May 31, 2011, 3:55 PM

Online tax bill fails in Texas

Gov. Rick Perry vetoes a bill designed to force out-of-state e-retailers to collect taxes.

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Texas Gov. Rick Perry, calling for a “thorough policy discussion” that would balance competing retail interests, today vetoed a bill designed to clarify when online and catalog merchants must collect sales tax on purchases by Texas residents.

“I have serious concerns about the impact and appropriateness of House Bill No. 2403,” Perry says in a veto statement filed with the Taxes Secretary of State’s office. “In particular, I believe this legislation risks significant unintended consequences.”

Perry did not clarify what he meant by unintended consequences. But the governor, a Republican with a pro-business, anti-tax reputation who recently said he might run for president, in earlier statements criticized Texas Comptroller Susan Combs for seeking $269 million in uncollected sales tax from Inc. That threat led Amazon to say it will close its Texas distribution facilities and kill plans to build more, eliminating more than 1,000 new and existing jobs. Amazon is No. 1 in the Internet Retailer Top 500 Guide.

HB 2403, introduced in the Texas Legislature earlier this year by Rep. John Otto, also a Republican, was designed to clarify when a retailer has an in-state physical presence and, therefore, is required to collect sales tax. According to the U.S. Supreme Court, states can require retailers to collect tax only if they have an in-state physical presence such as stores or distribution centers. The concept is called nexus in legal jargon.

A key part of the bill notes that a retailer can still come under nexus rules even when its distribution facilities are operated by a subsidiary company, the tactic that Amazon often employs. When he introduced his bill, Otto said it was designed to withstand court challenges but gave no indication of likely support from Perry. He added that his bill aimed to raise revenue without creating new taxes or increasing tax rates, but simply to force collection of taxes that are already supposed to be collected.

In the governor’s veto message, which is posted on the governor’s web site, Perry says he’s confident that Texas legislators, along with consumers, retailers, technology experts and representative of other states and the federal government, can come up with a better way than Otto’s bill to reach a consensus that “balances the competing interests, respects federalism, and is fair and equitable.”

A spokeswoman for Rep. Otto declined to comment. But Paul Misener, vice president of global public policy for Amazon, says the veto put Texas on the right track of seeking a broader solution to the sales tax issue. “We’ve long supported a truly simple, national approach, evenhandedly applied," he says. "This is federalism at work and many states are making the right decision to seek a federal solution.”

Despite the veto, which the Texas Legislature can’t attempt to override because the veto occurred at the end of the legislative session on May 30, the online sales tax idea is not dead in Texas. State lawmakers are considering many of the points of Otto’s bill—that is, the points related to a retailer’s physical presence and responsibility for collecting sales tax—in Senate Bill 1, which covers a general range of state fiscal matters and is before the Finance Committee and slated for a public hearing on June 2.

George Isaacson, a partner at Brann & Isaacson, and Steve DelBianco, executive director at NetChoice, will speak at the Internet Retailer Conference & Exhibition 2011 about online taxes in a session entitled "How to be prepared when the sales tax officers call."

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