July 29, 2010, 7:23 PM

Sales tax debate flares up on Capitol Hill

Both sides in the online sales tax debate rallied their forces in the nation's capital.

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As some members of Congress gathered today to promote the recently introduced Delahunt bill to mandate sales tax collection by Internet retailers, others pushed a new House resolution by Rep. Paul Hodes (D, NH) that opposes it.

“Congress should not impose any new burdensome or unfair tax collecting requirements on small online businesses, which would ultimately hurt the economy and consumers in the U.S.,” the Hodes resolution says.

The Hodes resolution, which has bipartisan support from four representatives, runs counter to House Rule 5660, The Main Street Fairness Act, which was introduced on July 1 by Rep. William Delahunt (D, MA) and calls for Congress to support the Streamlined Sales and Use Tax Agreement and authorize states that abide by that agreement to force Internet and catalog retailers to collect and remit sales from customers in those states. In effect, the Delahunt bill seeks to overturn the status quo that says retailers don’t have to collect sales tax in states where they don’t have a physical presence, such as stores, offices or distribution centers.

The Hodes resolution doesn’t mention the Delahunt bill or the Streamlined Sales Tax Agreement by name, but it contends that  “any federal legislation that would upset [the Internet’s] open and fair environment and impose new onerous and burdensome tax collecting schemes on hundreds of thousands of small online retailers would not only adversely impact thousands of jobs and reduce consumer choice, but would also effectively put an end to the robust e-commerce marketplace that consumers in the U.S. currently enjoy.”

The Hodes resolution was supported today by NetChoice, a coalition of online retailers and related organizations opposed to sales tax collection by Internet and catalog retailers. Its executive director, Steve DelBianco, said in a conference call today that collecting and remitting sales tax would cost small retailers an amount equal to 15% of the tax they collected.

But other groups today came out in support of the Main Street Fairness Act, so named because it’s supposed to level the playing field between retailers who currently collect sales tax, such as national retail chains, and those who don’t, such as many web-only retailers.

“The merchandise sold online is no different than what is sold in a store. There is no reason one group of merchants should be given an unfair price advantage over another,” Maureen Riehl, vice president of government and industry relations at the National Retail Federation, said today. The NRF is a retail trade organization that represents retail chains and, through its Shop.org division, online retailers.

Retailers have differing views on whether conversion drops in states where they have to collect sales tax. Mike Hackley, CEO of web-only retailer ShoppersChoice.com, says the sales tax he collects in his home state of Louisiana does not appear to have hurt sales to Louisiana residents. But Neil Kugelman, CEO of web-only jewelry retailer Goldspeed.com Inc., says his sales in his home state of New York are lower because he has to charge tax to New York consumers. “Jewelry customers in New York prefer buying from companies not in New York to avoid paying sales tax,” he says. “And my conversion rate in New York is lower than in other states.” He could not provide details.

GSI Commerce Inc., a provider of e-commerce technology and services to hundreds of retailers, does have detailed data, at least for one client. This online retailer, which GSI did not name, established a physical presence in certain states and thus had to collect sales tax there. Sales in those states dropped 12% over the nine-month period GSI studied in 2008 and 2009, says Fiona Dias, executive vice president of strategy and marketing. “When we think of how retailers have to fight for every bit of sales and every point in their conversion rates, this is a very big deal,” Dias says.

Dias adds that the client retailer sells a wide assortment of merchandise. The decline in sales was steepest among the retailer’s most expensive items, she adds.

The governing board of the Streamlined Sales and Use Tax Agreement, meanwhile, says that a mandatory system of sales tax collection, if imposed in states that have a sales tax, would collect $18.6 billion in tax revenue this year that would otherwise go uncollected. The NetChoice group disputes that figure and contends it’s far lower.

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