New bill would stymie state taxation of online sales

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After years of putting of proposals that would allow states to tax e-commerce, Congress is looking at a bill that would make taxing Internet sales more difficult.

The House Judiciary Committee’s Subcommittee on Regulatory Reform, Commercial and Antitrust Law held a hearing on Tuesday on H.R. 2887, No Regulation without Representation, which is aimed at solving the issue of state taxation of remote sellers – a problem ever since the landmark Supreme Court decision in Quill mandated the physical presence of the retailer in a state to allow the state to impose a sales tax obligation.

“There are at least two other proposed bills, plus a discussion draft, before Congress that address this issue, but this bill is the one that has a hearing,” observed Joyce Beebe, a fellow at Rice University’s Baker Institute for Public Policy. “The No Regulation without Representation Act would essentially codify the Quill decision. The other proposals are the Marketplace Fairness Act and the Remote Transactions Parity Act. They both set conditions under which states may impose the tax.”

The MFA and the RTPA differ in details but are similar in nature, according to Beebe. “Both would allow states to tax sales by remote sellers if the states are members of the Streamlined Sales and Use Tax Agreement, or meet certain requirements that simplify the compliance process,” she said.

“The biggest hurdle for states is to if they want to tax out-of-state sellers is to bring down the compliance cost,” she said. “For small sellers, the compliance cost could be huge. That’s why both the MFA and the RTPA address the issue of simplification.”

There are not many studies that estimate the exact dollar amount of these costs, Beebe noted: “However, existing studies generally indicate that, as a percent of taxes collected, smaller firms incur a heavier burden than their larger counterparts.”

In fact, Amazon, once one of the fiercest opponents of the online sales tax, is now taxing online sales nationwide. “It’s a smart move on Amazon’s part,” said Beebe. “Once they integrate [recently purchased] Whole Foods into their corporate structure, it will increase their physical presence in numerous states.”

The issue is vitally important to states, Beebe observed. “E-commerce sales have been growing rapidly, while on the flip side, the sales tax base across all states has contracted,” she said. “This has created financial issues for states that rely heavily on sales taxes.”

The states, Congress, the Supreme Court, and the merchants themselves all have large interests at stake, according to Beebe.

“Many states continue to face budget shortfalls, and the fiscal reality prompts these states to target online sales to meet revenue needs,” she said. “The Supreme Court has previously indicated the potential need to revisit Quill. However, it has turned down multiple cases in part to avoid legislating from the bench. Congress has the power to resolve the issue, and some states hope that Congress will mandate a solution. And merchants themselves, both online and traditional ones, have distinct positions on this issue.”

The testimony

At Tuesday’s hearing, Deb Peters, a South Dakota state senator and president-elect of the National Conference of State Legislatures, noted that both the MFA and the RTPA were before the subcommittee for some time, yet the hearing is on the No Regulation Without Representation Act, which was referred only six days ago.

“I am disappointed why this subcommittee, in the over four years since the Marketplace Fairness Act passed the Senate, has not found time to hold a hearing on either MFA or RTPA, both of which have broad bipartisan support,” she said. “Enacting a sound, destination-based solution for sales tax collection is more important now than ever. The growth of Internet commerce and the inherent price advantage afforded to out-of-state businesses is regrettably transforming Main Street retailers into showrooms. Today’s consumers now visit stores, compare products in person, ask questions and obtain help from the store’s employees, and then shop online to avoid paying tax, sometimes even while in that store.”

Andrew Moylan, executive vice president of the National Taxpayers Union Foundation, testified in support of the No Regulation without Representation Act: “The bill would establish a common-sense standard that states can only regulate individuals or businesses with a physical presence inside their state, pushing back against the decades-long trend of attempting to target out-of-state entities.”

“All across the country, states are hard at work attempting to project their power across borders in ways that harm taxpayers and undermine our federalist system,” he said. “The No Regulation without Representation Act represents a thoughtful, modest approach to restraining state abuses without trampling legitimate state prerogatives.”

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