April 14, 2011, 10:10 AM

Another taxing situation for e-commerce

A online sales tax bill appears headed to Congress. 

Lead Photo

Federal legislation that would allow states to mandate sales tax collection by Internet retailers may soon be introduced by Sen. Dick Durbin, a Democrat from Illinois who is also the Senate’s assistant majority leader.

Durbin’s office declined to confirm that a new online sales tax bill was in the works, but sources close to the matter say the senator is primed to introduce legislation  as early as this spring. Since 2000, lawmakers have introduced similar bills in every two-year session of Congress. Privately, online taxing experts say this year’s attempt could have a higher chance of success not only because of Durbin’s leadership role, but also because states face mounting pressure to find new revenue.

The bill, expected to be similar to the Main Street Fairness Act legislation introduced last year, would allow states that are members of the Streamlined Sales Tax Project to require all but the smallest of Internet and catalog retailers to collect sales tax regardless of where they have physical operations. Current federal law says states can’t force tax collection by retailers if they don’t operate in-state facilities such as stores or distribution centers.

Twenty-four states are already members of the Streamlined Sales Tax Project, or SST, though most have some final steps to take before they could mandate sales tax collection under a new federal law, says Scott Peterson, executive director of the SST’s governing board. The most important remaining step is passing local laws that would establish compensation of Internet and catalog retailers for the cost of collecting sales tax.

Under rules established by the SST, participating states would share 0.75% of sales tax revenue collected on Internet and catalog transactions with the retailers that collected the tax, Peterson says. To help small retailers absorb the cost of tax collection, the formula for distributing that revenue among retailers would compensate small merchants at a higher percentage of their sales compared to how larger retailers are compensated, Peterson adds.

Beyond that 0.75% amount shared with retailers, SST member states would also share some of the collected sales tax revenue with SST-certified providers of sales tax collection software to cover the cost of that software if it’s offered free to retailers. The SST rules exempt from sales tax collection duties those retailers with less than $500,000 a year in sales to customers outside of their own state. That threshold was raised in December from $100,000 in response to concerns by business groups, which said that tax collection would prove too onerous for smaller retailers while producing negligible increases in revenue for states, Peterson says.

Durbin’s bill, which sources say is likely to be accompanied by similar legislation submitted in the House of Representatives, seeks to overturn federal law that has stood since a 1967 U.S. Supreme Court decision, upheld by the high court in 1992, that said states could not legally require retailers to collect sales tax from their residents if the retailers don’t have an in-state physical presence. The 1992 ruling, however, noted that Congress could pass legislation establishing new sales tax policies.

Proponents of the Main Street Fairness legislation include large retail chains that already collect sales tax on online and catalog orders in states where they have bricks-and-mortar stores, as well as cash-starved states. They contend that such a law would create a relatively equal tax structure for online and offline retailers while also enabling states to recoup billions of dollars of tax revenue that now goes uncollected. A University of Tennessee study often cited by proponents of the legislation estimates that this revenue would amount to $23.3 billion in 2012.

In lieu of new federal legislation, several states such as Arkansas have pushed through their own sales tax laws, such as those that require Internet retailers to collect sales tax if they do business with in-state affiliate web sites.

Opponents, including web-only retailers, contend that forcing them to collect sales tax on online purchases could stifle the growth of online commerce. States generally require consumers to remit the applicable sales tax on goods they buy online or by phone, but few consumers do.

 

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