Looming Internet sales tax bill jolts consumers, retailers

The U.S. Senate begins debate on a proposed law that would require Internet retailers to collect sales taxes around the country, despite objections from online sellers that the bill goes too far.

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] Main Street retailers collect sales taxes on behalf of consumers, why shouldn't online retailers do the same?" asks Sen. Dick Durbin, an Illinois Democrat.
"[If] Main Street retailers collect sales taxes on behalf of consumers, why shouldn't online retailers do the same?" asks Sen. Dick Durbin, an Illinois Democrat. Getty Images

Consumers unhappy about the prospect of paying more to shop online aren't alone.

Online retailers are objecting to a proposed federal law to levy sales taxes on Internet shoppers, saying it's unreasonable to expect small businesses to comply with the detailed -- and sometimes conflicting -- regulations of nearly 10,000 government tax collectors.

The U.S. Senate began debate on the tax measure, S.743, Monday afternoon, capping years of lobbying by the National Retail Federation and the Retail Industry Leaders Association, which represent big box stores including including Walmart, Target, AutoZone, Best Buy, Home Depot, OfficeMax, Macy's, and the Container Store. President Obama also supports the bill, his spokesman said Monday.

"Congress should not grant these new taxing powers unless it first requires that states radically simplify their sales tax regimes," says Steve DelBianco, executive director of NetChoice, which counts eBay, Facebook, Yahoo, and LivingSocial as members. "This legislation doesn't even come close."

S.743 is a near-complete reversal from the previous approach adopted by the proponents of Internet sales taxes.

Eight years ago, Sens. Mike Enzi, R-Wyo., and Byron Dorgan, D-N.D., introduced legislation that would have allowed Internet sales taxes to be collected -- but only after states simplified and standardized their tax systems through a process created in 2000. Enzi said at the time that it was necessary to require "dramatic simplification in almost every aspect of sales and use tax collection and administration" including "a reduced number of sales tax rates" and "reduced audit burdens for sellers."

The current version of S.743, however, lacks those protections. Small sellers with no profits could be subject to audits in dozens of states. Each of the nearly 10,000 local tax jurisdictions could specify a different tax rate. Businesses would also have to figure out how to handle the complexity of integrating as many as 46 state government-supplied software packages into Web ordering systems.

Opponents of S.743 are planning to offer a three-word amendment during the Senate debate that Internet sellers only "in participating states" may be required to collect sales taxes. That would mean states could opt-out of the requirements, something that Oregon, New Hampshire, Delaware and the other states without sales taxes are likely to do.

The Senate's scheduled tax vote Monday afternoon is a procedural one. If successful, the real debate on the bill will begin, which will likely stretch over the next few days. A symbolic Senate vote last month on a related Internet tax bill -- which passed 75 to 24 -- suggests there's easily enough support to clear Monday's procedural hurdles.

"Now's the time for Congress to act," Enzi said Monday. Sen. Dick Durbin, D-Ill., added that it's "time to have a national program to collect this sales tax."

eBay CEO John Donahoe Sunday began rallying users of the auction site against S.743, saying in an e-mail that: "This legislation treats you and big multi-billion dollar online retailers -- such as Amazon -- exactly the same... Those fighting for this change refuse to acknowledge that the burden on businesses like yours is far greater than for a big national retailer."

Taxpayer advocates say Enzi's amendment amounts to a multibillion dollar tax hike on American consumers that shouldn't be rushed into law without a single hearing (S.743 was introduced last week). The National Taxpayers Union set up a petition to Congress saying: "I do not want to be made vulnerable to out-of-state tax collectors." Last month, 15 conservative groups sent a letter to members of Congress saying an Internet tax law is "is bad news for conservative principles and the cause of limited government."

They're joined by a coalition called True Simplification of Taxation, which includes the American Catalog Mailers Association, the Direct Marketing Association, NetChoice, and the Electronic Retailing Association. A scorecard (PDF) compiled by the group says S.743 meets only a fraction of 12 important simplification requirements.

S.743's limited simplification requirements require a single tax collector per state, a single audit agency per state, and "software free of charge for remote sellers that calculates sales and use taxes due on each transaction at the time the transaction is completed."

It also includes an exception for business that make under $1 million a year in revenue. But many small businesses can exceed that. If an eBay seller has over $1 million in revenue and a typical profit margin of perhaps 8.3 percent, he or she will make as little as $83,000 a year -- but could still be required to collect taxes on Internet sales, and be subjected to audits, in nearly 50 states.

State sales tax laws are notoriously labyrinthine and difficult for companies to follow -- which is one reason the 13-year effort at simplification is ongoing. 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.

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.com wasn't required to collect sales taxes in California until recently. Another exception is the sale of cigarettes, which is covered by the Jenkins Act.

As a practical matter, many Americans already pay sales taxes on Internet purchases, especially as Internet retailers including Amazon and even Apple have opened stores or warehouses in more states. But smaller retailers, including Newegg.com, Systemax's TigerDirect.com, and eBay sellers are less likely to have nexus.