Internet Sales Tax Bill Gaining Momentum

The days of tax-free sales on the Internet may soon be coming to an end. At least, that's what Rep. John Conyers, D-Mich, said during a House Judiciary Committee hearing on Tuesday. At issue was whether Congress should pass a bill -- H.R. 3179, the Marketplace Equity Act of 2011 -- that would allow states to collect sales tax from online purchases.

As it stands now, online retailers like Apple, Google and Amazon can collect sales tax only if they actually have a physical presence in the state where the customer resides. Otherwise, online shoppers are supposed to pay that sales tax -- or rather use tax -- directly to their states each April. Data shows that use taxes are easily avoided, rarely paid and difficult to enforce.

Online sales have been a sore spot for brick-and-mortar stores for years, citing an unlevel playing field between them and their online retailer counterparts. The competition is reportedly causing mom-and-pop businesses to close shop. And thanks to the introduction of Internet-connected smartphones and tablet, consumers have found an easier way to shop for the things they need, saving a trip to the local market. State and local governments, who are pushing residents to buy local, are increasingly feeling the loss of sales tax revenue.

With the proposed bill, the government isn't actually adding another tax -- it's simply forcing Internet retailers to collect taxes that are already due to each state. "I am a Republican governor that does not believe in increasing taxes,” started Gov. Bill Haslam of Tennessee. "This discussion isn’t about raising taxes or adding new taxes. This is about states having the flexibility and the authority to collect taxes that are already owed by their own in-state residents."

Back in 1992 in the case Quill v. North Dakota, the Supreme Court held that under the dormant commerce clause, a state may not compel a retailer to collect and remit the state’s sales tax if the retailer lacks a physical presence in the state. The Supreme Court felt that forcing a retailer -- especially a small business -- to collect and remit taxes would place a serious burden on the retailer’s ability to sell in interstate commerce.

Even more, the Constitution does not allow one state to reach into the pockets of another state’s retailers to exact taxation without representation. Yet now brick-and-mortar retailers are claiming that their online competitors have an unfair advantage, offering lower prices because there's no added sales tax. Tack on free shipping, and consumers have no need to leave the house.

"The Court’s decision in Quill was based on the observation that compliance with numerous taxing jurisdictions’ laws would be burdensome and confusing.  The Constitution does not require a physical presence standard as a tax collection criterion," said Judiciary Committee Chairman Lamar Smith.

The Marketplace Equity Act will replace the physical presence requirement with a requirement that state and local governments significantly simplify their tax policies if they want to collect sales taxes from out-of-state retailers. It will also contain an exception from the tax collection duty for small sellers.

"Any bill to enable sales tax collection from remote vendors should contain a robust small seller exception. This way America’s job creating small businesses do not become mere tax collection agencies for those 45 states with a sales tax," Smith said.

The Marketplace Equity Act is sponsored by Rep. Steve Womack, R-Ark., and Rep. Jackie Speier, D-Calif. The Senate Commerce Committee has scheduled a hearing next week on similar legislation.

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