July 26, 2012, 4:35 PM

Online sales tax bill stirs up opposing views in D.C.

The Internet Retailer Top 500 is cited in testimony before a House committee.

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With the merchants who make up the Internet Retailer Top 500 accounting for nearly all of the online state sales tax that goes uncollected, retailers outside of the Top 500 should be exempt from sales tax collection, Steve DelBianco, the executive director of NetChoice, an advocacy group for online retailers, said in testimony before a U.S. House committee this week on a proposed federal law designed to force web retailers to collect sales tax.

The Marketplace Equity Act, introduced with bipartisan support in the House of Representatives by Steve Womack (R-AR) and Jackie Speier (D-CA), seeks to overturn existing federal law that says states can’t mandate sales tax collection by retailers that don’t have a physical presence, or nexus in legal terms. That presence can include stores or distribution centers in a customer’s state. A similar law, the Marketplace Fairness Act, has been submitted in the U.S. Senate.

Testimony supporting the bill came from groups including the National Retail Federation, a trade organization representing retail chains as well as web-only merchants. “This reform is necessary to reduce the uncertainty currently rampant as shown by state-by-state attempts to establish nexus for collection purposes artificially stifling the growth and expansion of small- and medium-sized business across the country,” said David French, senior vice president for government relations.

DelBianco of NetChoice, which represents online retail organizations including Overstock.com Inc. and eBay Inc., contends that the new House bill as written would “definitely raise costs and prices for small businesses that compete—and survive—via their web and catalog sales.” The committee will keep open the record for five legislative days following the July 24 hearing for additional materials to be submitted, but has not scheduled additional action on the legislation, a committee spokeswoman says.

Citing a study by economists commissioned by NetChoice that used data from the Internet Retailer Top 500 Guide, DelBianco said the largest 500 retailers by web sales accounted for 93% of uncollected sales tax related to e-commerce in 2011. He suggested that legislators exempt from sales tax collection all retailers outside of the Top 500, which would set an annual sales threshold of about $15 million. By comparison, the bill as currently written provides for a small-retailer exemption at $1 million in annual remote sales, or sales to customers in states where a retailer has no physical presence.

DelBianco also contended in his testimony that the Marketplace Equity Act doesn’t require enough simplification of sales tax rules across the 45 states plus the District of Columbia that have sales tax. For example, he said, retailers should be able to work with a single set of rules across all states about which products are taxable and which aren’t.

DelBianco added that the technology and processes required to collect and remit sales tax will cost retailers an amount equal to 15 cents on every dollar of sales tax they charge customers.

Among other supporters of the bill is the Performance Marketing Association, a trade group for affiliate marketers such as blogs or other content sites that earn commissions from retailers for forwarding traffic to their e-commerce sites. Rebecca Madigan, the association’s executive director, who submitted written testimony in support of the bill, says a new federal law that removed physical presence as a basis for collecting sales tax would supersede individual state laws that have tied physical presence to retailers’ relationships with affiliates.

Such “affiliate nexus” tax laws, she says, “have already devastated 76,000 online-based businesses.” Some major online retailers, notably Amazon.com Inc. and Overstock.com, have severed ties with affiliates based in states that have passed such laws.

In fact, she contends that, instead of raising tax revenue for many states, such laws have been known to reduce tax revenue by causing retailers to terminate affiliate relationships and affiliates to relocate to other states that don’t pass such laws. “A federal solution will put to rest these desperate and futile attempts states pursue to solve their budget shortfalls,” she says.

 

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