Democratic senator wants Internet sales taxes

Saying online retailers have an "unfair advantage," Sen. Dick Durbin is planning to end the halcyon days of Internet shopping and usher in new sales tax collection.

Declan McCullagh Former Senior Writer
Declan McCullagh is the chief political correspondent for CNET. You can e-mail him or follow him on Twitter as declanm. Declan previously was a reporter for Time and the Washington bureau chief for Wired and wrote the Taking Liberties section and Other People's Money column for CBS News' Web site.
Declan McCullagh
4 min read

A Democratic senator is preparing to introduce legislation that aims to end the golden era of tax-free Internet shopping.

The proposal--expected to be made public soon after Tax Day--would rewrite the ground rules for Internet and mail order sales by eliminating the ability of Americans to shop at Web sites like Amazon.com and Overstock.com without paying state sales taxes.

Dick Durbin of Illinois, the second most senior Senate Democrat, will introduce the bill after the Easter recess, a Democratic aide told CNET.

"Why should out-of-state companies that sell their products online have an unfair advantage over Main Street bricks-and-mortar businesses?" Durbin said in a speech in Collinsville, Ill., in February. "Out-of-state companies that aren't paying their fair share of taxes are sticking Illinois residents and businesses with the tab."

At the moment, Americans who shop over the Internet from out-of-state vendors aren't always required to pay sales taxes at the time of purchase. Californians buying books from Amazon.com or cameras from Manhattan's B&H Photo, for example, won't pay the sales taxes at checkout time that they would if shopping at a local mall--which is what Durbin means by giving online retailers an "unfair advantage."

On the other hand, there are some 7,500 different taxing jurisdictions in the United States, each with a set of very precise rules describing what can and can't be taxed and at what rate. That makes it challenging terrain for retailers to navigate.

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In New Jersey, for instance, bottled water and cookies are exempt from sales tax (PDF), but bottled soda and candy are taxable. In Rhode Island, buying a mink handbag is taxed, but a mink fur coat is not (PDF).

Durbin's bill will be called the Main Street Fairness Act, which follows legislation introduced last July in the House of Representatives bearing the same name. A possible co-sponsor is Sen. Mike Enzi, a Wyoming Republican who backed a similar proposal before and did not respond to a request for comment. (See related update below.)

Making matters more difficult for the pro-tax forces is the decision by Rep. William Delahunt, a Massachusetts Democrat, not to run for reelection last year. Delahunt was probably Congress' most enthusiastic proponent of Internet sales taxes, and it's not clear a Republican-controlled House will be as eager to embrace the idea.

One early indication: Rep. Dan Lungren, a California Republican, introduced legislation in February saying that allowing states to levy "onerous and burdensome sales tax collecting schemes on Internet-enabled small businesses that do not even reside in their state would adversely impact hundreds of thousands of jobs." Former GOP presidential candidate Ron Paul is one of the sponsors.

The Direct Marketing Association, which sued Colorado last year to block a state tax law from taking effect, is preparing to rally opposition to Durbin's legislation.

"You're just giving the states a blank check to make changes without any congressional oversight," says Jerry Cerasale, the DMA's senior vice president for government affairs. "We oppose that...We think that's abrogating the authority of Congress."

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, which was 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 have agreed to simplify their tax codes and make them uniform. If enough states participate, proponents believe it will ease concerns about complexity and make it easier to convince Congress to make sales collection mandatory for out-of-state retailers.

Paul Misener, vice president of public policy for Amazon, says his employer isn't necessarily opposed to such legislation--as long as it's crafted very carefully. "We've long supported a truly simple, nationwide sales tax system, evenhandedly applied," he says.

The current legal and political landscape was shaped by a 1992 case called Quill v. North Dakota, in which the U.S. Supreme Court ruled: "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."

Under the Quill ruling, out-of-state retailers generally don't have to collect 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, which is why Amazon doesn't have an office in California. (Another exception is the sale of cigarettes, which is covered by the Jenkins Act.)

An important caveat is that 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. Few do.

Support for Durbin's forthcoming legislation is likely to come from the Alliance for Main Street Fairness and like-minded companies including Wal-Mart and Best Buy.

"Big box stores love to mobilize smaller booksellers to complain about competing with Amazon," says Steve DelBianco, executive director of the NetChoice coalition, which counts eBay, Overstock.com, and Yahoo as members. "The irony is that those small booksellers have been clobbered by big box stores. The Internet's their friend."

Update 10:30 a.m. PT: I've heard back from Sen. Mike Enzi's office. It sent me e-mail this morning saying: "Senator Enzi plans to co-sponsor the Main Street Fairness bill with Senator Durbin. As far as a timeline or drafts, you'll have to check with Senator Durbin's office."