from uncollected sales and use taxes.






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