At a Congressional hearing last week, retail industry groups representing store-based and direct retailers presented opposing views on whether Congress should move ahead with a proposed law that would mandate collection of sales tax on goods sold online and in catalogs.
“We are here to ask you to level the playing field between sellers that collect sales tax and those who cannot be required to collect the tax because they do business in the community on a virtual rather than physical basis,” said Wayne Zakrzewski, vice president and associate general counsel-tax, for J.C. Penney Co. Inc., No. 12 in the Internet Retailer Top 500 Guide. “Many of our competitors do not collect, which gives them a competitive advantage. This is not because they are innovative or provide incremental value to the consumer, but because the states do not have the ability to require collection of a tax that is due from the consumer.”
Zakrzewski spoke on behalf of the National Retail Federation, which represents large retail chains as well as other types of merchants. But while the NRF argues that a mandated sales tax on direct merchants would be more fair, the Direct Marketing Association, which represents web and catalog merchants, contends that the system as proposed would “seriously jeopardize” the continued growth of e-commerce in the U.S. because of the costs involved in collecting and remitting sale tax across more than 7,500 tax jurisdictions.
The hearing covered the Sales Tax Fairness and Simplification Act (H.R. 3396) introduced in August by Rep. William Delahunt (D, MA). The proposed law recognizes the Streamlined Sales and Use Tax Agreement, commonly referred to as SST, as an effective means of providing for interstate collection and remittance of sales tax. If the legislation is enacted into law, states that abide by the SST’s system of defining, collecting and remitting sales tax could mandate that sellers from other states process sales taxes for all customers within the SST member states. As of next month, the SST will have 17 states as full members, plus another five that support the SST but have yet to implement its policies.
Current law only requires sellers to charge sales tax for customers located in states where the seller maintains a store or other physical presence. Although current law also requires the customers to pay their own “use” tax if the seller doesn’t collect a sales tax, there has been no effective means of enforcing use taxes, according to tax experts.
The Direct Marketing Association contends that the proposed law would make it difficult for direct merchants to compete. “Expanded and overlapping state tax jurisdictions would seriously jeopardize the continued growth of electronic commerce in the United States, and it would impede the access of small and medium-sized companies to a nationwide market,” George Isaacson, tax counsel for the DMA, told the Congressional panel. Isaacson noted that the legislation fails to reduce the more than 7,500 tax rates across the U.S., that it doesn’t reduce the “burden” of tax collection, tax remittance and tax audits facing interstate marketers, and that it fails to guarantee fairness in the compensation of sellers for the costs of tax collection and remittance.
Barbara Tulipane, president and CEO of the Electronic Retailing Association, which represents primarily TV-based merchants, made a similar argument in a statement last week. “Small business expansion, fostered by Internet marketplaces like eBay as well as e-retailers throughout the country, is a major job creator helping to keep the U.S. economy moving forward,” Tulipane adds. “Making electronic retailers responsible for computing, collecting and remitting tax for thousands of taxing jurisdictions with different rates and coverage is unfair and will significantly harm the growth of e-commerce.
But J.C. Penney’s Zakrzewski contends that Delahunt’s bill provides for a “significant reduction in the burden imposed by the states sales tax system” in participating states. In a statement, the NRF added that the Streamlined Sales and Use Tax Agreement “provides uniform definitions, a taxability matrix showing what items are subject to tax,” and that the sales tax plan provides for assistance from software companies that specialize in collecting and remitting sales tax across multiple jurisdictions.
He added, “Passage of H.R. 3396 into law would be the appropriate next step to a modern, fair and responsive sales tax system across all participating states and sellers.”
Delahunt’s bill is similar to one introduced in the U.S. Senate by Michael Enzi (R, WY). Neither bill, however, is expected to pass in the current Congress, which extends through next year, says Daniel Schibley, a state tax analyst with CCH Inc., a Riverwoods, IL-based publisher of tax and legal information. “I don’t think these bills have any chance of passing in the current session of Congress,” he says. “The idea behind introducing them is to keep the issue alive while building support for legislation.”