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Bid to collect online-sales taxes is stalled in Congress

Many consumers have come to expect tax-free shopping as an online perk, but it’s costing state governments nationwide an estimated $23 billion in annual revenue, according to a 2009 University of Tennessee study.
Many consumers have come to expect tax-free shopping as an online perk, but it’s costing state governments nationwide an estimated $23 billion in annual revenue, according to a 2009 University of Tennessee study. BLOOMBERG

Every year, Roberton Williams combs through his credit card receipts and meticulously tallies up how much sales tax he owes from purchases he made online.

Williams, by his own admission, is “one of those crazy people” who actually pay online-sales taxes.

Few Americans realize they’re supposed to declare any out-of-state purchases made over the Internet on their state tax returns. And even those who do know rarely pay.

“I may well be the only fool in the world,” jokes Williams, a senior fellow at the Urban-Brookings Tax Policy Center at the Urban Institute, a centrist research center.

He once asked a tax official in his home state of Virginia how many people paid online sales tax. About 1 in 10,000, was the reply.

Many consumers have come to expect tax-free shopping as an online perk, but it’s costing state governments nationwide an estimated $23 billion in annual revenue, according to a 2009 University of Tennessee study. And brick-and-mortar retailers complain that it puts them at a competitive disadvantage to online-only businesses that don’t have to charge sales tax.

At issue are laws that allow states to collect taxes only from retailers with physical presences in the buyers’ states. A bill that would have closed this loophole by requiring businesses to collect state and local taxes from online shoppers sailed through the U.S. Senate two years ago this week with bipartisan support, 69-27. But the legislation, called the Marketplace Fairness Act, died in the U.S. House of Representatives.

An effort to revive it is stalled in Congress, hampered by the reluctance of many Republican lawmakers to prioritize anything that looks like a new tax.

It doesn’t help that a coalition of conservative groups has condemned the bill as “bad news for conservative principles and the cause of limited government.”

The 18 groups – including FreedomWorks, Heritage Action for America and Americans for Tax Reform – sent an open letter to the Senate in March, shortly after Sen. Michael Enzi, R-Wyo., reintroduced the Marketplace Fairness Act.

The letter warned that the bill would allow a massive expansion of states’ taxation authority beyond their borders, creating “a very slippery slope for states to attempt collection of business or even income taxes from out-of-state entities.”

They urged conservatives in Congress to oppose what they described as “unwise legislation.”

Even Senate Republicans who supported the bill in 2013 – such as Missouri’s Roy Blunt – might have a hard time defending it to the party base when they run for re-election. Blunt, who’s seeking a second term in 2016, said the bill would simply enforce tax laws already on the books, not impose new taxes.

“It would be fine with me if every state that says this is a tax that has to be paid wants to repeal it,” he said, “but you don’t have laws on the book in democracies that work that everybody can violate.”

For now, the issue is stuck in the House Judiciary Committee, which has jurisdiction over state taxation affecting interstate commerce. The main point of contention has been whether the sales tax charged should be based on the rate where the buyer lives, as advocates of the Marketplace Fairness Act prefer, or on the rate where the seller is, an alternative offered by House Judiciary Chairman Robert Goodlatte, R-Va.

A Judiciary aide said ideas had gone through several iterations and that the committee continued to work with all interested parties to find common ground. But lobbyists familiar with fruitless negotiations to find a compromise say retailers consider Goodlatte’s latest proposal so unworkable that they worry it’s actually intended to derail the entire process.

Retailers are hinging their hopes on a bill being drafted by Rep. Jason Chaffetz, R-Utah, that would place limitations on states auditing businesses outside their borders. The language comes in response to complaints from online vendors such as eBay and Overstock.com. They say the Marketplace Fairness Act as proposed by the Senate would create a compliance nightmare for small businesses, which would have to keep track of more than 9,000 state, local and municipal tax codes.

Chaffetz’s compromise bill isn’t a free pass for businesses, said David French, senior vice president of government relations for the National Retail Federation. “It just means you won’t have 500 jurisdictions coming and harassing you. . . . But the goal is to limit the amount of regulatory burdens that businesses have to deal with.”

Goodlatte and Chaffetz told Roll Call, a Capitol Hill newspaper, that they have no timetables for introducing their bills. And even if one of those bills gets through committee, a major obstacle remains: the Republican leadership.

Senate Majority Leader Mitch McConnell, R-Ky., voted against the bill in 2013, saying he considered it a new tax. Majority Whip John Cornyn, R-Texas, also opposed it. In the House, Speaker John Boehner, R-Ohio, said last year that he had serious concerns about the bill, and he refused to bring it up for a vote despite entreaties from about 30 rank-and-file House Republicans. They crowded into Boehner’s office before the end of the session last year to try to sway him, to no avail.

“He’s not going to spend political capital to make it happen,” said Williams, of the Urban-Brookings Tax Policy Center.

For his part, Williams would like businesses to start collecting online-sales taxes, if only to spare him from having to calculate the tax himself.

“It would be nice to have somebody else do it for me,” he said. “It’s a pain in the butt.”

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