Internet sales tax fight returns to Congress

eBay, a critic of new Internet tax legislation, will tell a congressional committee that big box stores aren't hurting online. Instead, they're rapidly gaining market share.

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
3 min read

eBay is preparing to amplify its attack on a proposed law that would usher in sales taxes on Internet shopping, CNET has learned.

The online auctioneer plans to tell a congressional panel considering the legislation tomorrow that the measure would merely consolidate the market power of Amazon.com and the largest big box retailers while putting eBay's small sellers out of business.

Traditional retailers and Amazon have seen their e-commerce share jump from 39 to 48 percent in three years, according to this eBay graphic.
Traditional retailers and Amazon have seen their e-commerce share jump from 39 to 48 percent in three years, according to this eBay graphic. Click for larger image. eBay

In fact, says Tod Cohen, eBay's deputy general counsel, online retailers with less than $10 million in sales--eBay sellers, in other words--have seen their share of electronic commerce fall from 31 percent in 2008 to 19 percent in 2010.

"It is the largest retailers that are growing," Cohen will tell a House of Representatives committee tomorrow, according to remarks obtained by CNET. "And not surprisingly, those giant retailers are lined up united in proposing a change in remote sales tax law."

Amazon.com did not respond to a request for comment. The Retail Industry Leaders Association, which counts representatives of Wal-Mart, Best Buy, and J.C. Penny as board members, has called new federal laws necessary because "brick-and-mortar retailers are required to collect sales taxes while many online and catalog retailers are not."

On the other hand, a 1992 Supreme Court ruling says that, in general, retailers currently can't be forced to collect sales tax on out-of-state shipments unless they have offices in those states. And with more than 7,500 taxing jurisdictions, each with its own rules and ability to conduct audits, compliance with each is is not a trivial task.

A House bill (H.R. 3179), which currently has 15 sponsors, lets state tax collectors force sales tax collection in some cases, assuming that states simplify their tax system. It exempts "small sellers" with under $1 million in total online revenue a year. (Cohen told CNET this evening that eBay would not oppose legislation with a far higher exemption.)

eBay rival Amazon.com has endorsed a similar Senate bill that has an even lower exemption for small businesses that tops out at $500,000. CNET was the first to report details of the Senate bill earlier this month.

Overstock.com's CEO Patrick Byrne is also scheduled to testify at tomorrow's House hearing. Byrne will say that, if the House bill had been law when his company launched in 1999, it would not have been able to survive and that it's nearly impossible to figure out the tax rates for the thousands of different jurisdictions, according to a source familiar with his testimony.

eBay's remarks represent an escalation in the war of words between it, Amazon.com, and big box retailers. An excerpt from Cohen's remarks:

The largest retailer on the Internet, Amazon, is a business with a national network of facilities, and is growing fastest. The giant "Brick & Click" retailers are also growing their market share online. In short, while small business retailers are active online and are adopting technology, they are not winning the race under the status quo...

The face of retail has changed dramatically over the past four decades. At the heart of the story has been the expanding dominance of giant retailers at the expense of small business. Giants have grown more dominant in retail; small independent retailers have been pushed to the edges. To illustrate, big-box discount retailers accounted for 42 percent of total retail sales in 1987. As of July 2010, their market share had jumped to 87 percent... The retail giants make up 18 of the Top 25 retail websites today...

Technically, of course, Americans living in states with sales taxes are supposed to keep track of out-of-state purchases and cough up the necessary sales tax on April 15--the concept is known as a "use tax." But state tax collectors have long complained that in practice, that just doesn't happen, and that the money has remained in taxpayers' pocketbooks.

States are currently limited in their sales tax collection authority because of the 1992 U.S. Supreme Court decision in the Quill v. North Dakota case. The justices ruled that retailers aren't required to collect sales taxes from customers who live in states where they don't have a physical presence, or "nexus." They did, however, make it clear that Congress could step in and change the rules.