Consumers used to saving money by not paying sales tax on online purchases may not have that advantage much longer as momentum grows for legislation allowing states to collect taxes on Internet sales

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WASHINGTON — As the owner of PFI Western Wear in Springfield, Mo., Randy Little gets irked when customers come into his store, find the perfect pair of boots, then buy them online, so they don't have to pay sales tax.

"We fit them, we give them customer service, and then they go online and buy it from somebody else cheaper," Little said, adding that some shoppers even start searching the Web on their smartphones before leaving his store.

But Little also benefits from the flip side of this tax-free equation, racking up thousands of dollars in online sales from customers outside Missouri looking to shave a few bucks off their shopping bills.

Sen. Roy Blunt, R-Mo., and other lawmakers want to close that sales-tax loophole for customers and online retailers alike, arguing that the system favors Internet companies over brick-and-mortar stores.

"It's wrong for the government to penalize some businesses over others," Blunt said this month as the Senate debated legislation that would allow states to collect sales tax for online purchases made from out-of-state retailers. "This is the fair thing to do."

Others say the "e-fairness" legislation is anything but fair. The Blunt-backed legislation, called the Marketplace Fairness Act, has unleashed a fierce lobbying battle — pitting major retail companies, such as Wal-Mart and Best Buy, against catalog companies and other Internet firms, such as eBay.

It has also triggered fierce resistance from some of Blunt's colleagues in Congress, who argue it will stifle Internet commerce and meddle in state tax policy.

"What this does is force the Internet marketplace and online businesses to become tax collectors," Sen. Kelly Ayotte, R-N.H., said during the Senate debate. "There is nothing conservative about this. It is the long arm of the federal government punishing states such as mine that don't have a sales tax."

States generally can collect sales tax from retailers only if they have a physical presence, such as a store or a warehouse, within the state's borders. In Missouri, consumers are supposed to voluntarily pay sales tax if they spend more than $2,000 a year shopping online with out-of-state retailers.

Blunt and others say few consumers actually pony up those owed taxes. The Missouri GOP lawmaker said his legislation would simply give states a way to enforce laws that are routinely flouted.

"You're supposed to pay this tax," he said. "People just don't do it."

Indeed, states lost out on about $23 billion in uncollected sales tax revenue in 2012 because of the inability to collect from online and catalog sellers. Missouri missed out on $430 million last year, according to an analysis by the National Conference of State Legislatures.

"This revenue could help fund police, school teachers and other much-needed programs," the NCSL wrote in its report on the issue.

Even the online retail giant Amazon has come out in favor of the legislation, in part because it would force states to streamline their tax rules before they could scoop up this extra revenue. Some states have moved to enact so-called Amazon.com laws, trying to capture online sales tax revenue in the absence of congressional action.

"Governors all over the country … have been active in saying this is a states' rights issue for them," said former senator Trent Lott, R-Miss., a lobbyist recently hired by Amazon to push for passage of the bill.

Amazon is required to collect sales tax on purchases made in nine states. Some experts say that even if Congress doesn't act, the days of tax-free shopping are numbered, as other states take action. The Marketplace Fairness legislation would give Amazon a more simplified national system for sales tax collection, instead of the patchwork of laws it faces now.

What Blunt and others see as a way to level the playing field, others see as a move by big business to put the squeeze on small start-ups.

Online sellers, such as eBay and catalog companies, argue that large retail businesses, such as Wal-Mart and Sears, have long enjoyed other types of tax preferences, such as credits for building or renovating a store.

"There is no level playing field out there," said Brian Bieron, a lobbyist at eBay.

Bieron said the bill is being pushed by three outside interest groups, each with their own agenda:

  • Big retail companies, including Amazon, that are grappling with sales tax collection in different states and want their smaller competitors to do the same.
  • Governors and state lawmakers hungry for additional revenue and new taxing power.
  • Genuine "Main Street" retailers, such as independent bookstores and jewelers, that "would prefer the Internet went away."

The pending Senate bill includes an exemption for small businesses that have less than $1 million in annual gross receipts, but Bieron says that's a minuscule amount in the world of retail. The bill, he said, would hit small businesses hard, forcing them to navigate a myriad of state sales tax laws.

Of course, eBay is no little start-up. The online auction business made Fortune's list of top 500 U.S. corporations in 2012, with $11.6 billion in revenue. In this battle, the company has found itself allied with a group of Washington anti-tax activists to lobby against the bill.

"This legislation is bad news for conservative principles and the cause of limited government," 15 conservative advocates declared March 11 in a letter to members of Congress. The letter was signed by a bevy of influential GOP players, including Grover Norquist of Americans for Tax Reform and Matt Kibbe of the Tea Party group Freedom Works.

Both sides of the debate have been galvanized by a vote in the Senate on March 21, when lawmakers were debating the 2014 budget. Blunt and others offered a version of the Marketplace Fairness Act as an amendment to the budget, and it passed easily.

The 75-24 tally was symbolic, because the budget is non-binding and the underlying bill is going nowhere. But proponents said it will give momentum to the legislation.

"The vote clearly demonstrates that people are on our side on this issue," said Joshua Baca, a spokesman for the Alliance for Main Street Fairness, a coalition of retailers pushing for the bill. It showed "overwhelmingly strong support" for the idea that "government is not in the business of picking winners and losers in retail."

Baca said he's cautiously optimistic that the bill will gain traction. Others conceded the legislation faces significant obstacles.

Sen. Max Baucus, D-Mont., chairman of the Senate committee that will consider the bill, called it a "revolutionary" tax policy change that would require careful consideration.

Bieron of eBay said the "idea is very unpopular" with consumers who will not like the idea of Internet sales taxes.

Little, the owner of PFI Western Wear, doesn't love the current system, but he's wary of any changes that could tweak sales tax rules without truly leveling the playing field.

He expressed concern about a provision in the bill that would allow states to opt out if they don't want to collect sales tax on Internet purchases. If, for example, Missouri opts in while Texas opts out, he would have to levy sales taxes both in his Springfield store and on Web purchases, while a Texas Internet competitor could offer the same item sales-tax-free.

Little's message to Congress? "Do not mess with it if you're not going to make it a mandatory, universal thing."

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