Democrats push for new Internet sales taxes

House Democrats try to force online retailers like Amazon to collect sales taxes for out-of-state purchases, saying $23 billion in new taxes could be raised.

Bill Delahunt
Bill Delahunt

The halcyon days of tax-free Internet shopping will, if Rep. Bill Delahunt gets his way, soon be coming to an abrupt end.

Delahunt, a Massachusetts Democrat, introduced a bill on Thursday that would rewrite the ground rules for Internet and mail order sales by eliminating the option for many Americans to shop over the Internet without paying state sales taxes.

At the moment, Americans who shop over the Internet from out-of-state vendors usually aren't required to pay sales taxes. Californians buying books from Amazon.com or cameras from Manhattan's B&H Photo, for example, won't be required to cough up the sales taxes that they would if shopping at a local mall.

This is hardly a new debate: pro-tax officials and state governments have been pressing Congress to require taxes to be collected for a decade or so. They argue that reduced sales tax revenue threatens budgets for schools and police, and say that, as a matter of fairness, online retailers should be forced to collect the same taxes that brick-and-mortar retailers do.

But with states scrambling for new sources of revenue during what may be a double-dip recession, pro-tax lobbyists are hoping that they'll have better luck this year. The National Conference of State Legislatures applauded Delahunt's legislation, saying he should be commended for allowing states to collect as much as $23 billion in new taxes.

So did the Retail Industry Leaders Association, whose tax committee members include Wal-Mart, Home Depot, Costco, AutoZone, Target, and IKEA.

On the other side are groups that advocate for lower taxes and retailers including Amazon.com and eBay. In a statement on Friday, Tod Cohen, eBay's vice president for government relations said: "At a time when unemployment rates are high and small businesses across the country are closing shop, we are confident that Congress will protect small Internet retailers and the consumers they serve from another Internet tax scheme."

Co-sponsors of Delahunt's bill, the "Main Street Fairness Act," include Reps. Michael Capuano, John Conyers, Stephanie Herseth Sandlin, and Peter Welch, all Democrats. No Republican has signed on as a co-sponsor.

The final version of Delahunt's legislation had not yet been made public on Friday, and his office did not immediately respond to queries from CNET. But it's expected to be similar to other versions he's introduced before.

Earlier versions were drafted in response to a U.S. Supreme Court decision saying that, in general, out-of-state retailers can't be required to collect sales taxes unless Congress changes the law. The justices noted in a 1992 case called Quill v. North Dakota: "Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes."

One exception to that rule is a legal concept called "nexus," which means a company can be forced to collect sales taxes if it has a sufficient business presence. If Amazon had an office in California, it already would be collecting sales tax for Golden State residents. (Another exception is the sale of cigarettes, which is covered by the Jenkins Act.)

In response to complexity concerns, the pro-tax forces have offered a proposal that they hope Congress can be persuaded to adopt. The concept is called the Streamlined Sales Tax Agreement, invented in 2002 by state tax officials hoping to straighten out some of sales tax laws' most notorious convolutions.

Since then, some 24 states have signed on, either wholly or partially, to the agreement, meaning they agree to simplify their tax codes and make them uniform. If enough states participate, proponents believe it will be easier to convince Congress to make sales collection mandatory for out-of-state retailers.

"Despite a decade of trying to reduce the unreasonable burdens cited by the Supreme Court, the actual simplification achieved by the Streamlined Sales Tax Project is not nearly sufficient to convince Congress that it should abandon its role in protecting interstate commerce," Steve DelBianco, executive director of the NetChoice coalition, said in e-mail on Friday. Coalition members include AOL, eBay, Expedia, and Yahoo.

There is one caveat under existing law: online purchases from sites like Amazon and eBay only seem to arrive tax-free. Legally, however, purchasers are required to pay their own state's sales tax rate--the concept is called a "use tax"--and then voluntarily report the amount owed at tax time. But, state tax collectors say, few do.

State tax collectors haven't exactly been idle while waiting for Congress. They've been trying to force Amazon to turn over purchase records in North Carolina, attempting to force retailers to become tax-tattlers in California and Tennessee, and putting the squeeze on affiliate programs in Colorado.

Earlier this week, the Direct Marketing Association sued Colorado, saying its law requiring out-of-state retailers to turn over purchase history information is unconstitutional.

 

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