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Tax advocates are hopeful as online sales tax debate heads back to Congress
A bill that would require all e-retailers to collect sales taxes is likely to be introduced this month, and advocates say the economic woes of state government make passage more likely than in the past.
Managing Editor, International Research
The debate over online sales tax is heading back to Congress this month, and advocates believe the economic woes of state government make it more likely the proposal could become law.
“Just as we’ve seen more progress in the states because of financial conditions, we expect we’ll see more progress in Congress, and possibly even enactment, because this is something the federal government can do for the states that doesn’t cost the federal treasury a penny,” says Neil Osten, federal affairs counsel of the National Conference of State Legislators, which supports the bill.
Osten says the Senate sponsor of the bill will be Mike Enzi, a Republican from Wyoming, and, in the House, Massachusetts Democrat Rep. Bill Delahunt. He says supporters of the bill have agreed on its contents and sent it to the sponsors for approval. They are likely to introduce the bill in the next week or two, Osten says.
Similar legislation has been introduced in every Congress since 2003, but has never passed either chamber. The bill would enable states that have complied with the Streamlined Sales Tax initiative to require all online retailers to collect and remit sales tax from consumers who live in those states.
The SST initiative standardizes across jurisdictions sales tax rules, such as the definition of what constitutes food. Each state can decide whether to impose sales tax on food, but the definition of what’s covered would be the same from state to state. The SST initiative, approved in 2002, is designed to eliminate the burden that would fall on retailers if they had to keep up with the rules of each taxing jurisdiction.
To date, 22 states have complied with SST, and Wisconsin has applied to the SST governing board to be certified as the 23rd. In all, 45 states have sales taxes, and in Alaska, where there is no statewide levy, local governments can impose sales taxes. The average sales tax nationally is around 6%.
Until now, retailers have only had to collect and remit sales taxes on web sales in states in which they have a physical location. While that could be every state for a big retail chain like Wal-Mart Stores Inc., it’s generally meant only one or a handful of states for web-only retailers and catalogers.
How much online shoppers would pay if the proposed legislation becomes law is not clear. A University of Tennessee study released this week estimates that states and local governments will miss out on between $11.4 billion and $12.65 billion in uncollected sales tax by 2012 if there is no change in the law. However, that is based on a broad definition of e-commerce that includes business-to-business sales, which the Tennessee researchers calculate constitute 93% of online transaction value.
Further complicating the calculation is the fact that some larger retailers already collect sales tax in many states. Donald Bruce, one of the lead authors of the Tennessee study with William F. Fox, estimates compliance for those large merchants nationally in the range of 60-65%. He says smaller retailers are more likely to collect sales tax only in one or two states.
What’s more, the proposed legislation would give the SST governing board the authority to exempt small e-retailers from the burden of collecting sales tax. If retailers under $5 million a year in sales were exempted that would reduce the additional sales tax collection by a third, according to the Tennessee study. Setting the threshold at $1 million, which is also under consideration according to Osten, would reduce the incremental sales tax by $3.4 billion, more than a fourth of the $12.65 billion that could be collected if the legislation became law.
Whatever the amount is, any additional tax would hurt e-commerce by eliminating a perceived benefit of shopping online, says Ken Burke, chairman of e-commerce technology provider MarketLive. “Saving the tax made it cost-neutral for the consumer to pay for shipping,” Burke says. “Now it won’t be cost-neutral. It will hurt online retailing and make it harder to compete.”
Other opponents say it would be an undue burden for retailers to collect taxes on behalf of 7,900 separate taxing jurisdictions, any of which potentially could audit a retailer’s tax remittances. The Streamlined Sales Tax Project “is streamlined in name only,” says Jerry Cerasale, senior vice president for government affairs at the Direct Marketing Association, which opposes online sales tax. “If states were serious in their efforts to simplify sales tax collections for remote sellers who have no presence in a state, there would be only one tax rate per state, one nationwide audit, one nationwide set of definitions and one nationwide definition of exemptions,” Cerasale says.
What’s more, there is not adequate technology available to help retailers comply with SST, says Bill McClellan, vice president of government affairs for the Electronic Retailing Association, a trade group of TV and web retailers that also opposes the legislation. And even if the technology were available, it would be a burden for online retailers to integrate with their own computer systems that are often highly customized. Plus, retailers would have to keep up with sales tax holidays and changes in tax rates in all the nation’s taxing jurisdictions, McClellan says.
Osten says the bill will provide compensation for the cost of complying with the sales tax legislation, whether by a retailer or its payments processor. And the law would not take effect immediately to allow time for states to come up with plans for providing that compensation.
Should Congress pass the sales tax bill it would land on the desk of President Barack Obama. Osten says the Obama administration has not committed itself on the issue. But he says there is a small indication that Obama might be sympathetic: He voted to send Illinois delegates to the conference that developed SST while he was a member of the Illinois Senate.