Politicians, retailers push for new Internet sales taxes

The halcyon days of tax-free Internet shopping may soon be over, if Congress approves a proposed federal law supported by Wal-Mart and other big-box stores.

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

If you think you paid the government enough in taxes this year, think again. An alliance of state and federal politicians, with the assistance of deep-pocketed big-box retailers, is hoping to lighten your wallet by levying new Internet sales taxes.

Their plan: to convince the U.S. Congress to approve a law that would allow states to force Amazon.com, Overstock.com, Blue Nile, and other online-only retailers to collect sales taxes from out-of-state customers.

A pro-Internet tax group bankrolled by Wal-Mart and other big box stores is invoking Little League games as justification for new taxes.
A pro-Internet tax group bankrolled by Wal-Mart and other big-box stores is invoking Little League games as justification for new taxes. CBS News

So far, they've had little success. But a state government budget shortfall estimated to total around $50 billion next fiscal year, coupled with accelerated state-by-state lobbying efforts in Minnesota, Virginia, Washington, and Florida, could lend new momentum to the federal legislation introduced last November. So could a Senate hearing next Wednesday.

Meanwhile, the retailers have been ratcheting up their rhetoric. A group called the Alliance for Main Street Fairness -- bankrolled by Wal-Mart, Target, Best Buy, Home Depot, and Sears, not one of which is typically located on Main Street -- distributed a press release last week arguing that Little League games could be imperiled unless Congress acts.

Warned the big-box stores: "Little League teams across the country receive donated jerseys, sports equipment, and much-needed financial support from America's Main Street retailers."

That's "the most shameless claim" yet from the pro-Internet tax lobby, replies Pete Sepp, executive vice president at the National Taxpayers Union, which has been a steadfast critic of the legislation.

"What enlightened argument will their P.R. mill come up with next -- that online sellers kick puppies and steal bottles from babies' mouths?" Sepp said. "Every grownup in this debate ought to be able to acknowledge that people who sell online have kids in Little League, as well as community-based businesses that pay the kinds of taxes that brick-and-mortar retailers do, such as property, profit, and telecom."

The Alliance for Main Street Fairness did not immediately respond to a request for comment from CNET this afternoon. In the past, the group has argued that "when local retailers lose sales to out-of-state, online-only retailers due to an unfair competitive advantage, it threatens jobs nationwide and damages local businesses that create those jobs."

The justification for the Senate bill introduced last year by Mike Enzi (R-Wyo.), Lamar Alexander (R-Tenn.), and Dick Durbin (D-Ill.) is a reprise of arguments that state tax collectors have made for at least a decade: they claim that online retailers that don't always collect taxes are unreasonably depriving states of revenue, and that they enjoy an unfair competitive advantage over local retailers that must collect taxes.

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 something like 7,500 taxing jurisdictions, each with its own rules and ability to conduct audits, compliance with each is is not a trivial task.

The Quill v. North Dakota ruling came out the way it did in part because tax codes tend to be complex and vary among states and localities, with bewilderingly different tax rates associated with the same kind of product. In New Jersey, for instance, bottled water and cookies are exempt from sales tax, but bottled soda and candy are taxable. In Rhode Island, buying a mink handbag is taxed, but a mink fur coat is not.

Technically, of course, Americans 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.

Amazon.com, which cut a deal last September to begin collecting sales tax in California, says it supports the Enzi-Alexander-Durbin bill, titled the Marketplace Fairness Act. The bill applies to retailers with "gross annual receipts in total remote sales" that exceed $500,000. (Even without a change to federal law, retailers with physical presence, or "nexus," in states already collect sales tax for shipments to those residents.)

Steve DelBianco, executive director of NetChoice, a trade association that counts eBay, Facebook, LivingSocial, TRUECar, and Yahoo as some of its members, says that Congress will be hesitant to levy what amounts to a tax hike.

"It'll be a giant surprise when Americans learn that all this new revenue that states are seeking is not coming from Amazon.com, but from consumers' own pockets," DelBianco says. "That'll be the biggest shock to taxpayers."

Update 6:05 p.m. PT: I've heard back from a spokesman for the Alliance for Main Street Fairness, who responded to the National Taxpayers Union by saying: "The only thing that is shameless is the existence of a special interest loophole that puts hundreds of thousands of Main Street businesses at a competitive disadvantage and costs our nation jobs."