Day of Reckoning for ‘Internet Sales Tax’ With Cloudy Forecast

May 6, 2013 4:09pm

The bill colloquially known as the “Internet Sales Tax” is up for a final vote in the U.S. Senate today, and it could go either way.

Senators on both sides of the aisle have pledged support for the bill, formally called the Marketplace Fairness Act, claiming it doesn’t change much. But others argue that it puts an undue burden on small-business owners.

Proponents say the act levels the playing field, taking away the competitive advantage that online retailers who opt not to charge sales taxes have over stores where customers shop in person. Legally, states are already allowed to collect these taxes, but they are rarely enforced.

“This is not a new tax on the Internet,” Tracy Gordon, an economics fellow at the Brookings Institution, said today. “Anytime you purchase something and bring it home to consume in your state, you technically owe a use tax on that purchase.”

Cassie Ho, a fitness blogger who sells designer gym bags and workout clothes on her website, Blogilates, sees the new regulation as inevitable.

“I think this was coming and I think it’s fair,” Ho told ABC News today. “Of course, as a small business, I don’t like it.”

She anticipates that because her products aren’t sold in stores, customers will keep coming, even if she has to add a sales tax to purchases delivered out of state.

Ho already charges sales tax for purchases made in California, where her operation is based, thanks to a ruling by the Supreme Court in 1992. The court said businesses only had to collect sales tax in geographic areas where they had a physical presence or “nexus.”

The Marketplace Fairness Act, which would bring states more revenue without requiring lawmakers to vote on a tax increase, has made unlikely allies of some in the Senate, including the two New Hampshire representatives, Reps. Jeanne Shaheen, a Democrat, and Kelly Ayotte, a Republican.

Both members of the Granite State’s delegation oppose the act, saying it would hurt small businesses that rely on the Internet for revenue but don’t have the resources to keep track of sales taxes in every jurisdiction in the United States.

James Gattuso, a regulatory policy senior research fellow at the conservative Heritage Foundation, reiterated such concerns, adding that the businesses could be limited by laws in states where they had no representation or significant presence.

“I do understand the position of the retailers who are pushing this, that you do not want a tax that treats anyone differently just for artificial reasons,” Gattuso said today. “But the solution that’s being proposed doesn’t make things any better. It makes things worse, and it does so by putting burdens on out-of-state retailers.”

An increase in revenue will be hard to resist for lawmakers from states faced with less money in federal funds, thanks to the budget cuts known as sequestration.

And state governments that opt into collecting their dues won’t be completely off the hook. The bill would require them to provide software to help businesses keep track of what taxes they owed. Online retailers who make less than $1 million would be exempt.

“It’s hard to imagine that it’s going to really be that expensive for online retailers to comply with the tax,” Gordon of the Brookings Institution said.

The bill has made speedy progress in the Senate. It passed a cloture vote April 25, meaning that tonight’s vote will decide whether it moves on or dies in the Senate.

Gattuso of the Heritage Foundation warned that even if the bill gets majority support in the Senate, it might have a harder time passing the House.

“The real debate will occur in the House of Representatives,” Gattuso said.

“Certainly a lot of Democrats have been opposing this because they understand that businesses in their states will be harmed by other states intruding in their states’ affairs. It’s hard to tell how it will go,” he said. “It might not be so much party-line as a recognition that this is an issue involving the growth of government.”

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