July 2, 2010, 2:10 PM

Online sales tax proposed in Congress

The bill would force e-retailers to process sales tax dollars that now go uncollected.

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A bill introduced in Congress yesterday would require Internet retailers to collect sales tax regardless of whether they have a physical presence in a customer’s state. The Main Street Fairness Act would apply to the states, currently totaling 23, that have simplified their tax laws as members of the Streamlined Sales and Use Tax Agreement.

The bill’s sponsor, Rep. Bill Delahunt (D, MA), says it’s intended to help states recover an estimated $18.6 billion in sales tax revenue from online purchases that will go uncollected this year, a figure that he says will reach at least $23 billion in 2012. “From 2009 to 2012, this amounts to a loss of approximately $55 billion,” he says. “In some cases, these revenue losses can comprise up to one-half of a state’s budget shortfall.”

Most of the new tax revenue likely would come not from sales taxes on retail sales but by taxing online business-to-business sales. A 2005 study by the University of Tennessee's Center for Business and Economic Research projected that states would lose $6.84 billion in 2008 by not taxing Internet and catalog retail sales, but that the potential revenue from taxing B2B web sales would be in the range of $21.54 to $33.68 billion.

If passed, the Delahunt bill could particularly impact consumers’ willingness to go online to purchase high-ticket items like jewelry and consumer electronics, where the loss of tax savings to consumers could be substantial, says Colin Sebastian, a stock analyst who follows digital media and Internet companies at Lazard Capital Markets.

The bill also would authorize the Streamlined Sales Tax Governing Board, which oversees the Streamlined Sales and Use Tax Agreement, to set an exemption based on annual sales for small retailers. Scott Peterson, the board’s executive director, says the board is looking at exempting all retailers that do less than $100,000 in annual "gross remote taxable sales," or sales to states where they are not required to collect sales tax.

Similar bills have been introduced over the past several years, but have failed to win enough support in Congress to move forward. Experts have said that for such legislation to win widespread support, the  Streamlined Sales and Use Tax Agreement, which is commonly called the SST, needs to have a large enough number of member states in hopes of getting support from more members of Congress. States that sign onto the SST can only make sales tax collection mandatory once a bill such as Delahunt’s becomes law.

Some sales tax experts contacted by Internet Retailer this week say they doubt the current number of SST member states, at 23, is enough to win over a majority of federal lawmakers. (Georgia has agreed to become the 24th member starting next January.)

"I think there's little chance this will pass this session," says Daniel Schibley, a state tax analyst at CCH Inc., a unit of Wolters Kluwer that publishes tax and legal information. He notes that, to win over Congress, the SST will first need to sign up as members large states like New York and California.

Eric Menhart, a partner with Washington, DC-based law firm Cyberlaw P.C., says one notable item in Delahunt’s bill that differs from earlier legislation is that it requires a minimum of 10 states as members of the SST in order to mandate sales tax collection in SST member states. Earlier bills had called for a larger minimum.

But while the lower threshold could ensure that the legislation could withstand any unforeseen problems that might lead states to drop out of the SST, it is also likely to make it harder to win enough support in Congress, Menhart says. “You need a decent majority of states as members of the SST,” he says. “Until you have that, it will be very difficult to get enough Congressional attention and support for this legislation.”

Still, Delahunt’s bill has strong support. The National Retail Federation, a retail industry trade group, says the Main Street Fairness Act would help to create a level playing field regarding sales tax collection among all types of retailers, including large retail chains as well as web-only retailers. It adds that it prefers national legislation over several existing state laws that have cropped up in New York, Colorado and other states that take a narrower approach to enforcing sales tax collection.

Moreover, Peterson says he expects the Main Street Fairness Act to do better than past bills because it’s slated to go before a committee chaired by Rep. John Conyers (D, MI), who is a co-sponsor of the bill.



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